Published May 2016
The UAE has announced it will proceed with the implementation of a value-added tax (VAT) regime, which is planned to come into effect on January 1, 2018. It is expected that the rate of the VAT will be 5% on all goods and services, with some exceptions including basic food items, healthcare and education. The new tax will not be limited to the UAE, but rather will be implemented across the GCC-countries, although possibly at different rates and different implementation dates.
The implementation of VAT will come with some corporate challenges, especially for businesses which have not previously been exposed to the nuances of tax compliance. Aside from having to accommodate for additional administration costs, companies will need to consider how VAT will affect their operating models, including supply chain arrangements, financial systems, transition periods, end customer pricing and other relevant areas. Organisations should specifically focus on:
Examining the impact of VAT on each stage of their supply chain with relation to transactions, whether they be inter-company or external services;
Determining how the introduction of the VAT can affect cash flow;
Deciding how much of the VAT burden they would like to pass on to the consumer; and
Ensuring robust internal documentation processes (for example invoicing) to correctly calculate and capture the necessary information required for VAT implementation and compliance.
The impact of VAT may also vary based on industry or organisational structure of a company. For instance, where a company has presence in multiple GCC countries, it would want to consider how best to treat the tax implementation if the VAT is not introduced simultaneously across the GCC countries. Similarly, companies that engage in long-term contracts would need to address existing contracts that do not account for the introduction of VAT. It will also be important for businesses to review their contracts for goods and services to consider if these contracts adequately allocate the risk of payment of VAT and whether the payment obligation will be inclusive or exclusive of VAT in the case where the contract is silent on the matter.
Accordingly, organisations should begin by analysing contracts to review their current position on tax and amend seek to make amendments by including clauses that accommodate for VAT. In the case of existing long-term projects, companies may wish to consider price adjustments to account for the introduction of VAT mid-contract. It is also worth considering how VAT might impact contract disputes and resolution. For instance, like other taxes, VAT payment may be applicable to payments ordered as a result of a dispute resolution. However, this would likely only be required where the payment is for rendered services, not where the penalty is purely compensatory in nature and where no service has been provided.
While the above are immediate action points for companies, further action will likely be required as more information regarding VAT implementation is released by the UAE government over time. It is also unknown the extent to which personal transactions might be impacted by VAT. For instance, there is currently no guidance as to the impact of VAT on property transactions. While it is unknown to what extent VAT will apply in these cases, if the European or UK models are adopted by the UAE, it can be expected that commercial property transactions where the property is a new build would be eligible for VAT. However, until the actual law relating to VAT implementation in the UAE is released, these discussions are speculative, but nonetheless important for purposes of corporate planning.
Finally, it will be interesting to see how the law implementing VAT would deal with the tax holidays granted to free zone entities under the respective free zone laws. The general understanding is that the tax holiday applies to all taxes and theoretically should include VAT.
If your business is considering entering the UAE market, or already has an existing operation in the UAE and you are interested in discussing the content of this article in more detail, please contact: Zainab Somji, Associate (firstname.lastname@example.org) or Darryl Paul Barretto, Associate (email@example.com) at +9714-4529091. You may also visit: www.ach-legal.com