VAT IN UNITED ARAB EMIRATES: WHAT IS IT AND WHAT ARE THE IMPACTS?

Why is VAT being introduced?

The Ministry of Finance and the wider GCC have agreed to implement Value added tax (VAT) at a rate of 5% from 1 January 2018. This landmark Agreement marks the start of a fiscal reform across the region.

The increased need to diversify the economy, changing operating models and promoting smart initiatives led by technology and employment continue to be key trends. In order to promote such change and create an economy which is safeguarded for the future, governments across the region have introduced various initiatives to reduce the dependency on oil-generated incomes and further stabilize the economy, one of which being the introduction of VAT in Dubai, Abu Dhabi and all of the Emirates.

How will VAT impact your business?

VAT in the UAE is likely to impact various segments of your business, therefore it is advisable to conduct a VAT mapping programme of your current procedures and processes in order to identify the VAT transformation required.

Depending on the size and complexity of your business and operations, VAT readiness can take from three months to a year, with an impact being felt across multiple touch points of your business, which include some, if not all, of the functions such as:

  • Finance, Purchasing and Sourcing and Imports
  • Sales and Marketing; Logistics and Customs
  • Legal and Human Resources; IT Department for Systems and ERP

Standard Rate: 5% to be applied to most goods/services supplied by ‘Chargeable Persons’

Zero Rate: Zero VAT (0%) applied to limited goods and services.

Exempt Supplies: Supplies outside the scope of VAT. Input VAT will not be recoverable.

Who needs to register?

Mandatory registration will be required for ‘Chargeable Persons’ (individuals, companies, groups, etc) making ‘Taxable Supplies’ of AED 375,000 (generally calculated over a 12-month period). The voluntary registration threshold will be AED 187,500.

POINTS TO CONSIDER

VAT Returns: Most Chargeable Persons will need to file quarterly returns. The deadlines for VAT returns will be a month from the end of the quarter. Some entities may need to file monthly returns.

Transitional Rules: Transitional rules will apply on stock / WIP as at 31 December 2017. Contracts that cross over the date of implementation of VAT will be affected.

Tax Audits: FTA has been given rights to undertake a Tax Audit on any person to ascertain the extent of compliance with the provisions of the LAW.

What if you decide not to change anything?

If nothing is done, there is a serious risk that your current business methodology will not be compliant with the new legislation. Furthermore, you might not be able to submit a complete and accurate VAT return in a timely manner. Non-compliance could lead to penalties or prosecution, whichever applies.

BAHRAIN VAT: IN COMPARISON

The government of Bahrain has announced the implementation of VAT from 1st January 2019. An Arabic version of the VAT law has been published. Implementing regulations will be released at a later date which will explain the VAT matters in further detail.

Some of the important points and differences to UAE and KSA VAT legislation are as follows:

1. Mandatory Registration – Threshold

The Bahraini legislation refers to the GCC agreement for the mandatory registration threshold which stipulates Saudi Riyal 375,000 as the basis of calculation. The Bahraini legislation has not clarified which rate of exchange rate will be used to determine the final value of threshold. Threshold value is likely to be 37,500 if we look at the example of UAE threshold which is not exactly equivalent to the exchange rate pertaining to, for example, 01 January, 2018. UAE used a rounded off exchange rate of 1AED/SAR to calculate its threshold. Bahrain is likely to use a round off figure of 10 BHD/SAR, hence, BHD 37,500 as the threshold.

2. Mandatory Registration – Period

Another important distinction when compared to KSA and UAE legislation would be the period of revenue considered for mandatory registration. KSA and UAE consider last 12 months and next 30 days of revenue for the purpose mandatory registration. In contract Bahrain considers last 12 months OR “anticipated revenue” in the next 12 months. Companies may have to provide signed contracts to establish future revenue.

3. Voluntary Registration – Threshold and Period

Similar to UAE and KSA the voluntary threshold will be half of the mandatory threshold and both revenues and expenses can be considered for this purpose. But similar to the distinction in the period, previous OR next 12 months of revenue and expenses can be considered for the registration.

4. Tax Return Submission Date

It will be the last day of the month subsequent to the tax period. For example, for Quarter Ended 31st March, 2019 the last date of submission would be 30th April, 2019. This is similar to KSA.

5. Tax Debit Notes

The document titled “Tax Debit Note” is officially recognized when compared to KSA and UAE where only additional invoices can be issued for any increase in the value of a Tax Sales Invoice. For instance, in UAE and KSA, if by error or omission a Tax Invoice was undervalued, you need to issue an additional Tax Invoice describing the change. Bahraini Legislation recognizes a Tax Debit Note which can be officially issued to rectify such an error, instead of an additional tax Invoice.

6. Pre-registration Expenses

In Bahrain, with regards to sale of taxable goods, only those Input VAT credits can be claimed where the respective taxable goods would be sold after the registration date. In terms of taxable services, no Input credits can be claimed prior to 6 months of registration date. This is similar to KSA.

The distinction in UAE is with respect to the input credits on services only. Input Credits can be claimed as long back as 5 years prior to registration, provided that these services were used to make taxable services.

7. Education Services and related goods/services

In Bahrain these are Zero rated supplies. The legislation has not restricted this provision to government institutes only, whether higher education or not. The implementing regulation is likely to further elaborate on this topic specially “related goods/services”, and whether transportation, uniform, educational aids etc. would come under the zero rate or not.

In UAE, Higher education is chargeable at 5% VAT where it is a private institute. Otherwise public and private education and related goods and services are zero rated with the exception of uniforms, school trips, food items, electronic devices etc.

In contrast in KSA, all education services and related goods/services are subject to VAT at 5%. Though, the VAT payable by KSA citizens on educations services and related goods/services will be borne by the KSA government.

8. Enforcement

In Bahrain, the enforcement of VAT legislation will be done through an existing pool of judicial officers and public enforcement officials. So we may expect more inspections and enquiries when compared to KSA and UAE, where new departments are formed for enforcement which would need sufficient time to hire, train and start their inspections.

9. Failure to submit VAT return in time

The time stipulated in Bahrain before a penalty is levied is 60 days, when a minimum of 5% to a maximum of 25% penalty, on the amount of tax, can be levied. In contrast UAE, and KSA apply penalty immediately after the due date is over which is 28 days and last day, of the subsequent month, respectively.

10. Prosecution

In Bahraini legislation there is much more emphasis on criminal charges to be levied upon the violations of the law, when compared to UAE and KSA where financial fines are largely emphasized and higher in value.

TRANSFORMING HR AND STRATEGIZING CHANGE MANAGEMENT

We were recently honored with “Mark of Excellence” for “Best HR Transformation & Change Management Strategy” at the Future Workplace Awards on November 13, 2018 at Park Hyatt, Dubai.

The initiative to transform the HR practices at our workplace was rolled in the last quarter of 2017 by our leadership team with the goals of improving productivity and performance management, automating HR, developing people- friendly policies and redesigning HR processes.

Therefore, the focus was on ‘the big picture’ for successful transformation.

“We intended to boldly pursue today’s inevitable journey to transform the traditional HR operating model via fully integrated change management strategies and strategically managed HR transformation.”

Sumeet Nayyar-CEO& Partner

“We aimed to develop and execute on the right plan by focusing on the people first.”

Nihar Kothari –Partner

“We encouraged curiosity across all facets of the organization which opened people’s minds allowing them to try new things differently.”

Abeer Syed – Partner

” We created a vision for change which helped us to direct, align and inspire employees.”

Tanmay Saxena – Senior Manager, Tax and Compliance Advisory
ACTION PLAN:

Our leaders recognized the huge trends that are emerging very rapidly and started working proactively to respond strategically every step of the way. The following action-plan was laid down.

GoalAction
Transform HR practicesHire a dedicated HR personnel
HR Audit
  • Audit policies according to UAE Labor Law
Establish retention strategies that promote the Firm as a great place to work/live.
  • Develop people friendly policies and procedures
  • Employee engagement activities
Employee HandbookComprehensive development of handbook including updated policies
HR Automation by ensuring process simplification and retaining the “human touch” and avoid creating a feeling that the HR function has been depersonalized
  • Employee self service
  • Automating leave management
Revamping Performance ManagementDevelopment of a PM model that aligns with business objectives
IMPLEMENTATION

“We adopted a realistic approach towards change management as it concentrated on reinforcing the people side of equation combined with effort to manage and execute the change.”

Affiniax Management

“Our most senior leadership believed in and supported the idea of revamping the Performance Management Framework — a framework focused on fueling performance in the future rather than assessing it in the past.”

Sheeba Mirza, HR Executive

We introduced the KPI and MSC model to develop our employees by weighting the KPIs and competencies so that there is a clarity of goals and competencies among the employees to deliver business outcomes.

Challenge: The challenge was just around change. We were sort of used to the rhythms of the old system

KICKOFF: There were phased roll-outs:

  • Mid-2018: May- We chose two departments with a pilot approach – Consulting and Corporate.
  • Training session was held by the HR Executive for the line managers and their direct reports to make them understand the model.
  • July 2018- We added the other departments – Audit, Accounts, Administration and Taxation later in the year.
  • Formation of steering groups consisting of HR Executive, Director and the Line Manager of each department.
  • And by the end of August 2018 we have covered all the departments.
RESULTS
CONNECTING CHANGE TO BUSINESS RESULTS
ProjectPurpose
Revamping Performance Management Framework – MSCs and KPIsEmployees are clear in understanding “how” to deliver on the expectations of “what” is expected. 70% weightage: KPIs and 30% weightage: Competencies
Free HR softwareAutomating HRMS thereby saving time, cost and increasing employees’ productivity.
  • Online Leave application system
  • Employee self service
People friendly workplace
  • Work from Home – 10 working days in a year.
  • Employee Referral Program
  • Complimentary Paid Leave – 2 festival leaves and a Birthday Leave every year.
  • Harassment Policy & Procedure
  • Team building activities such as monthly birthday celebrations, IWD 2018.
L&D Programs – YLP, FLP and Management Development ProgramDevelopment of employees at the entry, mid and senior level through customized learning programs.

KSA VAT: WHAT ARE ZERO RATED SERVICES AND HOW CAN I ENSURE THAT I AM NOT CHARGING TOO MUCH TAX?

The tax treatment of services provided by registrants under the UAE VAT and KSA VAT legislation is often a complex area, with both sets of tax laws providing strict rules on when such services can be subject to the zero rate of VAT.

In KSA, in particular, the law requires suppliers to assess a number of factors prior to zero-rating services.

Article 33 of the KSA VAT Implementing Regulations set out the conditions in which services can be subject to the zero rate of VAT. To qualify for zero rating, all the below conditions must be satisfied;

  • The supply of services must not take place in any GCC Member State* under the ‘special cases’ set out in the VAT laws,
  • The supplier must not have any evidence that the customer is resident in any GCC Member State and must have evidence that the customer is resident outside the GCC Member States,
  • The benefit of the services must not be received by the customer or any other person when that person is situated in KSA,
  • The services must not be related to any tangible goods or property (including real estate) situated within the GCC Member States,
  • The supplier must intend for the services provided to be consumed by the customer outside the GCC Member States, and
  • The supplier must have no evidence that the benefit of the services will be enjoyed within the GCC Member States.

* Note that, as the GCC states have not fully implemented the terms of the Unified Agreement on VAT, for the time being the term ‘GCC Member States’ solely refers to KSA for the purposes of the above. i.e. if the supplier has evidence that the customer is resident outside KSA, for the purposes of point 2 above he will be treated as having evidence that the customer is resident outside the GCC Member States for the purposes of the KSA VAT legislation.

In practice, determining whether a service to a particular customer satisfies the above conditions for zero rating can be a complex affair. Service providers may need to consider matters including;

  1. Whether the non-resident customer has a presence in KSA, even if temporary, that may result in them not satisfying condition 3 above,
  2. Whether the services concern activities being undertaken in KSA, and
  3. Whether the ultimate recipient of the service is benefiting from the service in KSA.

In light of the above, certain service providers are adopting a strict approach whereby they are by default charging VAT at the standard rate irrespective of whether their services to a particular customer satisfy the above conditions. Such an approach can result in adverse consequences, and in particular, may impose an unnecessary KSA VAT burden for non-resident customers who may not be able to recover such VAT.

It is important for suppliers to fully understand the conditions as set out by Article 33 to follow the correct VAT treatment of services provided to clients outside KSA. The GAZT is constantly issuing new guidance to assist registrants in determining the correct tax treatment of their supplies and you should seek advice if you are uncertain of the applicability of KSA VAT on your supplies as appropriate.

UAE VAT AND THE EXCHANGE RATE, HOW DOES TAX AFFECT CURRENCY EXCHANGES AND YOUR BUSINESS?

The Federal Tax Authority (“FTA”) published Article 69 in April 2018, of Federal Decree-Law no. (8) of 2017 for the clarification of Currency Exchange rate for VAT purposes with effect from 17 May 2018.

When a supply is made in any currency other than AED all taxable persons must use the Central Bank’s published exchange rates for the purposes of converting invoices issued in foreign currencies into the local currency (UAE Dirham) and calculate the VAT liability accordingly.

  1. For tax invoices prior to 17-May-18, exchange rates from reliable sources can be used.
  2. The exact exchange rate must be used, i.e. the same number of decimal places, as published.
  3. These rates are updated Monday to Friday and are based on rates prevailing at 6pm UAE time each day
  4. In instances where specific markets are closed due to local holiday, then the relevant rate to be used for VAT purposes will be the prevailing rate of the previous day at 6pm.
  5. Rates can be reliably sourced from Thomson Reuters and UAE Central Bank.
  6. The customs department shall convert the value to AED for the purpose of Import declaration, and automatically populate it in Box 6 of the VAT return.
  7. When the exchange rate used by the customs department is different from those published by the Central Bank, the former can be used, for declaring the VAT due on imports.

Your next step:

Businesses should consider the implications of this update on their transactions involving foreign currency to ensure that the correct amount of input VAT is being recovered, and furthermore understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this update and advise you on the recoverability of input VAT and VAT treatment of transactions involving foreign currency.