1 2 3 of VAT in UAE
VAT Overview
THE LAW
• Unified Agreement for VAT– provides a framework for all of the GCC members to follow
• National law – each GCC country will enact their own law to implement the tax, based on the Unified agreement.
• Unified Agreement heavily based on European Law
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VAT will be enforced from 1 January 2018
5% unified rate on Goods & Services across 7 GCC States
KEY CONSIDERATIONS
Taxable supplies - What is subject to VAT?
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In principle, every supply of goods and services provided by a business is subject to VAT, unless:• There is a specific exemption; or • The transaction is considered falling outside the scope of the VAT system
Types of supplies within the GCC VAT regime
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VAT is an input and Output Tax
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Step 1 Step 2 Step 3Sale at origin Downstream supply
ChainEnd customer
Regular Sale Price
VAT collected by Seller
Credit from previous stage
$ 100
$ 5
- $ 0
$ 200
$ 10
- $ 5
$ 1000
$ 50
- $ 10
Who Pays?When the end customer buys the product, the 5% VAT is added to the final sale price ($ 1050) effectively making the end consumer pay the full cost of the VAT.
The difference between output tax in sales price and input tax in purchase price is VAT.
TOTAL VAT COLLECTED$ 50
Sale Price + 5% VAT
$ 105 $ 210 $ 1050
• Businesses collect the VAT on their sales (output tax) and pay it on purchases (input tax) from otherbusinesses. This effectively turns them into tax-collecting agencies. The VAT moves up the value chain untilthe customer ultimately pays the entire cost of the VAT.
Illustrative
What is payable to the government is based on the NET VAT position of the entity
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Business charges VAT on sales
(Output tax)
Business pays VAT on purchases(Input tax)
Net VAT (Output tax – Input tax)
Payable to the Tax Authority Refundable by the Tax Authority
NegativePositive
Equals
Less
Taxable supplies – The standard rate of VAT
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Supplier charges VAT at 5%
Intermediary claims back VAT
Consumer pays VAT of 5% on the final pricePurchases:
5m + 250kSale to customers:10m + 500k
VAT return:VAT on sales: 500kVAT on purchases: - 250kNet VAT payable: 250k
5% VAT 5% VAT
Sale of goods to customers based in the same member state as the supplier
Taxable supplies – The zero rate of VAT
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Supplier charges VAT at 5%
Intermediary claims back VAT
Purchases:5m + 250k
Sale to customers:10m + 0 VAT
VAT return:VAT on sales: 0VAT on purchases: - 250kNet VAT refundable:250k
5% VAT 0% VAT
Consumer does not pay any VAT
Export of goods to customers based outside of GCC
Exempt supplies
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Landlord charges VAT at 5%
Bank cannot claim back VAT
Purchases:5m + 250k
5% VAT No VAT
Consumer does not pay any VAT
Exempt provision of financial services:10m
250K is not refundable and is a cost for the bank
Rental of Office Space
VAT – KEY FACTS The Basic Principles Summarized
• VAT is charged on sales (Normally referred to as ‘output tax’ and ‘outputs’)• VAT is paid on purchases (Normally referred to as ‘input tax’ and ‘inputs’)
• The OUTPUT TAX is collected from customers and paid to the government• The INPUT TAX is paid to your supplier and claimed back from the government
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CompanyINPUTS OUTPUTS
VAT – KEY FACTSFiling VAT returns – pay and claiming VAT
• VAT is declared monthly or quarterly• The output tax is paid over minus input tax
The VAT declaration (NB the VAT return will require additional data)
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Output tax 1000
Input tax (400)
payable 600
VAT – KEY FACTSThe scope of VAT:
• Taxable supplies made by taxable persons in the course or furtherance of a business• Imports of goods• Reverse charges
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Scope Definition
Taxable supply Any transaction on which VAT is charged at zero or standard rate
Supply Anything done for consideration
Supply of Goods Transfer of ownership of tangibles, finance leases, real estate
Supply of services Anything that is not goods, includes refraining from doing something
Taxable person A person who is or should be registered for VAT
Person Company, partnership individual, unincorporated body
Business (economic activity)
An activity being practiced continuously and regularly, including commercial, industrial, agricultural, professional, service activities, or any usage of material and non-material property and any similar activity.
VAT – KEY FACTSWho has to register?
• Registration threshold: 375,000 AED• Voluntary registration: 187,500 – 375,000 AED
Calculation based on:
• Look back over past 12 months; or • Expected turnover for next 12 months
• VAT grouping possible
Registration open since October 2017 – Large entities deadline is 31st October 2017Other deadlines are falling in next couple of weeks
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VAT – KEY FACTSBasic principles of VAT recovery
VAT recoverable if:• Its is incurred in connection with taxable
supplies;• In the course or furtherance of the business.
VAT is not recoverable if it relates to:• Exempt supplies• Non-business activities
VAT that relates partly to taxable supplies:• Apportioned (‘partial exemption’)
Evidence (tax invoice) will be required
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INPUT
TAX
TAXABLE CLAIM
EXEMPT BLOCKED
PART TAXABLEPART EXEMPT
PART CLAIM
THE REVERSE CHARGE
VATReverse charge
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Seller A Buyer
Services (VAT zero)Price 100
UAE KSA
Reverse charge(Applies Input & Output tax)
Output tax 5 Rev charge
Input Tax (5) Rev charge plus input tax
Payable ZERO
Buyer’s VAT declaration (for illustrative purposes assume no other sales or purchases)
A business buys services from overseas
REVERSE CHARGE• The reverse charge ensures VAT is paid
in the buyer’s country.• It ensures the buyer can gain no
advantage by buying from a foreign supplier
• For most businesses it is a paper exercise with no VAT cost.
• For a business that cannot claim all of its VAT– the reverse charge will create a ‘real’ cost.
INTERNATIONAL TRADE
VATMovement of goods
Sales between GCC countries•Business to Business sales – Reverse charge for buyer•Business to consumer – seller charges VAT
(Obligation to register if above threshold of USD 100,000
Export sales (i.e. to buyers outside GCC)• Zero-rated – all customers
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VAT Movement of goods (B2B) - example
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UAEKSA
Seller Buyer
Goods
• No VAT in UAE• Reverse charge in KSA
• Seller will need evidence of export to support zero-rating
VAT Movement of goods – Local stock
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UAE KSA
Seller Buyer
Goods
INVOICE
• As goods are located in KSA when allocated to customer the seller makes a supply in KSA
• Seller must register for VAT in KSA
Place of supply of services – basic rule
• B2B – place where the customer belongs (reverse charge kicks in) • B2C – place where the supplier belongs
Exceptions to the basic rule
• Land – where the land is located• Catering and hotels - location• Telecoms – where the service is enjoyed• Events – where the event takes place
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VATInternational Services
FREE ZONES
VAT Free Zones
What do we know?• Information coming in from the FTA • Clarity on free zones in coming weeks
Possible outcomes • Relief for gated zones?
Likely outcomes• Reliefs for international trade and movement of goods and passengers • Relief for un-gated zones to be seen
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WHAT SHOULD BUSINESSES BE DOING NOW?
Standard Impact of VAT on Businesses
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Cash flow
VAT Readiness
Intercompany transactions
Contractual agreementsIT systems
Change management / training
Business Communityreadiness
VAT function
Governance
Need for additional cash flow considering treatment of CAPEX input credit, applicability of VAT on unbilled consumption, payment delays, etc. Also need to take into consideration tax payment due dates, refunds, cash collection lead time, etc.
Updates to T&Cs of all commercial agreements to factor VAT
Customer and suppliers will need to register, meet Tax authorities requirements and provide mandatory information to ADWEA
Deployment of VAT function responsible for ensuring tax compliance
Grouping of inter companies to minimize VAT impact. Pricing and invoicing of transactions that falls outside the grouping.
Enablement of standard tax engines and updates to respective systems to capture input and output tax e.g. Maximo, Customer care and billing, Oracle
Significant amount of training and change management needs to be performed to customers, suppliers and employees
Updates to policies, processes and controls for VAT impacted areas (e.g. accounting, SCM, etc)
Questions ?
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