By January 1, 2018, it is expected that value added tax (VAT) will be applied at a rate of 5 per cent on most goods and services in the UAE and wider GCC region. The Unified Agreement, previously referred to by the working title of a framework agreement, is an overarching agreement that will be concluded by all six GCC nations. The best acronym, albeit long, is “GCC UAVAT”.
The unity referred to in the GCC UAVAT is a unity of purpose. The GCC UAVAT is intended to make sure that VAT is introduced in the GCC in a coordinated fashion. It does not necessarily mean that each national VAT law will be identical, nor that those national laws will all become effective on exactly the same date.
The rate of VAT has been confirmed at 5 per cent, a figure that was agreed at GCC level in mid-2016.
Minister of State for Financial Affairs Obaid Humaid Al Tayer. Speaking to reporters after a joint press conference with Christine Lagarde, Managing Director of the IMF in Dubai, Al Tayer said 100 food items, health, education, bicycles and social services would be exempt from VAT. Further information was provided by the Bahraini information affairs minister, who held a press conference attended by the under-secretary for finance in Bahrain. The Bahraini minister confirmed that basic food and other consumer commodities, medicines and medical supplies will be exempt from VAT. The list of exemptions signals a clear intention on the part of the GCC authorities to temper the mildly regressive nature of VAT.
VAT is an indirect tax applied at every stage of the supply chain, the end effect of the levy is on consumers who finally pay the tax while buying a good or service. Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government. A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain. VAT is said to be a “self-policing” tax because of the netting-off of input tax from output tax at each successive stage of the production and distribution cycles. Thus, administration is not confined to the national tax authority. As taxable entities, VAT-registered businesses also have administrative responsibilities. Work must be undertaken in that important regard.
There are four important stakeholders in this VAT episode: – governments (beneficiary), businesses (tax collectors), consumers (taxpayers) and consultants (VAT experts). VAT is a tax on consumption. It is ultimately paid by the consumer, in other words “the public” in some shape or form. The public does, therefore, need to be aware.
The businesses that are required to collect the VAT and deposit it with the government are the most worried . They will have to perform an extra function, which could result in additional hiring and costs, or risk of fines, although they do not receive a direct economic incentive. It is not just a question of simply collecting and remitting, , being in the ‘middle’ may bring several complexities.
if the UK and EU VAT regimes are anything to go by, the complete legislative picture will comprise a number of layers. All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date.
– Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT.
– Businesses that do not think that they should be VAT registered should maintain their financial records in any event, their turnover may change, and the in case the government tax team may need to establish whether they should be registered.
Registration for VAT is expected to be made available to businesses that meet the requirements criteria, three months before the launch of VAT. Businesses will be able to register online using eServices
Registered businesses will be expected to submit VAT returns on a regular basis. It is expected that the default period for filing VAT returns will be three months for the majority of businesses. Registered businesses will be able to file their returns online using eServices.
Details of the Tax Law will be made to the press and details will be published on the Ministry of Finance website. The primary source of information regarding the UAE VAT Law is the Ministry of Finance website.
There may be some special rules on VAT for organizations such as government entities as well as refunds available in some circumstances, especially where international obligations require us to make those refunds.
Everyone is urged to fully comply with their VAT responsibilities. The government is currently in the process of defining the exact fees and penalties for non-compliance.
VAT-registered businesses generally:
• must charge VAT on taxable goods or services they supply;
• may reclaim any VAT they’ve paid on business-related goods or services;
• keep a range of business records which will allow the government to check that they have got things right
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
VAT differs from sales tax which is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Not all businesses will need to register for VAT. In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT. The specific conditions (such as minimum annual turnover) that will help identify businesses that do not need to register for VAT are not expected to be announced before October.
Four-step guide to help companies in the UAE to prepare for VAT implementation, (which can take between eight and 12 months). It may take longer if some of the activities are outsourced, for example IT.
1. Impact assessment
• Complete an impact assessment to understand VAT and its commercial effects.
• Prioritise issues and prepare for implementation.
• This is a key step.
• The assessment looks at its various effects on the organisational, operational and financial levels.
• Typically, an impact assessment needs between eight and 12 weeks to complete and that leaves a relatively short time, no more than nine months, to affect implementation.
2. Project preparation
• Prepare a project plan and secure the necessary internal and external resources and ensure the stakeholders in the business are informed.
• VAT is not just a finance project. It affects all transactions and so touches every aspect of the organisation.
• VAT affects IT systems, finance, human resources, legal teams and even inter-organisation transactions.
• IT systems are integral to the process because they need to be updated to handle the VAT.
• Preparation will entail a cost that companies will need to budget.
3. Design and implementation
• Based on the impact assessment, they need to develop a road map for identifying the changes required, understanding the scheduling requirements and planning for work.
• Implementing the changes across various levels in the organisation starts with mapping the transaction footprint to understand the VAT obligations of the business. This should form the basis for making changes across different verticals in the organisation such as IT, supply chain and human resources.
• Businesses need to design the systems and reports and train their staff on the process requirements for VAT.
• This may require a new software/ new release, or upgrade, Consider:
COA changes,
Contract changes
Order, receipt and invoice formats
Cash flow and budget updates
Impact on open orders on1 Jan 2018
Whether any interfaces are affected
• Businesses must implement necessary changes to systems, controls, reporting and governance in good time.
4. Registering and testing
• Businesses need to register for VAT .
• They need to test that their business systems are capable of compliance and reporting.
• Businesses need to integrate the changes made into the operations and train relevant staff about their new roles and responsibilities to achieve the desired result.
• Testing the VAT system, processes and controls during a “live” phase (expected from January 1, 2018) is important to allow for the complete and accurate completion of the first VAT return.
• Make sure to test adequate volumes of data – e.g. processing a quarterly Vat return on all sales and purchase transactions may involve a lot of processing for some companies.
• Make sure to test interfaces.
