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Value Added Tax (VAT)

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Value Added Tax (VAT)

What is VAT?

A value-added tax (VAT), known in some countries as goods and services tax (GST), is a type of indirect tax that is collected by the businesses at each stage of the supply chain and paid to the government, based on the value added to the product or services at each stage of production/process/value addition. It is ultimately borne by the end consumer/user of the products or services.

Is VAT really a new tax? Why the government is implementing VAT? Has it been implemented in in any other countries?

VAT is the new tax under the tax regime in UAE, the government expects an estimated AED 12 Billion collection in the first year of implementation. Presently custom duty and luxury taxes are charged as indirect tax in UAE. VAT will be a new source of revenue for the government which will reduce the government’s dependence on Oil & Gas as a source of revenue. The VAT revenue will be used to provide UAE residents with high quality public services and world class infrastructure. More than 150 countries throughout the world have already adopted VAT/GST.

Are there any other countries implementing VAT in GCC?

All six GCC countries have agreed on a broad framework for the introduction of a general tax on consumption in GCC to be known as VAT and have signed Common VAT Agreement of the States of the Gulf Cooperation Council (GCC). Saudi Arabia is the first country in GCC which has already published VAT Implementing Regulations.

When will the VAT be effective in UAE?

As per the UAE Federal Tax Authority (FTA) pronouncement, VAT in UAE will be applicable from 1st January 2018.

Who will be administering the implementation of VAT in UAE?

The government has established a Federal Tax Authority (FTA) which will be governing the implementation of VAT in UAE.

Where can we find the VAT Tax Legislation?

The final version of the VAT legislation is yet to be published. Ministry of finance will publish the VAT legislation after the necessary government approvals.

What is the standard rate of VAT to be applied in UAE?

The standard VAT rate of 5% shall be applicable on supplies of goods and services. This will be applicable to the products and services which are not exempt or zero rated. So basically, there will be 3 categories of supplies.

a. Taxable supplies at standard rate
b. Zero rated supplies
c. Exempt supplies

Is VAT applicable only on goods or services as well?

VAT is applicable on both goods and services.

Is VAT applicable on the payments made for salary and wages?

No, VAT does not apply to salary and wages.

Will there be any special provision for Small and Medium Enterprises (SMEs)?

No, there will not be any special provision or relief for SMEs and they will have to comply with the VAT legislation like any other business.

Can government help businesses financially to upgrade their business systems to enable accurate VAT reporting?

The government can only provide information and guidelines through their website, electronic media and various workshops but will not help businesses to buy new technologies, hire tax consultants or accountants. Government is giving sufficient time to businesses to prepare for VAT implementation.

Will VAT apply to Free Zone Companies?

So far there is no announcement regarding giving any special treatment to free zone companies. The provisions will only be clear once the VAT legislation is published.

Who is required to register for VAT with the FTA?

a. Mandatory registration - Business entities will have to register with FTA if their gross turnover/revenue/import exceeds AED 375,000.
b.Voluntary registration - Business entities will have option to register with FTA if their gross turnover/revenue/import/expenses is/are between AED 187,500 to AED 375,000. Expense threshold also included in voluntary registration so that new startups can also register for VAT.

When the VAT registrations will start in UAE?

Electronic registration can start any time in the third quarter of 2017 on a voluntary basis and for those who should, but chose not to register, the mandatory registration will start from the fourth quarter of 2017.

Will a non-resident be required to register for VAT?

Non-residents will be required to register for VAT if they make a taxable supply in UAE exceeding the limit of AED 375,000 and there is no other registered entity taking the responsibility for accounting of these taxable supplies. If the other entity takes the responsibility like the reverse charge mechanism, the non-residents are not required to register.

What an entity is required to do after registering for VAT?

The Registered entities will have to maintain proper VAT records and file a periodic return to the FTA on a regular basis with details of VAT paid and VAT collected and settle the net difference with the FTA.

How many times in a year an entity will have to file the VAT return?

Entities need to file VAT returns 4 times in a year which can further be defined as quarterly return. These returns are required to be filed within 28 days from the end of the quarter. FTA has the right to decide a shorter period (for example monthly) for filing of VAT returns.

When an entity should pay the VAT collected by it to the Authority and how much does it require to pay?

It is not yet clarified in the draft about the tenor of payment of the VAT but it may be within 28 days from the end of the month which is also the deadline to file VAT return. An entity needs to pay the difference amount of the output tax and input tax to the authority.

What if an entity is always due a VAT refund? How and when FTA will refund the money?

Once the return is filed, the authority will refund VAT on verification to avoid any frauds. It is most likely the refunds will be processed online in the form of direct electronic transfer to the bank account.

What are the records should an entity maintain to comply with the VAT Authority guidelines?

An entity should maintain Tax invoices, debit and credit notes, import and export records, records of the goods/services provided for free, any other records/supporting as recommended by FTA.

Should an entity maintain financial records even if it thinks that it is not required to register for VAT (as per the registration criteria)?

Still the entity should maintain the financial records to establish that it is not required to register with the authority as it does not meet the threshold criteria.

For how many years an entity should keep the VAT related records?

Entities must maintain and keep all the records for 5 years.

If an entity does not maintain the VAT record, what will happen to the entity?

If the entities do not maintain VAT records, they will be imposed with statutory fines and penalties which will be prescribed in detail in the final VAT legislation.

What is the concept of VAT Group? Are entities under the same group required to pay VAT for intercompany transactions? What are the mechanics of payment for group of companies?

If one VAT Group of the group companies is formed (consisting of all the sister/subsidiary/associate companies) after meeting certain legislation requirements then there is no need to charge VAT on the inter-company transactions among the same group. VAT Group will be responsible to make payment of VAT and file the statutory returns.

What sectors will be exempt from VAT?

  • a. Life Insurance services
  • b. Residential property sold after three years of the completion of the building
  • c. Local passenger transport
  • d. Bare land transactions
  • e. Margin based financial products

What sectors will be zero-rated?
  • a. Education services including relevant goods and services
  • b. Healthcare services including relevant medical goods and services
  • c. If residential property being sold within 3 years of the completion of the building
  • d. Bullion (e.g. 99% purity gold and silver) or investment grade precious metals
  • e. Supply of aircrafts, ship etc. i.e. supply of some means of transportation
  • f. International transportation and related supplies
  • g. Export of goods and services outside GCC
What is the difference between zero-rated and exempted supplies? Can an entity still claim input VAT with the zero-rated and exempted supplies?

Zero rated supplies are goods and services that will be taxable but at the rate of zero percent. Even though a zero percent rate is charged on supplies to the consumer, a VAT registered entity can claim input tax credit on inputs used in making the zero-rated supplies.

Exempt supplies are those goods and services that are not directly subject to VAT. This means that VAT cannot be charged on the sale of exempt supplies. Entities engaged in supplying exempt goods and services cannot claim input tax credit on purchases associated with the exempt supplies.

Are there any special provisions for UAE Nationals?

The authority will introduce a scheme to allow UAE Nationals who are not registered for VAT to claim VAT paid on building material and services to construct a new residence for personal and family use.

Will there be special provisions for Islamic Finance Products?

No, these will be at par with the similar standard financial services.

What the FTA expects from registered entities?
  • Appropriately charge VAT on taxable goods and services
  • Pay to the authority the difference, if you have charged overall more VAT then you have paid
  • May reclaim or setoff if you have paid more than you collected
  • Maintain proper records of business and financial transactions to enable authority to satisfy their VAT audit requirements
  • Meet government reporting and compliance requirements
What is considered as non-compliance of the tax legislation?
  • Non-registration – Despite falling into the threshold.
  • Non- filing of VAT return
  • Non-maintenance of necessary records
  • Non-cooperation with the authorities
  • Tax evasion
  • Any other violation of tax legislation
VAT audit by FTA?

The FTA has the rights to conduct audit of entities and to visit and inspect records and make sure that entities are paying or reclaiming the right amount of VAT.

Can an entity object the decision of the FTA regarding fines and penalties?

Yes, the entity can object within 20 days of getting the notification from the FTA and FTA will have 20 days to respond. There are higher levels of appeal to Tax Dispute Resolution Committee and there after Competent Court.

Does an entity require to pay VAT on imports even if it is going to pay the custom duty on imports?

Yes, an entity is obliged to pay VAT on all the imports of the products except the sectors which fall under zero tax and/or exempt categories. The VAT shall be applicable on the value of the product that includes the custom duty.

Are custom duty exempt goods also exempt from VAT?

This is not to be treated as a thumb rule, there could be goods exempted from custom duty but taxable at a standard rate of VAT or vice versa.

Will tourist be paying VAT also? Will they able to claim the refund at the Airport?

Tourists will have to pay tax at the point of sale, if applicable on purchase of the products. They cannot claim refund of VAT at the airport or from any other authority.

Does an entity need to pay any VAT for the import into UAE from the GCC countries?

Yes, entities will need to pay VAT for the import from GCC countries subject to importing from the registered enterprises. The recipient of goods accounts for VAT under the reverse charge mechanism.

What if the goods are imported into UAE and transferred to another GCC country?

The importer cannot use the reverse charge mechanism and must pay import VAT and cannot recover this VAT. This import VAT should be recoverable in the GCC country to which the goods are transferred.

Where import VAT was recovered in the UAE under the anticipation that goods would not be transferred to another GCC State, but at a later date if the goods are moved to another GCC country, the tax payer will be required to “repay” the import VAT by treating the transfer as a deemed supply subject to VAT.

Does an entity need to pay any VAT for the export to any GCC countries?

You need not to pay/charge VAT for the exports to any GCC countries provided that the customer is registered for VAT in that GCC country and the goods shall be treated as export outside the UAE.

Can an entity adjust its VAT against the custom duty?

VAT is totally a separate tax and cannot be adjusted against custom duty.

What about the bad debts? Can an entity reclaim VAT on the bad debts?

Amount which cannot be recovered from debtors is known as bad debts. The VAT which was paid on the invoices turned into bad debts can be reduced from the output tax liability. One has right to declare and reclaim the VAT on bad debts by specifying the details of the invoices and the amount with complete supporting witnessing about the bad debts.

What are the VAT rates on purchase and sale of property?

If the property is a commercial property one has to pay VAT but in case of residential property one need not to pay VAT as residential property is exempted hence VAT cannot be charged.

Do I need to pay VAT on the insurance as well? Or how is the insurance treated differently?

Yes, VAT is chargeable on all insurance products except life insurance which is exempt.

How the inventory will be treated with effect from 1st January 2018? If an entity has opening stock on 1st January 2018, will VAT still be applicable?

Yes, VAT will be applicable on the entire opening stock and VAT will have to be charged on the sales of that opening stock.

Does VAT apply to the transaction of financial nature e.g. bank charges, bank interest etc.?

It is expected that VAT may be applicable on some fee based financial services and remaining services may be exempt. Margin based financial services are likely to be non-taxable. It is yet to be completely clarified in the legislation.

Reporting of revenue generated in each emirate to be done separately?

Yes, as an additional information the entities will have to report the revenue generated in each emirate. For retail businesses, it could be location of the shop/store.

What will happen to the existing debtors when the entity receives the payment? Do they need to deduct any VAT?

On the invoices raised before 1st January 2018, debtors are not supposed to deduct VAT. Debtors are not authorized and obliged to deduct VAT amount while making the payment.

VAT on supplies to and from the government entities?

Supplies by the government entities will attract VAT except any specific supplies which will be excluded, exclusion will be decided by the authority. Any supplies to the government entities will be taxable at the standard rate if the supply is not zero rated or exempted.

What are the provisions for visiting businesses (temporary imports for exhibition, repair etc.)?

The foreign businesses will be able to reclaim their VAT which they incur while visiting UAE.

Does an entity need to charge VAT if the payment is received before 1st January 2018 but the goods are delivered after the VAT implementation?

As per the GCC Common VAT Agreement should an invoice be issued or consideration paid before 1st January 2018 or prior to the registration date of the supplier and the supply occurred after such date, then the authority may ignore the date of the invoice or payment and consider the tax due date to be the date of supply of goods or services. And the supplies will be taxable.

What about the contracts entered before 1st January 2018 without VAT but are in effect even after VAT implementation?

Any supplies after the VAT comes into effect will be taxable. If the buyer agrees the supplier can charge VAT over and above the contract prices. If the buyer does not agree the contract prices will be considered as VAT inclusive prices.

In case of continuing supplies that are partially performed before 1st January 2018 and partially after such date, then the tax shall not be due on the part performed before 1st January 2018.

What is “reverse charge” mechanism?

The term “reverse charge” conveys that the recipient of the goods or services has to self-account the VAT due in a given transaction. This is an exception to the general rule that supplier, the person carrying out the supply of goods and services needs to collect and pay VAT (to the government).

Can a business issue cash receipt instead of a VAT invoice?

Any registered or required to be registered entity must issue a VAT invoice or a simplified VAT invoice. The format will be prescribed in the legislation. So, it is likely that cash receipt is not an option. The legislation may also prescribe different provisions for the businesses following cash accounting system.

What input tax cannot be claimed i.e. disallowed?

VAT on any expenses related to making a non-taxable supply. Some expenses specifically described in the legislations like entertainment expenses related to clients and employees are disallowed.

Is there any time limit to claim VAT on expenses incurred (input tax)?

Yes, this can only be claimed within 6 months from the agreed date when the payment of the invoice is due.

Reclaiming input tax on capital goods?

There is no clarity so far but it is expected that a mechanism of claiming the input tax will be included in the legislation.

How the VAT will be calculated on partial exemption?

Partial exemption will come into the picture when an entity is into the supply of taxable and exempt supplies. In case of exempt supplies the entity will not be able to recover the input tax related to exempt supplies. If the expenses (common) are related to both taxable and exempt supplies then the expenses will be apportioned in both.

What is deemed supply of goods and services?

In the following cases, it shall be deemed that an entity has made s supply of goods and services –

  • Disposal of goods other than economic activity
  • Changing the use of goods for non-taxable supplies
  • Retaining goods after ceasing to carry on an economic activity
  • Supplying goods without consideration unless it is in the course of normal business, like free samples and gifts of trivial value
What is place of supply and why it is critical?

The place of supply of goods and services (within UAE or outside) is the determining factor whether the goods or services are taxable or not.

For goods, the place of supply is the location where the goods are delivered (with some exception like water, electricity etc.)

For services, the place of supply is the place where the supplier is established (with some exceptions).

Does VAT apply to real estate sector?

Sales or lease of all the commercial properties will be taxable at standard rate i.e. 5%. Residential properties will be generally exempted. The first supply of residential properties within 3 years from the completion will be zero rated.

How can we assist?

The resultant challenge of VAT implementation pronouncement is to align the Business model with the government reporting and compliance requirements. We can help businesses to successfully and smoothly implement VAT into their business and support them on a continuous basis to meet the compliance and reporting requirements.

  • VAT orientation training to familiarize with the concept.
  • Review and assessment of accounting systems impacted by VAT
  • Assessing if the existing IT infrastructure can handle VAT
  • Coordination with the IT team to configure new reporting requirements
  • Identifying the human resource requirements
  • Advice to map accounting chart like Input, Output VAT & Control account.
  • Assessing the impact of VAT on Cash flow and profitability
  • Communication with the impacted stakeholders
  • Verification of VAT related transactions
  • Preparation and submission of periodic VAT Returns
  • Acting as your tax agent and assisting to prepare for tax audits
  • Guiding in maintaining proper books of accounts and financial records.
  • Preparing a customized implementation plan to include all the above and supervise the timely implementation.

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