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Implementation of the Value Added Tax in the United Arab Emirates

Implementation of the Value Added Tax in the United Arab Emirates

July, 2016
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Introduction

In February 2016, the Ministry of Finance announced the introduction of Value Added Tax (“VAT”) in the UAE, and has ended a long period of speculation and discussion of “when” and “if” VAT would be introduced.

According to the announcement, the UAE will impose VAT at a rate of five percent on the sale of goods and on services as from 1 January 2018. The five percent rate has been agreed between all GCC countries, and the framework agreement on the implementation of VAT is expected for release in July this year. The implementation will take place throughout the GCC, however the other GCC countries have from 1 January 2018 until 1 January 2019 to also implement VAT. The amount generated from VAT revenue in the UAE is expected to be between AED 8 and AED 12 billion in the first year.

According to the Minister of State for Financial Affairs, Obaid Humaid Al Tayer, there will be some exemptions from VAT: the GCC countries have agreed to approximately 100 staple food items that will be exempt, and have agreed to zero rate certain industries such as education, social services and health care. Furthermore, according to Younis Ak Khoury, undersecretary at UAE’s Ministry of Finance, the implementation of the VAT will take place in several phases. Thereby, VAT registration in Phase 1 will be obligatory for UAE companies that generate an annual revenue of AED 3,75 million and above. For UAE businesses with an annual revenue between AED 1,87 and AED 3,75 million VAT registration will be optional. With the roll-out of Phase 2, the registration will become obligatory for all businesses. The introduction of a value-added tax system in the UAE will not only affect consumers but also have a broader impact on business. The announcement of the VAT introduction date has put an end to the discussion about the possibility of VAT in the UAE, and raised new discussions about the readiness of businesses for the proposed date of 1 January 2018. Some business owners say they will require more time to implement the new system or to revamp their financial structures.

At the moment, it is uncertain exactly which VAT model will be implemented in the UAE and if every GCC country will apply the same model or if there will be different models to implement. We can mention three main VAT systems, namely the European, New Zealand and Japanese models.

The New Zealand model comes closest to resembling the ideal as it is levied at a single rate and is based on a relatively broad consumption of goods and services, extending through the retail stage of the economy with minimal exclusions. Most jurisdictions have adopted a European VAT model, however, this is marked by multiple rates and varying degrees of exemptions. In practice, no two VAT systems look exactly alike but show differences in rates, thresholds, exemptions, refunds and coverage.

The VAT system to be implemented by the GCC is still subject to speculation, but the following factors have to be considered:

      • Ease of administration and efficiency of the system;
      • Economic impact; and
      • Possible adoption of VAT models implemented by other Arab countries or those in the Middle East and North Africa (MENA) region.

The goal of this article is not to analyze which of the models will be the best for the UAE but to start a discussion on the practical implementation of VAT and the day-to-day challenges that businesses may face in the UAE after 1 January 2018.

Preparing for VAT (“VAT-readiness”)

In order to deal with the challenges, businesses in the UAE should evaluate and review their daily business activities, with a focus on the following points.

Understanding: Conduct analysis of all operational processes and business domains in order to determine all areas that will be affected.

Preparation: Elaborate future implementation strategy, prepare a checklist.

IT Systems: Make sure your IT systems are VAT enabled, including enterprise resource planning (ERP), accounting and point-of-sales IT systems. The IT systems must be able for complete implementation of all legal regulations in order to comply with VAT requirements in daily business.

Current accounting: Keep your books in order and make sure they are up to date by 1 January 2018, ready for the change as the time of supply is critical to your VAT liability.

VAT accounting: Ensure you have all the correct accounts and VAT codes set up to accommodate the calculation of your responsibility to generate a VAT return, which will need to be submitted periodically.

VAT return: Make sure your incoming and outgoing invoices are VAT compliant, on both the supply and sales fronts.

Employees: Check that your staff is knowledgeable about VAT and update job descriptions to reflect VAT duties and responsibilities.

Public officer: Appoint an appropriate person to be the public officer representing the company before the VAT authorities and make sure the person is suitable and prepared for the role.

VAT guide: Prepare a policy manual for the business, to cover the company’s policy regarding VAT.

Contracts: Put resources in place to provide for VAT should any contract or project span into January 2018.

Compliance

As general custom around the world, the principles of self-declaration as well as of prepayment are expected to be applied in UAE. Companies, as registered taxpayers, shall be responsible for calculation of the VAT payable as part of a self-assessment process and execute a prepayment during a fiscal year. At the end of the assessment year the company shall submit an annual tax declaration.

It is expected that the duties and responsibilities of company management will incur certain liabilities, and the consequence of non-compliance, errors and omissions weighs heavily on the company’s managers.

Taking into consideration the abovementioned consequences of non-compliance, the coherent and correct implementation of the VAT process and legally compliant execution on daily basis is essential for the management of the company in order to avoid future errors and sanctions.

Conclusion

After implementation, VAT will affect practically all functions within a business, including IT, human resources, procurement, finance and marketing. VAT is applicable on goods and services at each stage of the supply chain with the ultimate burden being borne by the customer, at least in theory. If not applied correctly, VAT may become an additional cost to the business, and non-compliance with the tax law will lead to severe penalties.

Therefore, all businesses must undertake and review their current situation in terms of their suppliers and customers and if the former are registered or not. The timely training of employees who will be dealing with VAT issues is just as crucial as ensuring that all systems of the business enable VAT administration.

Further development and details are still awaited, however, it is advisable for all businesses to start the review and preparation process in a timely manner to be able to evaluate their company’s situation and apply the necessary changes – after all, to paraphrase W. Edwards Deming “if you can measure it, you can manage it”.

 

Published: July 2016
Practice: Corporate and M&A
Publication: German Emirates Club
Authors: John Peacock and Svetlana Weiss-Friesen

 

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