Tax Services
RECENT DEVELOPMENT IN UAE VAT LAW
One of our resident VAT experts, Sudarshan, speaks about the new guidelines and clarifications published by the FTA during the last few months at IFA Dubai Branch Meeting on December 22, 2018.
He highlighted the seriousness of proper tax compliance and recordkeeping requirement to avoid unnecessary penalties by the FTA.
VAT: IMPACT ON BUSINESSES IN BAHRAIN
- Impact on Revenue
- Procurement and Input Tax
- Contracts & Policies
- Record Keeping, IT & ERP Systems
- Compliances
- VAT impact assessments
- Advise on tax-efficient structuring/
- Drafting of Sample Tax Invoices & Tax Credit Notes
- Registering and filing VAT returns
BAHRAIN VAT: LARGE FIRMS TO REGISTER BEFORE JANUARY 1, 2019
VAT IN UNITED ARAB EMIRATES: PROFIT MARGIN SCHEME
- Second hand goods, meaning tangible moveable property that is suitable for further use as it is after repair;
- Antiques i.e. goods that are over 50 years old;
- Collectors’ items i.e. stamp, coins, currency and other pieces of scientific, historical or archaeological interest.
- Only those goods which have previously been subject to VAT before the supply in question may be subject to the profit margin scheme. As a result, used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme. There needs to be sufficient evidence or information to justify that the good was subject to previously.
- The goods must have been purchased from either:
- A person who is not registered for VAT.
- A registered business which has already applied Profit Margin Scheme on the same goods.
- The taxable person made a supply of the goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. 52 of 2017.
- Used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme.
- Where a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply has been issued.
- Sufficient evidence or information is not available to justify that the goods have been subject to VAT previously.
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, change operating models, and promote smart initiatives led by technology and employment continue to be key trends. In order to promote such change and create an economy that 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 in UAE?
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, 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 is required to register for VAT in UAE?
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 deadline 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 of 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
KSA VAT: WHAT ARE ZERO RATED SERVICES AND HOW CAN I ENSURE THAT I AM NOT CHARGING TOO MUCH TAX?
- 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.
- Whether the non-resident customer has a presence in KSA, even if temporary, that may result in them not satisfying condition 3 above,
- Whether the services concern activities being undertaken in KSA, and
- Whether the ultimate recipient of the service is benefiting from the service in KSA.
UAE VAT AND THE EXCHANGE RATE, HOW DOES TAX AFFECT CURRENCY EXCHANGES AND YOUR BUSINESS?
- For tax invoices prior to 17-May-18, exchange rates from reliable sources can be used.
- The exact exchange rate must be used, i.e. the same number of decimal places, as published.
- These rates are updated Monday to Friday and are based on rates prevailing at 6pm UAE time each day
- 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.
- Rates can be reliably sourced from Thomson Reuters and UAE Central Bank.
- 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.
- 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.
UAE VAT: WHAT ARE DESIGNATED ZONES AND WHAT DOES IT MEAN TO MY BUSINESS?
- If the supply of services from the designated zones is provided within UAE, VAT charged is at the standard rate of 5%. If the supply is of export of services, the VAT is zero rated.
- If the supply of goods is within the designated zones, it is not subject to UAE VAT law.
- The Onus is on the supplier to ensure that it treats the supply correctly for VAT purpose. Therefore, the supplier should be satisfied that there is no reason to believe that the goods may be used by the purchaser for non-qualifying purposes. A written statement from the recipient of the goods that it will not be consumed in a non-qualifying manner is sufficient.
- Transfer from mainland UAE to DZs of goods and services is not considered to be an export and is therefore treated as local supply, and VAT charged is standard rated.
- Transfer of goods between DZs is outside the scope of UAE VAT law provided:
- goods (in part or in whole), are not released into circulation, nor used or altered in any way during the transfer, and
- transfer of the goods is undertaken in accordance with the rules for Customs suspension per the GCC Common Customs Law.
- The FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may be liable, if the conditions in point 5 are not met.
- Upon importing goods from DZs into the mainland, the Import VAT is payable by the importer.
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone
- Jebel Ali Free Zone (North-South)
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- Free Zone Area in Al Quoz
- Free Zone Area in Al Qusais
- Dubai Aviation City
- Dubai Airport Free Zone
- Hamriyah Free Zone
- Sharjah Airport International Free Zone
- Ajman Free Zone
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- RAK Airport Free Zone
- Fujairah Free Zone
- FOIZ (Fujairah Oil Industry Zone)