Published June 2017
Historically the Gulf Cooperation Council (GCC) has always been considered a tax-free jurisdiction with revenue streams primarily originating from the production of oil, being more than adequate to ensure buoyancy of economies. Fast forward to the current decade and much has changed. Due to the drop in oil prices and the consequential losses faced by the GCC member states, the IMF predicted that the GCC would face a cumulative fiscal deficit during 2016-21 of circa US $475 billion. Due to revenue from oil being drastically reduced, the GCC members are actively identifying alternative sources of income. Tourism, healthcare & education are examples of sectors that have seen tremendous impetus and growth as the GCC members seek to position themselves globally as serious competitors and centres of excellence within the Middle East.
Another alternative, yet obvious source of income, that has been successfully pursued in almost 154 countries globally, is that of Value Added Tax (VAT) and Goods and Services Tax (GST). In 2017 the much anticipated Unified Agreement for VAT of the Cooperation Council for the Arab States of the Gulf was published. This Agreement is intended to define the legal framework and implementation of VAT in the GCC.
The introduction of VAT in the UAE on 1st January 2018 is considered a bold move; but it is also reflective of the rate of development & growth in the UAE since its inception in 1971. Critics question whether this will indeed boost the economy or merely act as a further deterrent to international trade, as the additional 5% tax will inflate already rising prices for goods and services in the UAE. The implementation of VAT will be undoubtedly challenging, not least because the proposed date of implementation of 1st January 2018 looms so imminently over the UAE, but also because there are still so many unknowns. The main unknown is that of the actual legislative framework itself.
Professional advisers are grappling in the dark and remain without clarity until and unless the actual framework is published. Until then, the current methods of implementation and collection of VAT and GST in other countries, is all one has to use as a comparative benchmark.
Central to the successful implementation of VAT is the distinction that is to be drawn between goods and services that are “zero rated” as opposed to those that are classified as “exempt”. Businesses providing “zero rated” supplies will not levy VAT on such supplies, but can recover input tax from the tax authorities on related purchases, e.g. healthcare and education. Whereas businesses that provide “exempt” supplies will not be able to recover input tax from related purchases e.g life insurance and financial services.
There is still no precise list of which goods and services will attract the 5% VAT charge. However, certain clarifications have been made through various announcements by the Ministry of Finance (“Ministry”). For example, all transport of goods, passengers and associated ancillary services within the GCC would be zero rated (which includes local transport such as trains, taxis and buses). Additionally, the export of goods to non-GCC countries would be zero-rated. For imports VAT shall be levied only at the first point of entry into the GCC. The Ministry has stated that circa 100 food items will be exempt from VAT, but specific details are yet to be obtained. Similarly the sectors of Healthcare and Education are said to be exempt. Scratch below the surface though and what does this mean? Are service providers of education and healthcare exempt? What about health insurance, healthcare equipment and hardware, diagnostic equipment & supplies of healthcare products? Another grey area is that of IT, IT related services and e commerce. For example does software created solely for educational purposes attract VAT?
Sales of plots of land (undeveloped) are expected to be VAT exempt. However commercial property transactions e.g. sales and leases are said to attract the standard rate of 5%, whereas residential property transactions e.g. sales and leases are predicted to be VAT exempt. Interestingly though, the first sale of a new residential property shall be subject to the zero rate of VAT.
Who is caught by VAT and how do you know if an establishment needs to register for VAT? The simple answer is, if you are a business in the UAE with annual taxable supplies of revenue exceeding AED375,000, you are required to register for VAT. However for companies with annual taxable supplies of revenue between AED187,500 and AED375,000, registration is optional. Self regulation will become increasingly important with the onus being firmly placed on the establishment to maintain proper financial and accounting records. One of the most important aspects of VAT for a SME is to ensure that financial provisions are made in relation to the payment of VAT. This is because once a VAT invoice is issued, VAT is due and payable to the tax authorities, regardless of the actual recovery of that VAT payment from the receiver of the service.
What is abundantly clear is that compliance will be monitored and VAT returns are to be filed online each quarter. Unfortunately it appears that VAT returns must be filed in each respective Emirate, as no federal system of collection has yet been established. This added layer of complexity of calculation of VAT may prove especially onerous for the SME sector who trade throughout the UAE, as the internal compliance systems to be implemented covering each Emirate may be relatively expensive and complex for them. Businesses will be required to maintain all financial records (inclusive of tax invoices) for five years. Audits will generally be conducted having first given the business a five-day notice period. However in the case of suspicion of fraud, no notice will be required and the fiscal authority may shut down the business pending further investigation.
In reality the date of 1st January 2018 is somewhat academic, since all eligible companies should in fact be fully compliant by 1st October 2017, at the very latest, (as this is the date of registration with the relevant tax authority). Implementation of internal financial VAT compliant systems and accounting software will be crucial for all eligible businesses to ensure a smooth transition. Given the lack of information currently available in the public domain, obtaining professional advice will be more invaluable than ever before; as they say, the early bird catches the worm!
Authors: Sunita Singh-Dalal, Partner and Miriam Solomon, Intern.
If you have any questions regarding this article, please contact Sunita Singh-Dalal, Partner at firstname.lastname@example.org or call +971 4 452 9091.
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