Amidst all the expectations of a lot of businesses in UAE that the VAT introduction in UAE is going to be postponed, the air of confusion around this now has been completely cleared by the Federal Tax Authority (FTA) by having released the VAT Decree Law (Federal Law No.7 of 2017 on Tax Procedures) as well as Draft Executive Regulations on Value Added Tax . Therefore, now with 100% certainty, we can say that VAT in the UAE is all set to be effective from 1st January 2018. We have tried to decode VAT in UAE in very simple terms for all of you in this Article.
Intro to VAT
Explaining the Value Added Tax (VAT) in the simplest of terms is as follows:
- VAT is a consumption based indirect tax which is levied on supply of goods and services within the country as well on imports.
- Each and every business in the Supply Chain is required to collect and deposit the VAT to the Government on the Value Addition made by them on the Goods and Services, in which they deal.
- Entire burden of VAT is borne by the end consumer who consumes such goods and services. Therefore, in effect VAT is a pass through for all businesses who are part of the Supply Chain and the businesses in the Supply Chain are only acting as Tax Collection Agents on behalf of the Federal Tax Authority (FTA).
How VAT Mechanism Works ?
- Businesses charge and collect output VAT from their Customers on all Supplies of Goods and Services they make, in course of the business.
- Businesses pay Input VAT on purchases of all Goods and Services they make from their Suppliers, in course of the business.
- Businesses make Net VAT Payment to FTA on a periodic basis (monthly or quarterly- as prescribed for them by the FTA- The Businesses above AED 150 million turnover are by and large being prescribed to make monthly tax payments & file monthly tax returns, whereas the Businesses below AED 150 million turnover are by and large being prescribed to make quarterly tax payments & file quarterly tax returns ), which is the Difference between Output VAT and Input VAT for that Tax Period. Should your business have a Input VAT being higher than Output VAT in any Tax Period, you are entitled to claim the Refund of the differential amount from FTA in your periodic Tax Returns, subject to their being a valid justification of why your input VAT is higher than Output VAT. Generally, the businesses which are primarily into exports of Goods and Services out of UAE, will have a valid case of claiming VAT Refund from FTA, since the exports are Zero Rated.
Who is required to register for VAT in UAE ?
All businesses (whether they are incorporated or unincorporated) and individuals who have annual turnover for taxable supplies of goods or services of AED 375,000 and above, have got a mandatory requirement to do VAT Registration and have a Tax Registration Number (TRN). For the avoidance of doubt, the Taxable Supplies of Goods and Services include Standard Rated Supplies as well as Zero Rated Supplies.
The businesses with annual turnover or annual expenses of AED 187,500 and above, have an option to do a voluntary VAT Registration, if they wish to claim input tax credit of all the input VAT they pay to their Suppliers on procurement of various Goods and Services that they make, in course of the business, which also includes input VAT they pay on their utility bills, water & electricity bills, telecommunication bills, rents etc. Therefore, it may be advisable for businesses, who have got annual turnover or annual expenses of AED 187,500 and above to do a voluntary VAT Registration, if they wish to claim input tax credit for the input VAT paid by them.
Furthermore, it is important to note that the above requirements and thresholds for VAT Registration apply to all businesses in UAE, who are into business of any kinds of goods and services, whether they are registered as Mainland UAE Companies or as Free Zone Companies. Therefore, all Free Zone Companies in UAE are also required to apply for VAT Registration, if they meet the above mentioned threshold limits for VAT Registration.
What are the different categories of Tax Rates under VAT in the UAE ?
The VAT Law of UAE prescribes three different categories of Tax Rates :
- 5%- Standard Rated Supplies
- 0%- Zero Rated Supplies
- Exempt Supplies
Zero Rated Supplies are:
- Export of Goods and Services from UAE to countries, other than GCC countries implementing VAT.
- International Transportation of Goods and Passengers and Related Services.
- Air Passenger Transportation.
- Air, Passenger and Land Means of Transportation and Related Services.
- Investment in Precious Metals.
- First Supply of Residential Buildings for sale or lease within 3 years of its completion.
- First Supply of Charities Buildings and Buildings converted from Non Residential to Residential.
- Supply of Crude Oil and Natural Gas.
- Specified Educational Services.
- Specified Basic and Preventive Healthcare Services and related Goods and Services, supplied for providing these Basic and Preventive Healthcare Services.
Exempt Supplies are:
- Specified Financial Services (Margin Based Services).
- Residential Buildings other than which are Zero Rated.
- Bare Land.
- Specified Local Passenger Transportation.
Standard Rated Supplies are:
All other Supplies of Goods and Services, which are neither Zero Rated Supplies or Exempt Supplies, will be Standard Rated Supplies and subject to Standard Rate of 5% VAT.
What do businesses need to do to prepare for VAT in the UAE ?
Here is a summary of what businesses need to do prior to 1st January 2018 to be VAT Compliant and manage their cash flows more efficiently under the VAT Regime:
Step 1: Obtain proper knowledge and training on VAT
Given that this is the first of any kind of taxation introduced in UAE, which is going to have a wide spread impact on all businesses and individuals in UAE, it is very important that each business and individual understands each and every aspect of VAT Law and Executive Regulations and as to how it is going to impact them or their business. Whilst the common belief that only the Accountants and Finance team in an organization needs to know about VAT, the reality is that VAT is going to have an impact on each and every aspect of business and hence it is important that the Owners, CEO’s, Chairman, Other Key Stakeholders as well as all the employees of your business (or each of the Departmental Heads of the business, as a bare minimum) are provided proper knowledge and training on VAT, and are made to understand as to how the VAT is going to impact the business and organization on an overall basis, as well as the respective roles and profiles that they are handling, so that they are fully equipped to interact and deal with the third parties such as Suppliers, Customers, Government Authorities etc under the VAT Regime. In case your organization does not have an in-house VAT Expert, who can provide a proper VAT Training to all employees of your organization, then you would need to get a professional VAT Expert, who is experienced in providing VAT Training, to deliver such Training for your organization.
We at MaxGrowth Consulting-www.maxgrowthconsulting.com, are providing customized half day, full day and two days VAT Training Workshop, as per the business requirements of our Clients. Therefore, if your business does not have an in-house VAT Expert, please feel free to reach out to us, and our Professional VAT Experts with Big 4 Consulting Firms experience and expertise, will be happy to conduct customized VAT Training Workshop for your business.
Step 2: Carrying out VAT Impact Assessment and Diagnostic Studies
One of the major objectives and challenge that every business has is to ‘Manage its Cash Flows’. If the businesses do not manage their cash flows properly, then irrespective of what profits the businesses make, they are going to face serious challenges in running their business operations. The introduction of VAT in the UAE could have a serious impact in blocking of working capital and cash flows for your business, in case you do not carry out a proper tax planning. The problem of working capital and cash flow management will be further augmented with the introduction of VAT for those businesses, who do not have working capital facilities with the Banks or enough cash reserves. Therefore, in order to manage your working capital and cash flow more efficiently under the VAT Regime, it is critical that you carry out an in-depth VAT Impact Assessment and Diagnostic Study for your business. Such VAT Impact Assessment and Diagnostic Study, will include but not limited to following:
- Detailed Analysis of Whether to register your various companies as a TAX Group or as standalone companies, given that both these options have their own Pros and Cons.
- Understanding of your Company’s Financials and determining whether you should submit your audited financial statement or any other documents at time of submitting your VAT Registration Application.
- Understanding as to how the Branch of the business and Subsidiaries going to be treated under VAT.
- Detailed Analysis of how the Cash Flow Position of your business can be optimized under the VAT Regime.
- Using a lens to identify and zoom into each and every type of transaction that your business does or is likely to do in future and doing an in depth VAT Impact Assessment for each and every type of transaction, and coming up with strategies on how the transaction flow of certain transactions can be changed for purposes of more efficient cash flow management under the VAT Regime.
- Analyzing, if there are any unnecessary steps or processes in any of the transactions with customers, suppliers or third parties and removing such unnecessary steps or processes from the transaction flow, in case that makes your business more VAT efficient.
- Analyzing the current accounting software, accounting and book keeping processes, billing processes, invoice formats, credit note formats, debit note formats, back end systems etc used by your business and coming up with the complete list of changes required to be made in each of them in order to be VAT Compliant.
Our Team of VAT and Finance Experts at MaxGrowth Consulting- www.maxgrowthconsulting.com, with Big 4 Consulting Firms experience and expertise, is available to carry out a highly professional and comprehensive VAT Impact Assessment and Diagnostic Study Report for your business, in order for you to fully understand the Impact of VAT on each and every aspect and transaction of your business, as well as determine the changes you require to make in various aspects of your business, in order for your business to be VAT Compliant as well as VAT Efficient (in terms of Cash Flow and Working Capital Management).
Step 3: Doing VAT Registration for your Business
VAT registration in the UAE was opened by FTA to all businesses in UAE from the beginning of the fourth quarter of 2017 . The last date for submitting VAT Registration for businesses with annual turnover exceeding AED 150 million has already ended, whereas the businesses with preceding 12 months turnover between AED 10 million and AED 150 million are required to submit their VAT Registration Application before 30th November 2017; and all businesses with preceding 12 months turnover between AED 375,000 and AED 10 million are required to submit their VAT Registration Application before 4th December 2017. To avoid legal penalties, we urge all businesses with turnover exceeding AED 375,000 to complete their VAT Registration well in time. VAT Registration for businesses in the UAE has to be done with the Federal Tax Authority (FTA) of UAE. In case you have got multiple companies operating different businesses under different Trade Licenses, but are owned by the same owners in terms of actual beneficial ownership and have got a common control, then you could apply for Registration as a TAX Group. If you qualify for Registration as a TAX Group, then you will be provided by FTA with one single Tax Registration Number (TRN) for all the Group Companies. The benefit of doing registration as a TAX Group is that all the inter company transactions within the same TAX Group, are not subject to VAT and also in terms of compliance requirements, only one VAT Return for the whole TAX Group, will have to be filed with FTA, either monthly or quarterly, depending upon the period prescribed for your business for filing of VAT Returns by FTA.
Should you require any professional help to complete your VAT Registration Application, obtaining your Tax Registration Number (TRN) and your Tax Registration Certificate (TRC) from FTA, our VAT Experts at MaxGrowth Consulting-www.maxgrowthconsulting.com, are there to support you.
Step 4: VAT Implementation
The last and the most important step that all businesses are required to do prior to 1st January 2018, is to do the actual implementation of VAT in their respective organizations, in order to ensure that their businesses are fully VAT Compliant and VAT Efficient. VAT Implementation will include, but not limited to:
- Implementation of Optimal Cash Flow Management Strategies for your business under the VAT Regime.
- Review of all existing contracts that you have in place with your Customers as well as your Suppliers, as well as the new contracts that you are entering into and redrafting/renegotiating the terms of those contracts, in order to ensure that they are VAT Compliant as well as VAT Efficient (in terms of cash flow management) for your business.
- Review of all Processes and Policies you follow in course of running your business and making changes in those Processes or implementing new policies, in order to ensure that your business is VAT Compliant as well as VAT Efficient (in terms of Cash Flow Management). For example, the Business Processes, wherein the Invoices for Supply of Goods or Services are raised after a considerable time lag of the actual supply of those goods and services, have to be changed and strict new policies would need to be implemented, for timely issuance of Tax Invoices to Customers with or after Supply of Goods and Services to them. Similarly, the other Business Processes, wherein the Supplier Invoices are not received and entered into the Books of Accounts in the same Tax Period, in which the Goods and Services have been procured from them, could result in the Businesses paying higher Net VAT to FTA for that Tax Period and therefore having a detrimental impact on the Cash Flow and Working Capital of the Business. Therefore, such Business Processes would be required to be changed as part of the VAT Implementation.
- Review and Change of the Business Model, Transaction Flow, Transaction Milestones, Transaction Steps and Transaction Processes, where possible, in order to make them VAT Efficient (in terms of Cash Flow and Working Capital Management).
- Implementing changes in the current accounting software, accounting and book keeping processes, billing processes, invoice formats, credit note formats, debit note formats, back end systems etc used by your business, in order to make them VAT Compliant.
Our Team of VAT and Finance Experts at MaxGrowth Consulting-www.maxgrowthconsulting.com, with Big 4 Consulting Firms experience and expertise, is available to carry out a highly professional and comprehensive VAT Implementation Work for your business, in order to implement the required changes in business model, transaction flow, contracts, accounting software, business processes, accounting and book keeping processes etc, in order to make your business VAT Compliant as well as VAT Efficient (in terms of Cash Flow and Working Capital Management).
Understanding the full VAT impact on your business and implementing VAT properly and professionally is one of the most critical matters for all businesses in UAE, and if this VAT Impact Assessment, VAT Registration and Implementation Work is not carried out properly and professionally, in a timely manner right now, then it could have major long term repercussions on your business in terms of heavy fines and penalties as well blocking of your cash flows and working capital. If you have not already done this yet, then you are already running behind the Clock. However, it is ‘Better Late than Never’. We are there to support you in all aspects of VAT Journey of your business. Please feel free to reach out to us by phone at:+971566835302/+971563524089 or by email at: firstname.lastname@example.org; email@example.com or through contact form on VAT Page of our Company Website: www.maxgrowthconsulting.com