In the rapidly reforming legal environment of the GCC, Introducing Value Added Tax (VAT) is one of the boiling topic. we have highlighted important imposition of VAT for GCC businesses. We recommend some easy phases businesses might think about now, in preparation for the implementation of VAT.
What is VAT?
VAT is a tax on the supply of goods and services. Collection of VAT is enabled by businesses, through the supply chain, on account of the government. VAT is paid by the purchaser of the goods or services at every step of the supply chain.
You are required to account to the government for the difference between the output VAT and input VAT .If you are in the process of the supply chain, you can offset the VAT you pay to your suppliers (known as input VAT) from the VAT you gather from the purchasers of your goods or services (known as output VAT)., if the output VAT is the excessive amount. In a lay man’s word, in the condition where you have obtain more VAT than you have paid. If you have paid more input VAT than you have received as output VAT, you may recover the difference from the government. The end purchaser is ultimately liable for the full amount of VAT.
It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax.
GCC countries have decided to implement taxation as part of the governments’ efforts to diversify revenues in the context of sharp decline in oil prices. The International Monetary Fund has been recommending fiscal consolidation in the GCC through diversification of government revenues and reduction of subsidies.
How does it work?
Companies in the UAE that report annual revenues of over Dh3.75 million will be obliged to be registered under the GCC VAT system
The companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation.
With time it will eventually become obligatory for all companies to be registered under the system, when it is rolled out in the second phase, regardless of the reported revenues.
How will VAT affect your pocket?
Will everything be taxed?
The UAE will remain tax-free in many ways even after the implementation of VAT as there is no income tax on salaries in the country. Free zones in the country also offers tax free environment including 100 per cent foreign ownership in free zones, ease of doing business.
The government is likely to use its ability to either zero-rate or exempt many supplies most likely to impact the common man to ensure that the impact of VAT is kept to a minimum.?Essentially, the intentions of most governments when introducing a VAT is to focus more on taxing discretionary spend by consumers, while ensuring that those at the lower end of the spectrum are protected and assisted.
What will be exempt from the tax?
The UAE government has already announced that 100 food items, health, education, bicycles, and social services would be exempted from VAT.
What will be taxed?
Electronics, smart phones, cars, jewellery, watches, eating out, and entertainment will fall under the taxed category. GCC countries are also expected to introduce excise duties on certain beverages that are deemed to be harmful to health, including those with high sugar content.
You will not have to pay income tax in the UAE.
Will VAT be a cost to the business?
Where you are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) you will be entitled to reclaim VAT you incur on costs. Where you are engaged in activities that are exempt from VAT and you cannot reclaim VAT incurred on costs, VAT will be a cost to your business (as suppliers will charge VAT that you cannot reclaim).
Will it affect prices/margins?
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods/services. The price will need to take account of VAT, i.e. whether you charge Dh100 or Dh105, the amount will be deemed to include VAT.
Do I need to start preparing for VAT? What should I be doing now?
There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of your business and it is essential you consider the impact now and determine how best to deal with it.
Why VAT is good for MNCs
Why is VAT being considered by the GCC?
Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.
The national governments of the GCC states have been collaborating on the imposition of VAT concurrently across the Gulf Cooperation Council. A Gulf Cooperation Council Unified Agreement for VAT (also known as the VAT Framework Agreement) exists in final form, but has not been made official.
The VAT Framework Agreement needs to be agreed and brought into effect by respective of the GCC states, exclusively. It is likely that each GCC State also will issued its own legislation to practically implement VAT in its jurisdiction. Untill nw, the government of the Kingdom of Saudi Arabia has accepted the VAT Framework Agreement, as announced in the KSA Official Gazette (but without issuing the Agreement). No other GCC state has issued any form of sanction yet.
However, the issue of increasing price or absorbing VAT will be a major concern for companies selling small value items.
“Consider a product is sold for AED1 now but the company can’t simple increase it by 5 percent to AED1.05. Hence, it has to either absorb the cost and maintain the same price, or round it up on the higher side that will lead to a substantial price increase” he said.
Conn said companies are likely to face cash flow issues post VAT is implemented since the government is yet to clarify on duration of the tax refund process.
There is market assumption about the contents of the VAT Framework Agreement. The following are the key facts which have been made official for UAE Companies by the UAE Ministry of Finance:
The UAE government has specified that it is probable that VAT will be effective in the UAE on 1 January 2018.
The time span for other GCC states may not be the same.
The average rate of VAT is expected to be 5%.
Companies will require to be VAT registered.
The UAE Ministry of Finance has specified that registration is likely to be accessible three months before the launch of VAT in the UAE.
Companies will be able to complete their VAT registration online.
Companies are required to complete and submit VAT returns to the government on a consistent basis. The UAE Ministry of Finance has specified that it is anticipated that the default VAT return filing period will be three months. It means, there will be a quarterly filing and payment/reclaim process for maximum Companies