The UAE is three months away from the implementation of the Value Added Tax (VAT) and many of us are still wondering how the new tax will affect our businesses and daily lives.
VAT is supposed to be an indirect tax, which some would say is painless. Business owners will need to invest time and money in order to familiarize themselves with the concept of VAT including tax returns, tax audits, tax provisions in contracts and invoices and new cash flow management, just to name a few.
Rather than burying one’s head in the sand, it is vital to research and understand how to navigate this unknown territory.
Based on my international experience on VAT, I have broken down some of the key elements that need to be considered by every business operating in the UAE.
The transitional period
Transitioning from one norm to another is not always an easy process that is why it is important to note that any payment received after the 1st of January 2018 relating to a service or a product supplied before shall be subject to VAT. If the agreement does not mention VAT, the payment received will be considered as VAT inclusive.
General outlines of the VAT regulations applicable in the UAE
Once introduced, VAT will be automatically active in all GCC countries at a fixed rate of 5%.
All products and services (governmental and private) will be subject to VAT unless exempt such as those related to healthcare, food, insurance, education, local transport and some financial services. Residential property will be exempt, as opposed to commercial property which will be subject to tax.
VAT is payable in the country in which the service or product is considered to have been supplied. Essentially, this refers to products that are in the country in which the service provider is established or where the product is located at the time of the supply.
Goods and services exports outside the GCC will be exempt of VAT.
Companies must file a periodic VAT return in accordance with the regulations which will be promulgated, mentioning in particular, the amount corresponding to the VAT collected and deductible during the relevant period.
How will it impact your business?
Unless individuals decide to modify their consumer habits, the cost of living is likely to increase slightly whilst the government will be closely monitoring any excess made by certain businesses in that regard.
Companies must initiate their adaptation process - within the next few weeks, companies must sign-up on the new user-friendly government website: www.tax.gov.ae and obtain their Tax Registration Number (TRN). VAT registration is not required if the taxable supplies made in the UAE during the past 12 months (or the one to be made during the following 30-days) is less than AED 187,500. It will become optional if such sales fall within the range of AED 187,500 to AED 375,000 and mandatory if above.
Companies must review their invoice format to include certain mandatory items. Those are traditionally the companies’ full contact and TRN details, the VAT rate for each product or service (5%, 0% or exempted) and both the VAT free and inclusive totals.
Books and accounts must be reviewed to reflect VAT, both collected and deductible. Documents must be kept for a minimum period of five years.
Agreements with clients should be updated as soon as practicable. Contracts should clearly state whether the price is VAT inclusive or exclusive. They should also provide stronger or more adapted penalty clauses and indemnification provisions. Otherwise, the cost of the product or service will be deemed to be VAT inclusive.
Provisional cash flow must be increased to facilitate the payment of VAT which will be due “on the date of the supply of the goods or services, the date of the issuance of the tax invoice or upon partial or full receipt of the consideration, whichever comes first” (Article 23.1 of Common VAT Agreement of the States of the GCC. Regulations will be issued for companies willing to address VAT payments on bad debts.
Penalties will be applicable for late or absent payments.
I strongly recommend that companies comply with deadlines and seek advice for more complex operations involving, for instance, invoices for services and/or products submitted to different tax regimes, treatment of retainers and provisional payments, repetitive and/or partial delivery of services and goods, imports/exports within the GCC, offshore transactions, etc.
The UAE has had a strong legacy of implementing ambitious projects. Residents and nationals have always been positively impressed with the capacity of the UAE government to anticipate the future.
The vision of the future of this great country has always proven to be accurate. If taxes are implemented, then this is definitely for the best so let’s wait and see.
Alain Zahlan de Cayetti, Managing Partner of CVML (Dubai)