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0 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VALUE ADDED TAX (VAT) Are You Ready? 23 August 2017
AGENDA
1. Understanding of VAT
2. VAT – How it Works
3. VAT Basics and Terminologies
4. Progress so Far
5. Expected Next Steps
6. Compliance Requirement
7. Generic Impact Areas and Challenges
8. VAT Impact on ERP Systems
9. Typical IT Implementation Issues
10. Readiness Requirement
11.Questions?
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UNDERSTANDING OF VAT
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UNDERSTANDING OF VAT – GLOBAL PERSPECTIVE
B A S I C F R A M E W O R K Following is brief on VAT and the global framework adopted.
Indirect tax applicable on
consumption of goods or services
Businesses will have to charge VAT on supplies
made
VAT shall be charged with
eligibility to claim off-set of input
taxes paid
One of the most common types of consumption tax found around the
world
Deductions of VAT would be
with some exceptions
Concept of Zero Rate Supply & Exempt Supply
relevant to examine
Charged at each step of the ‘supply
chain’
May apply on imports in addition to
existing Customs duty
Currently present in more than
150 countries
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VAT – HOW IT WORKS
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VAT – HOW IT WORKS
#1 : Collects AED 1 as VAT Net VAT to Government = AED 1
HOW VAT WORKS?
GOVERNMENT
#4 CUSTOMER
#2 Supplier of services
VAT Deposited to Govt. AED 1
VAT Deposited to Govt. AED 2.5
#1 Supplier of goods
#2 : Collects AED 2.5 VAT Net VAT to Government = AED 2.5
#3 : Pays AED 0.5 VAT; Collects AED 4 VAT from customer Net VAT to Government = AED 0.5
#4 : Pays AED 4 VAT [total of VAT # 1+2+3 (to the extent of AED 0.5]
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VAT BASICS & TERMINOLOGIES
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VAT IMPACT – TAXABLE SUPPLY
Value: 150 Input VAT: 7.5
Synopsis
Illustration:
Procurement • Value: 200 • Output VAT: 10 Output services
Cash outflow / refund Amount
Total Output Liability 10
Input VAT (creditable) 7.5
VAT outflow in cash 2.5
Cost of procurement Amount
Value of procurement 150
Add: Non-creditable VAT 0
Total cost 150
Cost to Customer Amount
Value of service 200
Add: Output VAT @ 5% 10
Total cost to customer 210
Analysis:
Output tax @5% Input VAT – ‘Creditable’ Net impact – Tax on ‘Value Addition’
Customers An Organization
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VAT IMPACT – ZERO/ NIL RATED SUPPLY
Value: 150 Input VAT: 7.5
Synopsis
Illustration:
Procurement • Value: 200 • Output VAT: 0 Output services
Cost of procurement Amount
Value of procurement 150
Add: Non-creditable VAT 0
Total cost 150
Cost to Customer Amount
Value of service 200
Add: Output VAT @ 5% 0
Total cost to customer 200
Analysis:
Cash outflow / refund Amount
Total Output Liability 0
Input VAT (creditable) 7.5
VAT Refund 7.5
Output tax @ 0% Input VAT – ‘Creditable’ Net impact – No VAT
Customers An Organization
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VAT IMPACT – EXEMPT SUPPLY
Value: 150 Input VAT: 7.5
Synopsis
Customers
Procurement • Value: 200 • Output VAT: 0 Output services
Cost of procurement Amount
Value of procurement 150
Add: Non-creditable VAT 7.5
Total cost 157.5
Cost to Customer Amount
Value of service 207.5
Add: Output VAT @ 5% 0
Total cost to customer 207.5
Analysis:
Cash outflow / refund Amount
Total Output Liability 0
Input VAT (creditable) 0
Cash outflow / Refund 0
An Organization
Illustration:
Output VAT – No VAT chargeable
Input VAT – Non-creditable
Net impact – Blocked credit
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• Common VAT framework will form the basis for the introduction of domestic VAT Law by each member State;
• VAT would have a direct impact on nearly all business operations;
• it would also have an significant bearing on the support and administrative functions which are as follows:
VAT OVERVIEW & IMPACT ON BUSINESS FUNCTIONS
Tax charged at each step of supply chain and paid by the customer.
Charged as a (%) on price of goods & services.
VAT zero rate / exemption include health, education, basic foods, etc.
5% VAT GCC
OVERVIEW
01 January 2018 Anticipated Implementation Date
VAT Impact on various
business domains
Financial Accounting &
Reporting
Procurement and
Manufacturing
Inventory Management &
Logistics
Legal & compliance
IT systems
Sales & Distribution
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PROGRESS SO FAR
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VALUE ADDED TAX
P r o g r e s s s o f a r P r o g r e s s s o f a r
March - May 2017 Ministry of Finance (MoF), UAE conducted workshops and awareness sessions
VAT Awareness session for business sector and relevant stake holders Participation of around 15000 Companies
May 2017
KSA – VAT Law
KSA released its draft VAT Law for public consultation
Nov 2016 GCC member countries ratify the VAT Framework for the whole GCC region
VAT Framework
Updated FAQ; UAE – Federal Law No. (7) of 2017 on Tax Procedures
July 2017 MoF, UAE released updated FAQs in the public domain; MoF, UAE issues Tax Procedure Law as foundation for planned UAE taxation
July 2017
KSA – VAT Regulations
KSA issues its draft VAT Implementing Regulations for public consultation
August 2017 The FTA, UAE and MoF in cooperation with institutions and government authorities such as ‘Chamber of Commerce launched second phase of awareness workshop on VAT and excise tax treatment
Awareness Workshop – Phase II
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He also said the law regarding the new value-added tax (VAT) will also be signed in the third quarter and its regulatory framework will be released in the fourth quarter. "We are starting with Saudi Arabia and the UAE in January and the rest could implement until the end of 2018," he said.
The UAE’s tax official said the excise tax law will be signed by the government in the third quarter, while its regulations will be released in the following quarter.
EXPECTED NEXT STEPS
1
Draft VAT Law – Q3
2
Registration – Mid September
2017 350,000 firms expected to
register
3
Implementing Regulation to
follow the Draft VAT Law
4
Excise Tax Implementat
ion by Q4
5
VAT Roll Out 01 January
2018
Source : https://www.zawya.com/mena/en/story/Excise_Tax_UAE_to_implement_tax_on_tobacco_and_energy_drinks_this_year-ZAWYA20170816052646/
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COMPLIANCE REQUIREMENT
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COMPLIANCE REQUIREMENTS CHECKLIST
VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE
One Registration for one entity within Member state
Threshold limit likely to set at AED 375,000
Registration likely to begin from End of September 2017
Option for Voluntary Registration Available
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4 2
1 3
Group Registration likely to be permissible
Penal Consequences if liable to register but not registered
Every person exceeding Threshold Turnover limit to Compulsory Register
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PAYMENT OF TAXES & FILING OF RETURNS
VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE
Likely Tax period to be 3 months or less
There could be refund scenario as well
Filing of Return also mandatory for disclosure of procurement and Supply transactions, Emirate-wise
Payment of Tax is net of output less input
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6
5
4 2
1 3
Non-compliance may lead to Penal implications
Payment & Return Filing likely to be on E-Platform (Arabic ?)
Every taxable person liable to pay taxes due at end of Tax period
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VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE
INVOICE & RECORD KEEPING
Invoice to be valid document for claim of credit by Buyer
Books of Accounts and Records to be maintained are prescribed in framework
Prescribed particulars to be printed on invoice
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5
4 2
1 3
To be preserved for 5 years
Additional Records may be suggested
Every taxable supply has to be supported by invoice
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GENERIC IMPACT AREAS AND CHALLENGES
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IMPACT OF VAT ON YOUR BUSINESSES
Accounting and Reporting Technology Supply Chain Program
Management Advocacy Compliance Indirect Tax Assessment
Businesses will need to amend systems, processes and procedures and will need to ensure they comply with the new requirements, such as for example:
• Charging VAT on supplies at the correct rate
• Calculating VAT deductible on purchases
• Calculating the overall net amount of VAT to pay/ refund
• Submitting VAT returns, showing the required information, within the prescribed deadlines
• Paying the net amount of VAT due, within the prescribed deadlines
• Keeping the correct documentation in relation to invoices, records, accounts, VAT returns, etc.
While VAT is charged and collected by businesses on behalf of the Government and as such should not be considered as a cost, there will be an additional burden in terms of administration and compliance with the new legislation
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Classification • Classifying the supply into taxable,
zero-rated and exempt supply • Treatment for Government & Non-
Government entities • Treatment for Education & Medical
sector • Not for profit organisation
Transitional Impact • Understanding impact on cut-over
transaction; • Changes to be considered in the
contracts/ IT system from cut-over perspective
Compliance Requirement • Serial number invoicing; • Compliance burden i.e. filing of
Returns, making timely Payments, Records maintenance, etc.
• Electronic Records • Reporting in English or dual language
Information System • Integrating various systems on
which the organization operates; • Configuring various formats for
complying with the prescribed requirements
• Configuring requisite fields to generate reports in desired formats
Key VAT issues • Valuation on related part transaction; • Inter Co. transaction & Cross Charge
between Group Co. • Group reg vis-à-vis single reg; • Availment of correct Input Credit; • Leakage of tax due to dealing in multi
tax structure products;
Functional Impact • Government Grants & Subsidy • Treatment of free supplies and
discount • Supply Chain Re-engineering and
mapping the same through system • Location of server ? • Aligning chart of accounts
BUSINESS IMPACT & IT CHALLENGES
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VAT IMPACT ON ERP SYSTEMS
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VAT IMPACT ON ERP SYSTEMS
TAX STRUCTURES
• Invoices • Reports • Payments
• Codes and Rates • Classification • Logics & Rules
• Customer Master • Product Master • Vendor Master
• Legal Entities • VAT Groups • Locations
• Inter / Intra company Ops • Supply Chain • Sales processing • Petty Cash and Expenses • Service contracts • Projects
• Chart of Accounts (Tax) • Fixed Assets • Payables Management • Receivables Management
ERP SYSTEM
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ILLUSTRATIVE ERP SYSTEM CONSIDERATIONS FOR VAT
Business Transaction
• Business transactions like sales, purchase, inter company services etc. needs to be aligned with the VAT law
Master Data
• Various master data such as chart of accounts, vendor master, customer master, price master, material master etc.. need to be updated
• Design, development and logic formulation of tax/ proforma invoices will be required as per the provisions of the VAT law, where prescribed
Tax Invoice Formats
• Transaction data like open sales orders, purchase orders, contracts and agreements will be migrated during the cutover activities
Data .M.. iigration
• Design, development and testing of various tax reports, forms etc. is required during the VAT transition Reports
Tax Calculation and Credit
• Configurations for automatic tax calculation procedures and credit mechanism for VAT would be required to be aligned with the VAT law
Accounting Aspects
• Various accounting aspects of the VAT for eg: accrual and reversal of VAT etc. will be required to be aligned with the VAT law
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TYPICAL IT IMPLEMENTATION ISSUES
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TYPICAL IT IMPLEMENTATION ISSUES
Initiating it very late;
IT team/software vendor not clear about the VAT requirements and configurations
Delay in issuing VAT patches by the software service providers which results in delay and ineffective implementation
Issues in configurations and customisation – post download of patches
Issues while migrating from test environment to production
Not clear about the chart of accounts requirements under VAT
Errors in issuing invoices, generating reports, etc in test scenario
Errors faced while conducting UATs are not addressed
Many systems are outdated and can’t support changes/ modification made to it
Integration of multiple ERP or softwares used
Many users are accustomed to entering fixed set of data and sudden change makes it difficult for users to adapt
Large number of master data of customers and vendors is required to be collated and updated in the system
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READINESS REQUIREMENT
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28
Post Roll Out
• Mapping on weekly
basis the system
performance;
• Monthly
reconciliation of
VAT liability and
VAT input tax;
• Maintaining records
01 Jan to 28 Apr 2018
READINESS REQUIREMENTS
START
• Formation of VAT
task force;
• Planning and
initiation
ANALAYZE
• Conducting impact
assessment
• Including all
functions;
• IT systems Gap
analysis
Implementation & Training
• VAT Registration;
• Implementing the
recommendations
of Impact report;
• Conducting
functional and
compliance
training
01 Sept to 31 Oct 2017
• Coding the tax
masters;
• Configuring
formats;
• Coding tax logics
IT Implementation TEST
• Performing user
acceptance test;
• Verifying the tax
logics;
• Extracting sample
reports and
documents
01 Nov to 15 Dec 2017
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Questions ?
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THANK YOU!!
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