Obaid Humaid Al Tayer, Minister of State for Financial Affairs, has stated that the UAE will implement VAT at the rate of 5% on 1 January 2018, quoted as saying 150 food items, health, and education to be exempted.
The Gulf Cooperation Council (GCC) resolution covering the tax will come into effect at the same time in 2018 but GCC countries will may do so until January 1 2019 to implement VAT at the latest; the senior official was quoted as saying at the conference hosted by the Ministry of Finance in Dubai.
What is VAT and what’s the difference with Sales Tax
Value Added Tax (or VAT) is an indirect tax that is collected for government by an intermediary (e.g. a retail store) from the person that ultimately pays the tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax. A business pays the government the VAT that it collects from the customers while it may also receive a refund from the government on the VAT that it has paid to its suppliers. The net result is that the VAT receipts to government reflect the ‘value added’ throughout the supply chain.
Sales Tax similarly to VAT is a consumption tax. It defers from VAT as in many countries sales taxes are imposed on transactions involving goods. Furthermore, it is imposed on the final sale to the consumer. This differs with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale.
VAT is considered a more sophisticated approach to taxation as opposed to sales tax as it makes businesses serve in a way acting as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
The importance of VAT for UAE
The UAE Federal and Emirate governments provide citizens and residents with many public services and infrastructure including hospitals, roads, schools, parks, waste control and police services. These services are currently paid from the government budget. Consequently, VAT will be a new source of income to the government which will contribute to the continued provision of high quality public services into the future. It will, however, help the government to reduce its dependence on oil and other hydrocarbons as a source of revenue, while moving towards to its vision.
The UAE is not discounting the possibility of collecting other forms of tax. “As per global best practice, the UAE is exploring other tax options as well. However, these are still being evaluated and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however,” said the Ministry of Finance.
What should businesses need to know and do to prepare for VAT?
If the initial date for the VAT roll-out is followed, businesses can probably start registering for VAT from 1st October 2017. As announced recently, the registration will be open three months before the go-live date. Companies will have the option to register online.
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 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.
For most businesses, VAT returns should be filed every three months. Filing of returns can also be done online using the government’s eServices.
“Once the law is out, businesses would first have to figure out whether their products/services are taxable or not and if yes, they would have to ensure that their billing or invoicing process is capable of adding a VAT charge to all taxable products. The easiest way to do this is to alter your IT systems to automatically calculate and add VAT to the invoices,” said Pardasani.
Businesses are encouraged to implement the new tax system, but the Ministry of Finance said that the government is currently in the process of defining the exact fees and penalties for non-compliance.
Should companies start hiring VAT professionals?
“It is essential that businesses try to understand the implications of VAT now and once the legislation is issued, make every effort to align their business model to government reporting and compliance requirements.” said the Ministry of Finance. According to that, businesses may need to change their core operations, financial management and book-keeping, technology and human resource mix in order to prepare for VAT. Businesses are also strongly advised to ensure that in all the commercial contracts they enter into, they include a clause that spells out that the VAT burden can be passed on to the consumer.
Hiring new staff that will enable businesses prepare for and implement the new tax policy should be done at this point in time. “Companies should have started to think about the additional resources they would need to ensure VAT compliance. Depending on how tedious / frequent the process is, companies would need resources based on the complexity of their operations. But one thing to bear in mind is that VAT is not only a finance issue,” said Pardasani. “It flows through all operational departments of the company. This is because wherever a company acquires products or services, it may pay VAT and it would need to capture all the documentation relating to VAT paid, in order to claim refunds.”
What our team can do for you
At Freemont Group, we can manage your accounting processes efficiently and provide you with the timely and accurate information and analysis that is critical to strategic decision-making. We do the same for your VAT compilations which we can submit. Freemont Group provides VAT advisory, tax optimization, tax implementation and training services in the UAE and throughout the GCC.
Our clients receive easy to read, consistent reports of all their international activities, along with the accompanying management reports. We also provide payroll and human resource consulting services for companies of any size whether there is 1 entrepreneur or they employ 100 employees. Our fund administration services include inter-alia, fund accounting and valuation services in compliance with IFRS and best practices.