Presentation on updates of VAT in UAE is in line with the various advisories issued by Ministry of Finance along with the expert views. VAT is being implemented in the UAE wef 1st January 2018. Presentation has impact of VAT/ Steps to follow to become VAT compliant/ thresholds for VAT registration with process to be followed.

1. VALUE ADDED TAX – VAT
UPDATE - 1
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By Manoj Agarwal
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2. VALUE ADDED TAX - VAT
➢ Value Added Tax (VAT) is Consumption Based Tax applies on supplies of
Goods and Services. VAT is chargeable at each level of supply chain.
➢ VAT is an indirect tax as it applies to the final consumer that purchases
the product or the service for own purpose and not for further sale.
➢ Consumers pay VAT as a net cost whereas businesses usually pay VAT
and have to manage the related negative cash flows on account of
pending recovery of VAT from Tax Authorities.
➢ Most businesses charge VAT and are generally entitled to reclaim the
VAT they incur and relates to their business activity.
➢ Being consumption based tax, VAT is considered a preferred means of
raising public revenue and is adopted in most countries across the globe
➢ Levying tax at each stage of the sale ensures better compliance and
fewer loopholes to be exploited.
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3. HISTORY OF VALUE ADDED TAX - VAT
➢ Wilhelm von Siemen of Germany devised the concept of VAT in 1918.
➢ The Value Added Tax (known as TVA) was initially introduced in France
by Maurice Lauré on April 10, 1954.
➢ Over 150 countries have implemented VAT (or its equivalent like Goods
and Services Tax - GST) worldwide including European Union.
➢ As seen earlier, VAT is generally introduced at a low rate at the beginning
and then increased thereafter (10% in UK in 1973 & now 20%).
➢ Each 1% increase in the VAT rate in the UK generates £5 billion
additional tax revenue for Her Majesty's Revenue and Customs (as per
HMRC).
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4. WHY INDIRECT TAXES INSTEAD OF DIRECT TAXES
 Less controversial – effectively, consumers have a
choice not to buy goods or services so can avoid
paying VAT.
 Increase in tax rate of Indirect Taxes can generate
significant additional tax revenues compared to
similar increases in Direct Tax rates.
 Personal Tax increase can act as disincentive to
productivity as employees/ businesses pay higher
taxes.
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5. VALUE ADDED TAX (VAT) AND SALES TAX
 Sales Tax is also a
Consumption Tax.
 Generally Sales Tax is only
imposed on transactions
involving goods on final sale to
the consumer.
 Sales Tax to be charged by the
seller to end consumer of the
goods.
 VAT is being charged at each
point of sale starting from
producers till end consumer.
 VAT is also imposed on
imports of goods and
services so as to ensure that
a level playing field is
maintained for domestic
providers of those same
goods and services.
Many countries prefer VAT over Sales Tax a more sophisticated approach
of taxation as it makes businesses serve as tax collectors on behalf of
the government and cuts down on misreporting and tax evasion.
SALES TAX VAT
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6. GOODS VS SERVICES
 Goods are tangible items and include both
moveable and immovable objects other than
money.
 Services are intangible and include the
performance or omission of any act of the
toleration of any situation other than the supply of
goods.
 Thumb rule for VAT – if it is not a good, it is very
likely to be a service.
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7. VAT IN THE UAE
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8. INTRODUCTION OF VAT IN THE GCC COUNTRIES
 To diversify income sources as developments are negatively affected by
revenues in the region due to reduced income from oil revenues.
 To enable the Governments to maintain the current high standards of
public services necessary for the effective and efficient operation of
Education, Health, Public Safety & Utilities and other environmental
services.
 5% rate expected to be introduced in all 6 GCC Countries.
 1st January 2018 confirmed as date for UAE and Kuwait.
 Bahrain, Oman, Qatar & KSA can introduce VAT by 1st January 2019.
Trading within the GCC:
 Coordinated approach on introduction of VAT in the GCC Countries is
likely to ensure that a reasonably level playing pitch is maintained to
distortion of competition arising as a result of domestic VAT legislation will
be minimized.
 Co-operation between GCC Countries is likely to lead to a similar and
simplified) approach to cross border supplies of goods and services.
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9. TYPES OF ACTIVITIES
Taxable
• Standard VAT rate - 5% or 0%.
• Include in the calculation of the taxable turnover.
• Input credit allowed.
• Examples: General Trading, Manufacturing, FMCG
Exempted
• Activities exempted from levy of VAT.
• Not to include in the calculation of the taxable turnover.
• No input credit allowed.
• Examples: Medical & Educational Services, Sale of Books.
Not
Covered
• Goods which are outside the scope of UAE VAT law will be
termed as goods not covered.
• These goods are not charged to VAT and will not be part of
taxable turnover.
• Example: High Seas Sale.
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10. VAT REGISTRATION THRESHOLDS
Compulsory
Registration
Companies with annual
revenues over Dh 375k to
registered under the GCC VAT
system.
Optional
Registration
Companies with annual
revenues between Dh 187k to
Dh 375k – Optional register for
VAT during the first phase.
Compulsory
in Second
Phase
It would become obligatory for
all businesses to register under
the VAT system in second
phase.
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11. PLACE OF VAT CHARGEABILITY
Goods
 Generally VAT is payable at the time of import of goods.
Services
 A business buying services from abroad is obliged to “self-
account” for any VAT arising, as opposed to the services
supplier having to register for and charge VAT.
 This is known as the “Reverse Charge”.
 Under “Reverse Charge” recipient of the service accounts for
VAT on the service in the country in which the business is
established.
 Credit for this VAT can be taken subject to normal rules.
Import
Export
 Within GCC: At the entry point of other GCC member
country.
 Outside GCC: Zero rated.
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12. PROCESS OF VAT COLLECTION
Process of VAT collection can be categorized into two broad
heads based on the method of collection:
 Account based collection of VAT
Under this method, tax is calculated on the value added.
Value added is calculated as the difference between
revenues and allowable purchases.
Most countries do not use this method, however Japan
still uses this way for tax collection.
 Invoice based collection of VAT
Under this method, sale receipts or invoices are used to
compute the corresponding VAT. At the time of sale of
goods or services, trader issues invoice which contains
separate details of VAT collected.
Most countries use the invoice based method of VAT
collection.
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13. ACCOUNTING FOR VAT
Invoice Basis
 VAT has to be accounted for by supplier based on the
date of issue of an invoice, even if the invoice has not
been paid before the VAT filing deadline for the VAT
period during which the invoice was issued.
Cash Received Basis
 Regardless of the date of issue of a sales invoice, the
VAT liability arising based on the date/ VAT period
in which the related payment is discharged.
 In the UAE most probably government will follow
Invoice Basis accounting for VAT.
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14. IMPACT OF VAT ON BUSINESS
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15.  Business engaged in the
supply of goods or services
that are subject to VAT
(including at the zero rate)
will be entitled to reclaim
the VAT incurred on costs.
 VAT will not additionally
increase expenses as
business will reclaim VAT
paid from consumers.
 Business engaged in the
activities that are exempt
from VAT, cannot reclaim
VAT incurred on costs.
 VAT will be a cost to the
business indirectly (as
suppliers will charge VAT
that business cannot
reclaim).
 eg Medical, Education etc.
Activities with VAT Exempted Activities
Businesses need not to have feared that the VAT is going to
increase the cost. VAT may bring in few additional costs but it will
be a host of other advantages like financial discipline, better
control, availability of better credit information and weeding out of
fake companies.
Two Scenarios of Activities
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16. IMPACT OF VAT ON CONTRACTS
 The introduction of a Value Added Tax (VAT) means that
companies to undertake a review of their current
commercial arrangements and general terms and conditions
of sale to ensure that their contractual position is suitably
protected.
 Contracts should clearly state whether the price is
“inclusive” or “exclusive” of any applicable Tax (Value
Added Tax or others).
 Given that a supplier is generally responsible for VAT if the
contract is silent on these aspects then the supplier may
find that it is required to account for VAT with the relevant
authority and it may be unable to recover the VAT from its
customers.
 Businesses needs to built internal procedures to deal with
collection and payment of the VAT on contracts.
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17. FREE ZONE COMPANIES WITH BUSINESS ON MAINLAND
An interesting point in relation with the Free Zone
consultancy businesses which are providing services on
shore as well.
 With the introduction of VAT, these businesses need to be
conscious on the additional sanctions which may be
imposed for nonpayment of VAT in relation to any services
which may be deemed to have been delivered onshore with
the assumption that the legislation does not impose a VAT
on Free Zone services.
 Trading from Free Zone to mainland will attract VAT.
 Once the legal framework has been implemented a
detailed analysis of the law and regulation will be required
to understand the reach of the taxation
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18. BECOME VAT COMPLIANT
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19. COMMON ISSUES FOR DEVELOPING VAT
FUNCTIONS
People
•Unclear roles and
responsibilities.
•Inadequate
resources.
•Limited access to
training.
•Little
understanding of
data used in the
process.
Process &
Controls
•Manual processes
including
calculation and
reporting
•No controls in
relation to VAT on
Sales and
Purchases
•No formal risk
identification
procedure in place
•Missing filing
deadlines with no
overall plan to
manage filings
System
•Inadequate
Technology
Support
•No system
controls relating
to VAT liability
determination
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20. LESSONS TO BECOME VAT COMPLIANT
Be VAT
Compliant
Always consider
the 'end-to-end'
Process and
Solution
Don't
underestimate
the Timescales
and Skill sets
Required
Automation and
end user
Flexibility
Communication,
Training and
Change
Management
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21. The right skills to consolidate and test data, submit
returns, adapt systems and handle relationships
with professional advisers and Tax authorities.
Strong technical and systems knowledge needs to be
embedded into the business. Ongoing training to
keep teams' knowledge updated.
Clearly communicated process underpins the
success of finance systems, if the systems are not
utilized correctly, their full potential will not be
realized.
KEY TO EFFECTIVE IMPLEMENTATION OF VAT
Technology solutions for greater efficiency and accuracy
where automation of tax decision is enabled. Tax
reporting and compliance solutions can provide
assistance.
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22. ISSUES TO BE ADDRESSED IMMEDIATELY
 Review all legal agreements relating to supplies of goods and
services.
 Consider how the business is going to cope with the issue and
receipt of VAT invoices, credit notes, etc.
 Identify a suitable software package that works well for
businesses.
 Liaise with the suppliers to ensure that records are updated to
take account of introduction of VAT.
 Depending on the size of business, consider the necessity to
arrange an external VAT training course or to have a bespoke
VAT training course prepared.
 Appoint a “VAT champion” in the organization as the primary
person to ensure that business is “VAT Proofed” and that there
are no unpleasant surprises at a later stage.
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23. THANK YOU
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