1 2 3 of VAT in UAE

VAT Overview

THE LAW

• Unified Agreement for VAT– provides a framework for all of the GCC members to follow

• National law – each GCC country will enact their own law to implement the tax, based on the Unified agreement.

• Unified Agreement heavily based on European Law

Page 2

VAT will be enforced from 1 January 2018

5% unified rate on Goods & Services across 7 GCC States

KEY CONSIDERATIONS

Taxable supplies - What is subject to VAT?

Page 4

In principle, every supply of goods and services provided by a business is subject to VAT, unless:• There is a specific exemption; or • The transaction is considered falling outside the scope of the VAT system

Types of supplies within the GCC VAT regime

Page 5

VAT is an input and Output Tax

Page 6

11/6/2017 6

Step 1 Step 2 Step 3Sale at origin Downstream supply

ChainEnd customer

Regular Sale Price

VAT collected by Seller

Credit from previous stage

$ 100

$ 5

- $ 0

$ 200

$ 10

- $ 5

$ 1000

$ 50

- $ 10

Who Pays?When the end customer buys the product, the 5% VAT is added to the final sale price ($ 1050) effectively making the end consumer pay the full cost of the VAT.

The difference between output tax in sales price and input tax in purchase price is VAT.

TOTAL VAT COLLECTED$ 50

Sale Price + 5% VAT

$ 105 $ 210 $ 1050

• Businesses collect the VAT on their sales (output tax) and pay it on purchases (input tax) from otherbusinesses. This effectively turns them into tax-collecting agencies. The VAT moves up the value chain untilthe customer ultimately pays the entire cost of the VAT.

Illustrative

What is payable to the government is based on the NET VAT position of the entity

Page 7

Business charges VAT on sales

(Output tax)

Business pays VAT on purchases(Input tax)

Net VAT (Output tax – Input tax)

Payable to the Tax Authority Refundable by the Tax Authority

NegativePositive

Equals

Less

Taxable supplies – The standard rate of VAT

Page 8

Supplier charges VAT at 5%

Intermediary claims back VAT

Consumer pays VAT of 5% on the final pricePurchases:

5m + 250kSale to customers:10m + 500k

VAT return:VAT on sales: 500kVAT on purchases: - 250kNet VAT payable: 250k

5% VAT 5% VAT

Sale of goods to customers based in the same member state as the supplier

Taxable supplies – The zero rate of VAT

Page 9

Supplier charges VAT at 5%

Intermediary claims back VAT

Purchases:5m + 250k

Sale to customers:10m + 0 VAT

VAT return:VAT on sales: 0VAT on purchases: - 250kNet VAT refundable:250k

5% VAT 0% VAT

Consumer does not pay any VAT

Export of goods to customers based outside of GCC

Exempt supplies

Page 10

Landlord charges VAT at 5%

Bank cannot claim back VAT

Purchases:5m + 250k

5% VAT No VAT

Consumer does not pay any VAT

Exempt provision of financial services:10m

250K is not refundable and is a cost for the bank

Rental of Office Space

VAT – KEY FACTS The Basic Principles Summarized

• VAT is charged on sales (Normally referred to as ‘output tax’ and ‘outputs’)• VAT is paid on purchases (Normally referred to as ‘input tax’ and ‘inputs’)

• The OUTPUT TAX is collected from customers and paid to the government• The INPUT TAX is paid to your supplier and claimed back from the government

Page 11

CompanyINPUTS OUTPUTS

VAT – KEY FACTSFiling VAT returns – pay and claiming VAT

• VAT is declared monthly or quarterly• The output tax is paid over minus input tax

The VAT declaration (NB the VAT return will require additional data)

Page 12

Output tax 1000

Input tax (400)

payable 600

VAT – KEY FACTSThe scope of VAT:

• Taxable supplies made by taxable persons in the course or furtherance of a business• Imports of goods• Reverse charges

Page 13

Scope Definition

Taxable supply Any transaction on which VAT is charged at zero or standard rate

Supply Anything done for consideration

Supply of Goods Transfer of ownership of tangibles, finance leases, real estate

Supply of services Anything that is not goods, includes refraining from doing something

Taxable person A person who is or should be registered for VAT

Person Company, partnership individual, unincorporated body

Business (economic activity)

An activity being practiced continuously and regularly, including commercial, industrial, agricultural, professional, service activities, or any usage of material and non-material property and any similar activity.

VAT – KEY FACTSWho has to register?

• Registration threshold: 375,000 AED• Voluntary registration: 187,500 – 375,000 AED

Calculation based on:

• Look back over past 12 months; or • Expected turnover for next 12 months

• VAT grouping possible

Registration open since October 2017 – Large entities deadline is 31st October 2017Other deadlines are falling in next couple of weeks

Page 14

VAT – KEY FACTSBasic principles of VAT recovery

VAT recoverable if:• Its is incurred in connection with taxable

supplies;• In the course or furtherance of the business.

VAT is not recoverable if it relates to:• Exempt supplies• Non-business activities

VAT that relates partly to taxable supplies:• Apportioned (‘partial exemption’)

Evidence (tax invoice) will be required

Page 15

INPUT

TAX

TAXABLE CLAIM

EXEMPT BLOCKED

PART TAXABLEPART EXEMPT

PART CLAIM

THE REVERSE CHARGE

VATReverse charge

Page 17

Seller A Buyer

Services (VAT zero)Price 100

UAE KSA

Reverse charge(Applies Input & Output tax)

Output tax 5 Rev charge

Input Tax (5) Rev charge plus input tax

Payable ZERO

Buyer’s VAT declaration (for illustrative purposes assume no other sales or purchases)

A business buys services from overseas

REVERSE CHARGE• The reverse charge ensures VAT is paid

in the buyer’s country.• It ensures the buyer can gain no

advantage by buying from a foreign supplier

• For most businesses it is a paper exercise with no VAT cost.

• For a business that cannot claim all of its VAT– the reverse charge will create a ‘real’ cost.

INTERNATIONAL TRADE

VATMovement of goods

Sales between GCC countries•Business to Business sales – Reverse charge for buyer•Business to consumer – seller charges VAT

(Obligation to register if above threshold of USD 100,000

Export sales (i.e. to buyers outside GCC)• Zero-rated – all customers

Page 19

VAT Movement of goods (B2B) - example

Page 20

UAEKSA

Seller Buyer

Goods

• No VAT in UAE• Reverse charge in KSA

• Seller will need evidence of export to support zero-rating

VAT Movement of goods – Local stock

Page 21

UAE KSA

Seller Buyer

Goods

INVOICE

• As goods are located in KSA when allocated to customer the seller makes a supply in KSA

• Seller must register for VAT in KSA

Place of supply of services – basic rule

• B2B – place where the customer belongs (reverse charge kicks in) • B2C – place where the supplier belongs

Exceptions to the basic rule

• Land – where the land is located• Catering and hotels - location• Telecoms – where the service is enjoyed• Events – where the event takes place

Page 22

VATInternational Services

FREE ZONES

VAT Free Zones

What do we know?• Information coming in from the FTA • Clarity on free zones in coming weeks

Possible outcomes • Relief for gated zones?

Likely outcomes• Reliefs for international trade and movement of goods and passengers • Relief for un-gated zones to be seen

Page 24

WHAT SHOULD BUSINESSES BE DOING NOW?

Standard Impact of VAT on Businesses

Page 26

Cash flow

VAT Readiness

Intercompany transactions

Contractual agreementsIT systems

Change management / training

Business Communityreadiness

VAT function

Governance

Need for additional cash flow considering treatment of CAPEX input credit, applicability of VAT on unbilled consumption, payment delays, etc. Also need to take into consideration tax payment due dates, refunds, cash collection lead time, etc.

Updates to T&Cs of all commercial agreements to factor VAT

Customer and suppliers will need to register, meet Tax authorities requirements and provide mandatory information to ADWEA

Deployment of VAT function responsible for ensuring tax compliance

Grouping of inter companies to minimize VAT impact. Pricing and invoicing of transactions that falls outside the grouping.

Enablement of standard tax engines and updates to respective systems to capture input and output tax e.g. Maximo, Customer care and billing, Oracle

Significant amount of training and change management needs to be performed to customers, suppliers and employees

Updates to policies, processes and controls for VAT impacted areas (e.g. accounting, SCM, etc)

Questions ?

Page 27