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VAT Value Added Tax - Presentation on Key Concepts and Knowledge
Introduction of Value Added Tax (VAT) in the UAE
All the Member countries of the Gulf Cooperation Council (GCC) have signed a unified VAT agreement which enables the implementation of a formal VAT system across all the member states of the GCC.
The VAT agreement forms the basis of all the existing VAT laws and regulations in the UAE and other GCC member countries. In addition to the VAT agreement, the federal decree-law No. 8 of 2017 on value added tax also provides guidance relating to the implementation of VAT laws and regulations in the UAE and it will also form the basis for any future VAT legislation in the UAE.
VAT has been effectively applied on business transactions in the UAE and Saudi Arabia from 1 January 2018. However, as per the VAT agreement all the GCC member states are required to implement VAT in their respective countries by 1 January 2019.
What is Value Added Tax (VAT)?
VAT is a type of consumption tax that is levied on use/consumption of goods and services. VAT falls in the category of indirect taxes and currently it is employed in more than 180 countries around the globe.
It is charged by business entities or individuals that are registered for VAT, on account of supplies of goods/services to customers in the normal course of their business operations. VAT is levied at each stage in the supply chain. It is the end-consumer of the goods/services that bears the VAT cost. VAT registered businesses act as agents of government and therefore they first collect and then they account for the collected tax on behalf of the government.
How VAT Works in the UAE?
VAT is charged on business transactions involving supply of goods and services to customers. The VAT registered businesses charge VAT by adding it to the amount of goods/services that are provided to the customers for either business or personal use. The businesses that are registered for VAT in the UAE have the right to reclaim VAT paid to suppliers on goods purchased or services received for business purposes. The difference between VAT charged to customers and VAT charged by suppliers is reclaimed or paid to the government by the business entity.
For Imports, VAT is charged when goods enter in the country in which they will ultimately be used or consumed.
Businesses registered under VAT will be responsible for ensuring the documentation of their business income, costs and associated VAT charges.
Stages in the supply chain
Sale price without VAT
VAT charged on sales
VAT reclaimed on purchases
Net VAT payable
|Farmer produces and sells cotton to a manufacturer||AED 20||AED 1||AED 0||AED 1|
|Manufacturer produces Bed sheets and sells to wholesaler||AED 40||AED 2||AED 1||AED 1|
|Wholesaler sells to retail chains||AED 60||AED 3||AED 2||AED 1|
|Retail chains sells to the Consumer||AED 100||AED 5||AED 3||AED 2|
In the example mentioned above, consumer is the one that will bear the entire VAT cost of AED 5 as the consumer is the person that ultimately uses the bed sheet.
Definitions of Commonly used VAT Terms
Definitions of some of the most commonly used VAT terms are as follows:
• Taxable Person: Any person that is registered or obligated to register for VAT as per underlying conditions for registration mentioned in the federal decree-law No. 8 of 2017 on VAT.
• Taxable Supply: supply of all goods and services in the state except for those that fall under the category of exempt supply or considered to be outside the scope of VAT.
• Date of Supply: the date at which VAT is charged on goods and services.
• Goods: All types of products or material purchased with the purpose of using them in the normal course of business operations.
• Services: supply of anything except for supply of goods.
• Output VAT: It is the amount of tax added to the value of goods/services that are supplied to customers.
• Input VAT: It is the amount of tax added to the value of goods/services which the entity buys from its suppliers.
• Due Tax: Amount of tax that is calculated and then charged to the pursuant as per the provisions mentioned in the federal decree-law No. 8 of 2017 on VAT.
• Payable Tax: Amount of tax that is due to be paid by the taxable person to the concerned Authority.
• Tax Invoice: A tax invoice provides tax details for goods that are sold and services that are provided.
• Tax Period: A specific time period for which the tax payable to the concerned authority shall be calculated and paid.
• Exempt Supply: supply of goods/services that are exempt from VAT.
Basics of VAT
VAT is levied on goods or services that are supplied by a VAT registered business during the normal course of its business operations/activities.
The taxation point with reference to VAT is the point when a business registered for VAT becomes liable to pay VAT on goods purchased or services rendered for business purposes. The tax point can simply be defined as earlier of the following:
• Goods supplied to customers for use or when services are provided;
• Tax invoice raised and issued by the supplier of goods or services;
• Consideration received by the supplier against goods supplied or services performed.
Place of Supply – Goods
For transactions involving the supply of goods to customers, the important factor to consider with respect to VAT will be whether the supply is made within the UAE or outside the UAE. If the goods are supplied outside the UAE then in that case VAT will not be charged. If the goods are supplied within the UAE then in that scenario VAT may be charged depending on the nature and type of the supply.
In case of supply made in the UAE for both business to business and business to consumer transactions VAT will be charged either at zero or standard rate.
If goods are supplied to another GCC state that already has implemented VAT then in such a case the place of supply will be the state to which goods are supplied provided that the customer is registered for VAT in that GCC state. If the customer is not registered for VAT in its respective state then the place of supply will be the UAE.
If goods are supplied outside the GCC or to a GCC state that is yet to implement VAT then place of supply will be the UAE and VAT will be levied at the Zero rate.
Place of Supply – Services
The basic rule to be followed for determining the place of supply in case of services provided is the place of residence of the service provider.
The exceptions to the basic rule are mentioned as follows:
1. If services are provided to a person registered for VAT in another GCC implementing state then the place of supply will be that implementing state and if the person is not VAT registered then in that case place of supply will be the UAE.
2. Place of supply for services in relation to the installation of goods would be the place where the services will be performed.
3. If services are provided by a person who is not a resident in the UAE to a business that is resident in the UAE then in such a scenario the place of supply will be the UAE. In a situation like this, reverse charge mechanism (RCM) will be applied by the resident business entity. If supply is to a VAT registered business in another VAT implementing GCC state then place of supply will be that implementing state.
Date of Supply – Goods
In a situation in which goods are supplied by the supplier to the customer using the means of transportation then the date of supply will be the date at which goods are supplied to the customer by the supplier.
When supply of goods by the supplier to the customer does not involve use of transportation by the supplier then in that case the date of supply will be the date when goods are provided by the supplier to customer for possession.
Date of Supply – Services
The basic tax point for services is the date at which services will be performed by the service provider.
The date of supply for continuous services provided over a specific period of time will be the earlier of:
• Issue of tax Invoice
• Receipt of payment from the customer
VAT Rates in the UAE
VAT registered businesses in the UAE are required to charge VAT at the rate of 5% on supply of all kinds of goods and services in the UAE except for the following:
• Supply of goods or services that are exempt from VAT
• Supply of goods or services that fall into the category of zero rated supply
• Supply of goods or services that fall outside the scope of VAT in the UAE
Supplies that are exempt from VAT in the UAE are as follows:
• Bare Land
• Financial service not conducted against an explicit fee, commission, discount, rebate or any similar consideration
• The issue or transfer of ownership of a debt security or equity security
• Life Insurance
• Lease of residential property
• Second Sale of residential property
• Local Transportation services
Supply of goods or services that are categorized as zero rated in the UAE are as follows:
• All direct and indirect supply of goods/services outside the GCC implementing states
• Healthcare services
• Education services
• Buildings designed and built specifically to be used by charities
• First sale of residential property
• International Transportation
• Exported Telecommunication services
• Investment in precious metals
Businesses in the UAE with annual supplies (taxable) of more than AED 375,000 (or equivalent) must register for VAT in the UAE.
Businesses with annual taxable supplies falling in between AED 187,500 and AED 375,000 can register voluntarily for VAT in the UAE.
Businesses that are yet to register for VAT cannot charge VAT on supply of goods or services to their customers and also are not entitled to reclaim the VAT they have paid on goods purchased or services rendered.
Calculating and Reporting of VAT in the UAE
VAT registered businesses in the UAE are required to charge VAT on supply of goods or services to its customers. The amount of VAT which a business entity is liable to pay to the government is calculated by deducting the figure of VAT already paid on purchase of goods or services rendered from the amount of VAT levied on sales by the business entity.
In the UAE, the VAT reporting process is completed when the registered business entity or person files the VAT return with the tax authority. Businesses registered for VAT must file VAT return with the tax authority on monthly or quarterly basis or a period as determined by the FTA (Federal Tax Authority).
VAT Implementation Considerations
It is important for business entities or persons that are yet to be registered for VAT in the UAE to consider the following when they are about to be registered for VAT in the UAE:
1) Identifying the personnel that will ensure compliance with the VAT requirements.
2) Detailed analysis of processes, procedures and systems currently in place such as legal structure, supply chain, IT, procurement and others so that to assess what changes are needed to align these in accordance with the VAT requirements.
3) Preparation with respect to filing VAT returns in accordance with the VAT requirements. This could include decisions like whether to have an in-house department or use tax consultants in Dubai for VAT preparation and filing services.
4) Identifying and analyzing the areas that will be affected the most from VAT requirements and system.
5) Providing awareness and training to staff members with the purpose of making them familiar with the relevant VAT laws and regulations applicable in the UAE.
Difference between Zero-rated and Exempt Supplies:
A zero-rated supply is a taxable supply on which tax is charged at the rate of 0%. An exempt supply is the supply of goods or services on which no VAT is chargeable. VAT registered entities making zero-rated supplies are entitled to claim their input tax deductions on goods or services acquired in the course of making such supplies. VAT registered entities cannot claim input tax deductions on goods or services in the course of making exempt supplies.
Who is Liable to pay VAT?
Generally, the person or entity that issues a VAT invoice is the one that is responsible for paying VAT to the tax authorities in the UAE.
In situations, where goods or services are supplied in an implementing GCC state and the supplier of the goods or services is not the resident of that particular implementing state then in that scenario the recipient of the goods or services will be required to pay VAT to the concerned authority.
Treatment of Exports
When a registered business in the UAE supplies goods or services to a person/entity located outside the UAE then that supply is called export. Generally, the exports fall into the category of zero-rated supplies and therefore VAT on exports will be charged at the rate of 0%.
In UAE, the exporter is responsible for providing the documents that are deemed necessary to provide evidence of the export made by the exporter:
• Purchase order
• Packing list/Delivery Note
• Sales invoice
• Insurance documents (Where applicable)
• Instructions regarding delivery of goods from the customer
• Evidence of consideration received from customers
• Bill of lading or Airway bill
Treatment of Imports
The goods or services that are supplied into the UAE from outside the UAE are called imports. In case of supply of goods or services by a registered business in a member implementing state to a registered business entity or person in the UAE, the place of supply would be the UAE as the recipient of the goods or services belongs to UAE. In Scenarios like these the right to charge tax will be with the UAE government.
If goods or services are supplied by a business entity or person from outside the GCC member state to a business registered in the UAE then the place of supply in the context of VAT for such a transaction would be the UAE.
Generally, it is the supplier that charges VAT and then collects it by acting on behalf of the tax authority but in both the situations mentioned above VAT will be levied using RCM which would result in the recipient of the goods or services (business registered in the UAE) not only accounting for VAT but also paying it to the concerned government authority.
VAT Reverse Charge Mechanism (RCM)
Under reverse charge mechanism, on certain specified supplies, the recipient of goods or services is responsible for paying tax to the Government, unlike in the case of the forward charge in which the supplier of the goods or services is liable to pay tax to the government. The difference between reverse charge and forward charge is the shift in responsibility of paying tax, which is moved from the supplier of the goods or services to the recipient of it.
In order to make sure that VAT is collected on supply of goods or services where the supplier is not a taxable person and the supply has been made to the UAE, the government of the UAE has introduced the reverse charge mechanism (RCM). As per the RCM, the buyer or recipient is treated as a person making taxable supplies to himself and therefore the recipient of goods or services will be responsible for paying VAT to the government.
The following are the supplies on which VAT will be levied using the Reverse Charge Mechanism (RCM) in the UAE:
• Imports of specified goods or services for business purpose
• Supply of crude or refined Oil
• Supply of hydrocarbons for resale purpose
• Supply of processed or unprocessed natural gas
• Supply of any form of energy
• Supply of goods or services by a supplier who is not the resident of the UAE to a person who has a place of residence in the UAE
In case of all the supplies mentioned above, VAT will be levied using RCM only if specific conditions with respect to each supply mentioned above are fulfilled in accordance with the UAE VAT Executive Regulations.
When a VAT is levied on a transaction using RCM then in that case the buyer in such a transaction is required to make a declaration of its purchases (Input VAT) and also the sales (output VAT) in the same VAT return. By doing this the effect of both the entries gets cancelled out from a cash payment perspective in the same VAT return.
VAT Compliance Requirements
Business registered for VAT in the UAE are required to account for and report both its VAT entitlements and VAT obligations in accordance with the relevant laws and regulations, to the concerned government authority.
Some of the VAT requirements are as follows:
1) Businesses exceeding the threshold specified for VAT registration in the UAE
2) Filing VAT returns regularly either on monthly or quarterly basis or on a period as determined by FTA (Federal Tax Authority)
3) Paying VAT, if any, that is to be paid to the tax authority by a specified date
4) Keep and Maintain proper documentation and records with respect to the entity’s business transactions. Some of the documents and records which a business entity is required to maintain for VAT purposes are mentioned as follows:
• Issued tax invoices in sale transactions
• Tax invoices received in case of goods purchased or services rendered
• Import and export documents
• Supporting documents in relation to payments made to Vendors
• Filed VAT returns and back up data
• Contracts with vendors and customers
• Inventory records
• Supporting evidence with reference to VAT payment
• Credit notes and Debit notes
• Reconciliation of figures as mentioned in tax returns with those appearing in the entity’s accounts.
5) Registered businesses must keep and maintain accounting records along with other supporting information for a minimum period of five years. In case of the real estate business the minimum period for which an entity is required to hold and maintain accounting information is 15 years.
A tax group basically involves the formation of a single taxable person by two or more taxable persons. A tax group can be formed only if the following conditions are fulfilled:
• The parties to the tax group should be related to each other
• Each party to the tax group should have a fixed establishment in the UAE.
• One or more persons conducting the business operations in the group arrangement should have control over the others
Designated zone refers specifically to an area designated by the cabinet decision and that fulfills the criteria specified in the Executive Regulations. As per VAT Law in the UAE, all the VAT free zones are Designated Zones. In context of VAT, the designated zone will be treated as a place outside the UAE and VAT on any supply of goods or services between the designated zones will not be charged at the rate of 5%.
For Example, Entity ABC located in Dubai Airport Free Zone (DAFZA) supplies goods to Entity BCD located in Jebel Ali Free Zone (JAFZA).
In the above mentioned example, both JAFZA and DAFZA are designated free zones as per cabinet decision and therefore the supply of goods from ABC to BCD will be VAT free because the VAT is between the designated zones.
As per the cabinet decision, the Designated Zone specified should fulfill the following criteria/conditions in order to be classified as a designated zone.
• Designated Zone should be located within a specified geographical area.
• Proper security measures and customs control should be in place to monitor the proper entrance and exit of individuals and goods to and from the designated area.
• There should be internal control procedures relating to the method of keeping, storing and processing of Goods with the Designated Zone.
• The operator of the Designated Zone is required to comply with the processes and procedures set by the Authority.
The Designated zone must comply with the above mentioned conditions.
Cash Flow Management
A business registered for VAT should also focus on managing its cash flows with reference to VAT in an effective and efficient manner. The businesses should consider various options with respect to managing their VAT cash flow such as reducing the time of VAT collection on purchases and expenditure, and deferring VAT payments or both.
The major concern for entities operating within this sector will be the implications on the flow of cash with respect to VAT. The businesses in this sector will also be required to put a lot of focus on VAT compliant systems and processes.
Some of the factors that the entities operating in the said sector should also take into consideration are mentioned as follows:
• Transactions involving business entities operating in other implementing GCC states and the related reporting requirements and supporting documentation.
• The impact of VAT on the pricing of the product made available to the ultimate user.
• The requirements connected to invoicing as per the VAT laws and regulations.
Financial Services Sector
Financial services not conducted against an explicit fee, commission, discount, rebate or any similar consideration is exempt from VAT. Life insurance is also a type of financial service and that too is exempt from VAT. The entities operating in the financial services sector should consider the following when accounting for VAT in the UAE:
• The appropriate accounting treatment with reference to VAT against services provided.
• The appropriate classification of all the claims against VAT paid on goods purchased or services rendered as well as the VAT levied using RCM.
• The methods and techniques to be designed and adopted in relation to recovering VAT charged on services provided to customers.
• Assessing the viability of outsourcing VAT activities for the purpose of ensuring compliance with VAT requirements.
It is important for businesses operating in the field of telecommunication to consider how to account for and report VAT as the businesses operating in the said sector may be providing telecommunication services to both companies and individuals that are located inside the UAE as well as outside of it.
Some of the factors that the entities operating in the said sector should also take into consideration are mentioned as follows:
• Assessing the VAT treatment with regards to hubbing and data roaming services to telecommunication companies operating in foreign countries.
• The underlying terms and conditions of contracts for post-paid and pre-paid plans should be reviewed and amendments should be made where necessary so that to make the content of the said contracts in accordance with the prevailing VAT requirements in the UAE.
• Determining the VAT impact with reference to prepaid plans that are either partly used or not used at all.
• Determining the VAT impact and treatment with regards to services provided to customers using third party arrangements or platform.
The important point to consider for businesses operating in the retail sector is the pricing and invoicing of the products they supply to customers as well as the classification of sales in compliance with the VAT laws and regulations. The launch of promotional schemes such as voucher arrangements and similar arrangements can have complex VAT implications.
Other key factors in relation to VAT that needs to be considered by the businesses operating in the said sector are as follows:
• Reviewing payment terms with your customers and vendors so that to effectively manage the VAT cash flow.
• Reviewing the pricing process to make sure that the entity is neither perceived nor found to be overcharging its customers due to VAT introduction in the UAE.
• The appropriate treatment of advance payments and deposits in accordance with VAT regulations.
There are also some other elements which the business entities operating in various industries in the UAE should take into consideration:
• Invoicing as per VAT requirements
• Requirements in relation to keeping and maintaining all the records pertaining to entity’s business transactions
• Treatment of franchise Income
• Treatment of Trade and security deposit
• Rules and requirements regarding price display
• Rounding offs
• Miscellaneous income from other sources
• Buy back arrangements
• Transactions involving Stock transfer
• Sale involving discounts
• Accessories sold to customer as complementary as part of sale of main product/item
• Sale of service contract
• Sale of extended warranty
• Cross charges from related party
• Arrangements or transactions involving exchange of goods
• Receiving of rebate
• Capital expenditure incurred on setting up shops or outlets for distributing the product.
HOW PUSH DIGITS CAN HELP YOU
Push Digits Chartered Accountants is one of the best and well-reputed tax consultants in Dubai providing tax consultancy services all over UAE. Our VAT Consultants perform a detailed tax audit in relation to every business transaction before your return is filed with FTA. Our tax consultants in UAE also provide industry-specific tax services, tax registration services, tax deregistration services to a wide spectrum of clients.
How we can help you in Implementing VAT System Complying with the Prevailing VAT Requirements?
There are a number of concepts, regulations, procedures and processes which a business entity show know about and comply with as per VAT laws and regulations. Our approach firstly includes the understanding of the client’s business nature and activities with the perspective of the applicable VAT regulations. The second step of the approach includes assisting client entity in establishing and implementing VAT compliant systems and processes.
Our approach has been broken down into following points:
• Detailed assessment and review of existing client system and processes
• Identifying Key areas that will be affected the most from VAT implementation
• Assessing and reviewing important documents like existing contracts with customers/suppliers and recommending the appropriate VAT clauses to be incorporated into the existing as well as the new contracts.
• Training client staff to ensure that the client entity’s staff is aware and updated with regards to the applicable VAT laws and regulations in the UAE.
• Providing recommendations and assisting the client company in re-structuring its procedures, processes and transactions so that to align the client entity’s existing systems with the VAT laws and regulations.
• Providing advice and support for changes in the client entity’s IT structure and system.
• Providing advice and assistance to client entity in relation to registering for VAT, VAT rollout, preparation and filing of VAT returns.
• Providing assistance and support in period post VAT implementation.
Topics and Areas covered under our Awareness Programs and Training Programs for VAT Implementation
Our Professional Company conducts awareness programs conveying important and critical information to the participants on VAT implementation in UAE. We invite all the relevant personnel of our clients including Directors, Accountants and IT staff to attend these sessions to increase their practical knowledge of VAT implications in their Company.
Apart from awareness sessions, our Tax Consultancy Team also organizes VAT training sessions for our clients to educate them well on handling various matters and issues related to VAT implementation and operations. The trainings which are provided by our team cover applications of VAT concepts in real life scenarios as well as clarifications on applying processes and procedures for proper compliance with the VAT laws and regulations.
Our VAT Implementation Service in UAE and it’s Details
The following points highlight our approach for successful implementation of VAT for our clients in UAE:
i) Evaluation of Existing Business Processes and Systems
Your current processes and procedures are examined, reviewed and analysed by us to obtain a thorough understanding of the Business after which our team develops a plan for VAT implementation in your Company which both suits your business and is compliant to VAT regulations.
ii) Implication of VAT on your Company
As part of our VAT implementation process, we assess the implications and impact of VAT on your Company and report these implications to you since it is important for the Management to know which areas will be mostly affected. This gives a chance to the Company to understand which areas are to be focused more during the VAT implementation stage.
iii) Registering for VAT
We advise and provide support to the client entity in relation to completing the processes and formalities required for registering under VAT.
iv) Segregation of Duties Concerning VAT Implications
It is highly important for the Company to segregate duties between it’s staff related to VAT activities for better performance of business operations in compliance to the VAT laws and regulations. During our assignment of VAT implementation, we support and advise you on proper segregation of these duties as well as preparation of an organizational hierarchy in this regard. We will also guide on selection of a team leader who will be responsible for leading the VAT implementation process.
v) Accounting Systems Compliant with VAT
Our team of accounting and tax consultancy shall review the client’s existing accounting software and systems further to which recommendations will be reported to the Management of the Company along with appropriate chart of accounts and classifications as required for proper VAT reporting. Guidance and support shall also be provided to the accounting and IT team for preparing and implementing documents such as Tax Invoices, Credit Notes etc as per the requirements of VAT regulations.
vii) Filing of VAT Return
We will provide the client entity with complete support in relation to preparation and filing of the VAT return. We will also provide assistance to the client entity in addressing the problems in relation to VAT cash flow, in case, if the client entity has any.