How to make your business accounting systems ready for VAT?

The VAT law, which is set to launch in the six GCC nations, including the UAE, on January 1, 2018, brings along with it several compliance norms for eligible businesses and penalties for those who fail to follow the rules.

Compliance with the VAT law may not be as easier for GCC businesses, especially for small businesses, as it will require some changes in the business management, operation, technology, operations, bookkeeping and financial practices. The Federal Authority is committed to levying tax penalties from noncompliant businesses in order to ensure a proper implementation of VAT in the region.

The administrative penalties, of minimum Dh500 ($136) but not more than three times the tax amount, will be charged from businesses that fail to provide required and accurate information when registering for VAT and when requested by the FTA, or intentionally destroys any relevant documents/data. In case of tax evasion, a business will be charged a penalty worth up to five times the original tax amount and/or a prison sentence.

The bookkeeping and compliance requirements as published by the authorities suggest that businesses will need to maintain proper accounting system to be VAT compliant. However, it is highly unlikely that the GCC businesses, in terms of technology and systems, are at present ready for VAT, as this is the first time that they have to manage themselves for a proper tax system.

VAT implications on business processes

Some of the short-term VAT impacts on the businesses are explained below.

Businesses are, from now on, required to maintain proper records of their tax information, including the receipts, invoices, credit and debit notes, account ledgers, annual account records, etc.

In addition to the above records, businesses will also be required to maintain proper books of the following information for minimum five years from the transaction date:

§  Tax invoices and credit/debit notes

§  Records of all imported/exported goods and services by/from the company

§  VAT account management, including VAT paid, VAT due, penalty, recoverable tax, etc.

§  Goods/services that are disposed of by the company

All the transactions performed by a taxable business must be accompanied by proper VAT invoices, which will be according to the following rules:

§  It should be in Arabic

§  The invoice currency should be UAE Dirham (Dh). If it is in another currency, it should be converted to Dirham before it’s processed.

§  The invoice must include

§  the name, address and VAT registration number of the supplier

§  the issue date

§  The name and description of goods/services

§  The transaction amount and VAT applicable on it

This will, obviously, be an issue for businesses that never before had to issue a tax invoice or credit note for any of their supplies or had to maintain accounting records for the same. As per the VAT norms, businesses will be required to file their tax returns on quarterly basis online on the government’s portal.

Many professional accounting software solutions are already being launched by software companies and experts to provide businesses with VAT calculation and filing assistance. Businesses can use one of the VAT software to ensure seamless tax compliance and filing of tax returns. You can also contact the expert tax consultants for better guidance regarding the implementation of VAT in your business system.

A good VAT software will let you manage all your VAT returns, reporting, tax liability, payments and refunds, VAT registration and view your VAT account from a central dashboard. It may also let you generate proper VAT-compliant invoices to attach with your business supplies. Just be sure to research thoroughly before choosing a tax software.

The implementation of VAT might get a little confusing for some businesses’ accounting processes, but there is nothing to be worried about as the government is eager to provide full guidance to those who need it. The best thing you can do as a GCC company starts preparing your business for the new tax system.

The UAE Decides on Tax non-compliance charges 

In a public message released earlier this month, the UAE government has made it clear that the UAE businesses not complying with the new tax policies will have to face adequate punishments, normally in the form of financial penalties in the range of Dh1,000 to Dh50,000.

The decision, which was made by the UAE Council of Ministers recently, is expected to bring more transparency to the relationship that exists between the FTA (Federal tax Authority) and UAE businesses, a tax expert said.

The penalties will be charged from businesses who fail to comply with the new tax laws being introduced in the country, including excise duty and VAT. The normal cases of tax non-compliance will attract fines in the range between Dh1,000 to Dh50,000, while other more specific tax violations may incur penalties as much as half of the unpaid tax amount.

As one can understand, any tax system in any legislation is meaningless without proper penalties in place. A tax expert, said, “Those who do not comply with the tax provisions are bound to face penal consequences … Fines and penalties are the key drivers for a person to be more compliant with the law.”

Excise duty and VAT are the two newly launched or upcoming taxes. Excise tax has already been introduced on October 1 and will be levied as a duty on tobacco products, some energy drinks, and carbonated drinks. VAT (Value Added Tax) is expected to be officially launched on January 1, 2018.

The UAE government and FTA have officially published the list of penalties to assure the businesses that the authorities are serious about tax laws compliance throughout the country. It may mobilize business owners to think more seriously about the potential costs of non-compliance. Hopefully it will convince everyone to take the tax implementation issues seriously and drop the notion of VAT being delayed in UAE or not implemented at all.

Khalid Ali Al Bustani, Director General, FTA, denied the claims of VAT being delayed and confirmed that the new tax system (VAT) is on schedule to launch on January 1.

The new UAE tax penalties are in line with the tax laws in other countries. However, there are some exceptions. “it was quite some time ago when such a major tax implementation was taking place in a whole region, almost simultaneously. The penalties must take the broader context into account,” he added.

Shah also supported Nawrot’s statement by saying that the UAE is introducing a consumption-based tax (VAT) for the first time, and it is not fair to expect the same level of non-compliance penalties as other tax matured countries.

Most countries around the world already have a proper tax system in place. The UAE was one of the few last tax-free countries. However, if the news is to be believed, the penalties applied by the UAE are even harsher as compared to the ones announced by Saudi Arabia. “Late payment penalties are higher — for Saudi it is 5 per cent to 20 per cent of the tax amount due, while in the UAE it ranges from 2 per cent of unpaid tax to 300 per cent, depending upon period of delay,” said Amit Chib. “The penalties seem to be on the higher side to act as deterrent for non-compliance.”

The penalties being charged by the UAE seem even higher when compared to other countries like India (Dh11 per day tax penalty) and German (1% per month of due tax amount).

Tax experts, while in agreement regarding the tax evasion policies, believe that there will not be many tax evasion cases after the implementation of VAT in the country, except the ones appearing due to the lack of awareness and preparedness among businesses.

Nawrot also said that his firm believes that most of UAE businesses and people will comply with the new tax laws. “In my opinion, the ‘real’ fraudsters and criminals will be outliers among the taxpayers due to the diligent and procedural approach the FTA is applying (for example with the excise tax registration). I predict, however, that some taxpayers may simply not prepare in time,” he said.

Nawrot further added that the purpose of the publication of the penalty list is to remind the UAE based businesses that they still have three months to get ready for the VAT system. It is expected to drop the non-compliance statistics.

Tax expert Amit Chib assured that tax evasions are not expected to be very high. However, there might be an issue related to the “capabilities of business whether in terms of accounting and bookkeeping, training or the resources available to be VAT compliant,” he said. “Businesses may find it challenging to maintain necessary records and systems and thus may end up incurring administrative penalties.”

Impact of VAT On UAE Businesses

Ministry of Finance in UAE has decided that from January 1, 2018, value added Tax will be implemented across the UAE on the consumption of goods and services. It is assumed that VAT will be charged at the standard rate of 5% on all goods and services. Health, education, basic food items will be exempted from the tax. The new tax system will not only be implemented on UAE but also across the GCC countries at the different rates and at the different application dates.

From the introduction of Value- added tax system will not impact only end consumers but also impact businesses in UAE. From the VAT system in UAE several businesses are facing challenges in implementing the taxation system. Apart from focusing on additional administration costs, businesses or companies will be required to focus on how VAT will impact their operating models which include the financial system, supply chain arrangements, transition periods, operation models, end customer pricing and other relevant areas. Businesses or organizations especially focus on above areas.

Finbarr Sexton, indirect tax leader for the Middle East and North Africa at Ernst & Young (EY), says that, “VAT will be implemented at each stage of the supply chain on goods and services and the cost will be incurred by end- consumer”. From the implementation of VAT in UAE will affect all- functions of business which includes technology, procurement, finance, marketing and human resources.

Analyzing the impact of VAT at each stage of supply chain along with relation to transactions, whether that may be inter- company or external services.

The consumer comes in the end at the each stage of supply chain and the tax fully incurred by the end consumer. So it’s essential that how much tax would be incurred by the end- consumer at the time of consumption of goods and services.

If value-added tax system will not implement correctly, it may become an extra cost for the business. Additionally, extra penalties would be charged by the government when taxes not submitted timely. All businesses in UAE must reassess their current contracts to regulate if VAT has been appropriately implemented or not.

According to Alp Eke, senior economist at the National Bank of Abu Dhabi, said that, “From the introduction of VAT, UAE economy is expected to grow $440 billion in 2019, contribution would be approximately $6.5 billion,

A recent survey done by Deloitte found that 69 percent of GCC businesses were afraid with not being ready for VAT from January.

Justin Whitehouse, Deloitte Middle East indirect tax expert said that “they were aware of the VAT introduced in the GCC, half of the respondents said that VAT will be introduced in the upcoming future.”

According to a tax consultant, “Companies or business enterprises operating their business in UAE is likely to face cash flow issue after the implementation of value-added tax (VAT)”.

How can the implementation of VAT in UAE affect cash flow?
Cash flow is one of the issues that can be faced by Small and medium enterprises (SME) in UAE Cash flow is one the items often unnoticed in the implementation of VAT in UAE, with no clarifications how long the refund process will take. If you are operating the business in UAE how does the cash flow work, you can say that VAT does not affect my business, but at one point either you are owing a lot of money to the government or you might be waiting for the refunds.

As per the information sources, it is clear that UAE will start collecting VAT at the standard rate of 5 per cent from January 1, 2018. Basic food items, health, education will be tax exempted.
According to International Monetary Fund (IMF), VAT at the standard rate of 5 per cent would help to generate more revenue equivalent to about 1.5 percent of the UAE’s gross domestic product.

VAT on Free zones in the UAE

UAE free zones are special economic zones which are free from many official government laws, including the Federal law and the Labour ministry laws. However, some of the laws, including the UAE criminal law are applicable in the free-zone regions. The clarification about the application of the new VAT system in such free zones has not yet been made by the government. The UAE VAT Law, under the article 50 to 52, covers these free zones, and the decision regarding the implementation of VAT in these zones is pending for the fourth quarter of 2017.

The concept of free zones has been very successful and popular in the country. Many new zones are being developed under the same mechanism to promote the growth and digitization in the UAE. These free zones are completely exempted from import and export taxes, income taxes, corporate taxes, etc., and have many other facilities like full repartition of capital and profits.

Since the authorities have not yet made any decision about VAT in these free zones, let’s try to understand how it may affect the economy.

Let’s assume that the free UAE zones are exempt from the VAT. Then, the cost of things will be slightly cheaper in these zones as compared to the normal regions of the country. This will largely impact those areas that are situated on the border or near the border of these free zones. People living near free zones in the UAE might see a difference in the prices of various things due to VAT in the remaining areas of the country.

The most significant effect will be on the prices of valuable entities like commercial properties. People will see a noticeable difference in the price of a property located in the free zone area and a property located just a few meters away in the normal area. This might further promote the growth of the onshore commercial environment.

However, it is being estimated that neither the free zones nor the businesses outside the free zones will be exempt from the VAT. There might be a special tax rate for the businesses situated in these free zones, as compared to the normal VAT rate of 5%. Some specific services and commodities, including duty-free goods, will be VAT free in bonded free zones. A bonded free zone is allowed to hold goods before duties are paid on them.

After the implementation of VAT in the country, many small and medium businesses might face a dip in the cash flow due to increase in tax liability. Although there is a provision of tax refund on inputs, there is no clarity on how long it might take for such refunds to process. Even if some businesses do not see the immediate effect on their cash flows, it will impact everyone sooner or later.

It is normal for refunds to be delayed when a new tax system is launched in a country. The government and the authorities are mostly busy in auditing the returns before they begin the refunding process. This is what delays the release of refunds to the involved businesses, which in turn, affects the cash flow in the market.

While the standard UAE VAT rate of 5% is lower as compared to many other economies in the world, the difference in tax liability within the country, such as special relaxation for businesses in the free zones, will impact the economy.

The new UAE VAT law mentions the concept of designated zones, but it is still not clarified whether the free zones will be kept under these Designated Zones or not. Therefore, it is also not clear how these free zones will be treated after the implementation of VAT in the country. If free zones are kept under designated zones, they will be free of any VAT liability, as designated zones will be not covered under the VAT system. As per the UAE VATLaw, there will be no tax on the transfer of goods from one designated zone to another. However, the government might define some special conditions under which the businesses situated in a designated zone will still be liable to pay VAT.

It is being estimated that more information regarding this might be released by the fourth quarter of this year.

UAE VAT Registrations for Businesses Open till Dec 4

The Value Added Tax (VAT) with five per cent tax rate is scheduled to be launched in UAE in the starting of the next year. However, the VAT registration for eligible businesses has already begun and will continue till December 4. That means, all the businesses that are liable to register under VAT (having an annual turnover of Dh375,000 or more) are required to submit their registration applications latest by this date.

The registration applications are being accepted through the official online portal which will stay open around the clock. The FTA has also clarified that all the help and information regarding VAT enrollment are available on the website.

UAE VAT Registration Timeline (Schedule)

All businesses that come under VAT liability must submit their registration applications on or before the dates mentioned below.

Businesses with an annual turnover of Dh150 million or more need to register before October 31, 2017. Businesses having an annual turnover between Dh10 million and Dh150 million should register latest by November 30, 2017. All the remaining businesses with turnover more than or equal to Dh375,000 must apply for VAT registration on or before December 4, 2017.

The registrations are currently open for all types of businesses that satisfy the threshold requirements. Manu Nair of Emirates Chartered Accountants Group clarified that only the last date of registration is different based on the annual turnover of respective organizations.

A penalty may be levied on the companies that are eligible for VAT but do not register in time.

The FTA is also allowing voluntarily registrations under VAT, for which the limit is Dh187,500. All the businesses (small & startups) having an annual turnover more than this limit but less than the normal VAT registration threshold and dealing in taxable supplies and/or imports can apply for voluntary VAT registration.

“This opportunity enables startup businesses that do not have the required income to optionally register for VAT,” the FAT explained.

“The FTA is keen to give the business sectors sufficient time to adapt their operating systems to the requirements of the VAT system,” Khalid Al Bustani, director-general of the FTA said in a statement.

As per the official report, businesses will be required to upload their annual financial statements or any other proof of their annual turn overx while submitting their VAT applications. “Even if the last 12 months’ turnover is less than the mandatory threshold Dh375,000, but expected turnover within the next 30 days is more than Dh375,000, still the business has to register,” said Nair.

There are some special considerations and requirements to fill the VAT registration applications.

If one or more partners of your company are also engaged (as a partner) in any other UAE based company, then you are required to mention the name of all such companies in your application.

A company is allowed to choose a manager who will represent the company in all the VAT (tax) related matters. The personal details and contact details of the manager should be provided in the VAT application by the company.

As you may already know, VAT also has a provision for group registration, in which multiple entities of the same business or multiple companies under the same management/control can apply for tax group registration, given that they have a valid proof of relationship between said entities. The management must choose a representative member (main company) in order to register as a VAT group.

The name of the company, as well as the name of the manager/owner, should be filled in Arabic in the registration application. The application should also contain the details of the bank in which the company has a business account. After successful submission of application, a tax identification number (TRN in case of group registrations) will be provided.

VAT Registration: https://www.tax.gov.ae/getting-ready-for-vat.aspx

Sign up for VAT Registration at FTA Online Portal: https://eservices.tax.gov.ae/en-us/signup

Invoices

A VAT Invoice is a type of document that must be generated and issued by only VAT registered the business. The invoice can be treated as documentary evidence on the sale of goods and services in compliance with the law.

VAT invoices also needed by the business as a proof of evidence to support VAT credit claims, i.e. VAT incurred on the acquisition of goods and services for the purposes of the business can only be claimed if the business holds a valid VAT Invoice from the vendor. Through invoice, the end consumer is able to know that how much VAT paid by him at the time of consumption of goods and services.

Calculation and reporting VAT

After the registration under VAT, registered businesses must have to pay collected VAT to the tax authorities either monthly or on a quarterly basis. Value added tax can be calculated by the formulae output tax – Input tax.

Output Tax is the percentage of selling price received by the seller on the selling price of his final product.

Input Tax is the percentage of cost price incurred by a buyer to purchase raw materials to produce final product/ good

VAT = Input Tax – Output Tax

In most jurisdictions, the process of filing and submitting VAT return is completely done through online. VAT registered businesses are required to submit or file VAT return usually by the end of the calendar month, following the end of the reporting period, either monthly or quarterly.

What is the meaning of VAT number?

At the time of registration for VAT, the businesses or individual will be assigned a unique 11 digit number which will serve as CST Number/ VAT Number/ TIN Number for the business.

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VAT likely to create finance and accounting jobs

 The Value Added Tax, which is likely to implement in the UAE from 1 January 2018, is expected to create as many as 5,000 jobs for the students of accounting and finance streams. The introduction of VAT in the GCC region will create an immediate need for graduates from finance backgrounds to assist businesses with their VAT implementation and taxation procedures.

The stat was confirmed by Paul Drum, who is the head of policy at CPA Australia and a tax expert. He said that the VAT is anticipated to create around 5,000 finance and accounting jobs in the region. He further added that VAT has been implemented and run by more than 150 countries around the world.

In a tax workshop held at the University of Wollongong in Dubai, Drum explained, “The UAE will apply a VAT rate of 5 per cent on taxable supplies which is very low in comparison to the average tax rate of 19 per cent globally. However, not everything will be charged VAT as the law makes provision for zero-rated and tax exempted goods and services to ensure that the impact of VAT on consumers is kept to a minimum.”

As for the job openings, Drum said that the launching of the VAT is definitely a good thing for current finance and accounting students in the country as they will get immense job opportunities in many big organizations.

Since the 5% VAT rate in UAE is the lowest among all the countries following this tax mechanism, the new tax system is not likely to create much burden on the businesses. The government revenues generated from taxation will be spent on creating more public facilities and in services like public health services, parks, public schools and transport facilities.

The VAT will be applicable on consumer electronics goods, cars, smartphones, legal services, jewelry, financial and accounting services, beverages, entertainment and eating out. Many basic need items, including basic food items, transport and public education, basic health facilities, etc., will be exempted from the VAT. However, the zero-rated tax is different from the exempt tax, in that the suppliers of zero-rates services and goods will still have to pay tax but will be able to reclaim the input VAT paid, whereas there is no mechanism of input credit for the suppliers of VAT-exempt goods.

As per the VAT norms, businesses with an annual turnover of Dh375,000 or more will have to register under VAT. There is also a voluntary registration facility for business with annual turnover more than or equal to Dh187,500 but less than the threshold limit of the normal registration. VAT registered businesses are required to maintain proper records of business deals and taxes paid to the government.

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VAT could emerge a cost centre for banks irrespective of rates

In VAT exempt categories, banks will have only limited recourse to input tax refunds

Dubai: Implementation of Value Added Tax (VAT) in the UAE starting from January 1, 2018 will have some adverse implications for the banking sector’s margins, irrespective of the rate at which the VAT will be charged on the financial services.

Following the introduction of VAT, it will apply to most supplies of goods and services and this may be at the standard rate of 5 per cent or at zero rate, referred to as taxable supplies. There will be a third category of supplies that will not be subject to VAT, referred to as exempt supplies.

Going by the indication in the recently introduced UAE VAT Law (Federal Decree-Law No (8) of 2017 on Value Added Tax), most financial services, except the fee-based services are going to be in the VAT exempt category. However, clarity on this will be available only when the government issues the Executive Regulation of this Decree-Law specifying tax rates and categories.

Going by the international practices, most financial service will fall in the exempt category, except fee based services. According to tax experts, many services offered by banks falling in the VAT exempt category could mean, these institutions are not able to recover the tax costs on inputs or pass it on to their customers, implying significant cost implications ultimately impacting margins.

VAT is likely to be an irrecoverable cost, negatively affecting margins for the banking sector. It is therefore imperative that the impact of VAT on UAE banks is clearly understood.

VAT is a tax on transactions and impacts all areas of business from IT systems to legal, HR to marketing, and procurement to finance. The standard rate of VAT is going to be five per cent. Whether a service is supplied at either five per cent or zero per cent VAT, the taxpayer making the supplies is generally entitled to recover any VAT incurred on their costs.

Blocked VAT cost

For banks, this will include administrative and cash flow costs. However, it is likely that most financial services will be VAT exempt. VAT exempt is not a rate of tax and so cannot be added to the price of goods or services. Supplies that are VAT exempt do not typically allow for VAT incurred on costs to be recovered, thereby creating a blocked VAT cost.

Transactions involving moving money are likely to be VAT exempt. International transactions may be zero rated or outside the scope of VAT. VAT registered businesses that supply goods and services subject to VAT at a standard rate or zero-rate are usually entitled to claim a “credit” for VAT paid on their business expenses (input VAT). However, in the supply of exempt goods and services, no input tax credit will be available. Therefore the VAT cost will be borne by these businesses.

Exemption means that no VAT will be charged on the provision of such exempt supplies and VAT incurred in relation to making these supplies cannot be reclaimed.

The exempt supplies generally include the acceptance of deposits, the provision of loans or granting of credit, the operating of any current, deposit or savings accounts, the issue, transfer or disposal of securities among others. In addition, any services banks provide acting in an intermediary capacity to facilitate the making of a financial supply, are generally exempt. Many fee based services such as advisory fees, debt factoring services, managing and safekeeping of physical securities are taxable.

A bank that provides both taxable (whatever the rate) and VATexempt services will be required to calculate how much VAT it is entitled to recover. The exact amount will depend on the local legislation would vary from fixed percentages to reasonable or special methods that may require negotiation with the tax authority.

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UAE businesses must register  

for VAT by Dec 4

Businesses with annual turnover of more than Dh375,000 should register on or before December 4, 2017

The online registration for five per cent Value Added Tax (VAT) is now open and businesses with an annual turnover of more than Dh375,000 should apply for registration on or before December 4, 2017, the UAE Federal Tax Authority (FTA) said.

The registration portal is available to all businesses around the clock. The website has been specially designed to provide guidance to registrars on the completion of their applications, said the FTA.

The agency has urged all businesses to adhere to a timeline for registration. Those with an annual turnover exceeding Dh150 million should register before October 31, 2017, and those with an annual turnover exceeding Dh10 million should register before November 30, 2017.

All businesses that must be registered by January 1, 2018, should submit their applications before December 4, 2017, to minimise the risk of not being registered in time for the beginning of 2018.

Khalid Al Bustani, director-general of the FTA, said the authority is committed to enhancing the readiness of businesses. “The FTA is keen to give the business sectors sufficient time to adapt their operating systems to the requirements of the VAT system.”

The FTA said businesses with taxable supplies and imports from abroad that are less than the mandatory registration threshold and exceed the voluntary registration limit of Dh187,500 annually can optionally register for VAT.

“This opportunity enables startup businesses that do not have the required income to optionally register for VAT,” the FTA said.

The timeframe for registration doesn’t restrict any companies to apply for registration before the due date. In short, even a company having less than Dh10 million turnovers can apply for registration now.

Even if the last 12 months’ turnover is less than the mandatory threshold Dh375,000, but expected turnover within the next 30 days is more than Dh375,000, still the business has to register. The proof of the annual turnover such as financial statement has to be uploaded in the application.

Companies can propose a manager to represent them in all aspects on tax matters. His personal details such as passport copy, emirates ID and contact details are to be provided in the application and uploaded.

If any of the partner/director of the company is a partner in any other company in the UAE either now or at any time in the last five years, the name of such companies should be given in the application.

There is an option for companies to register as a tax group. If more than one company is managed by the same management and there is proof of relationship between the companies, such companies can choose the tax group registration option. In such cases, the transactions between the group companies will not be taxable.

In order to register as a tax group, one should choose a prospective representative member of the group (main company). Once the application is submitted, a tax identification number will be allocated. Once the group application is submitted, the authority will issue a TRN for the group. In the application, the company’s name as well as the name of the manager should be filled in Arabic. The applicant should fill the name of the bank, branch and the IBAN number of the UAE bank in which it operates.

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