The United Arab Emirates (UAE) Government is officially moving forward with a 5% value-added tax (VAT) that will take effect on January 1st, 2018, you need to prepare for it immediately.
Any business that’s required to register for the VAT in UAE must be registered before January 1st, 2018. To help you avoid the penalties and fees of UAE’s new tax law, UAE VAT faculty and tax expert- Aditya Shinde answers the most pressing questions about the UAE VAT and show you exactly what it is, what it means for your business, and what you’ll need to do to remain compliant.
So, let’s start with the most basic question:
What is the UAE VAT Law and Why is it being implemented?
Value-added taxes are collected incrementally and are based on the value of the product or service at each stage of production and distribution. So, every stage of the product lifecycle will be taxed. The UAE VAT law is a general consumption tax which will apply to the majority of transactions of goods and services, including those bought from abroad. The tax will be set at 5% and will be implemented on January 1st, 2018.
With a 5% VAT, if a supplier purchases a widget for $1 from a manufacturer, the manufacturer (the seller) will be required to charge an extra $.05 to the supplier (the buyer), and pay that $.05 to the Government. The 5% tax will be added-on by every seller throughout the supply chain all the way to the final customer. The UAE will be using this tax to curb their dependence on oil as a primary source of revenue and to provide citizens of the region with better public services such as hospitals, schools, and roads. The UAE VAT is the second major tax being enacted after the Excise Tax took effect earlier this year.
Do you think companies are ready for VAT?
I am concerned that small to medium enterprises (SMEs), which account for more than 60 percent of GDP, is not properly prepared for the roll-out of the 5 percent levy. My feeling is that a relatively large number of companies in the UAE may not be completely ready on January 1 but the work that is being done now should hopefully position them well – at least in the first quarter of 2018. Companies are ill-prepared because some waited too long to comply with VAT, particularly SMEs, which didn’t have the bandwidth or the resources of their larger peers.
The main reason was they were waiting for the laws and regulations, and the laws and regulations took some time to finalise. There was a lot of work that all businesses could have done before the laws and regulations were issued to help their preparation and they could have made assumptions and validated those assumptions. The challenge for all companies at the moment is to finalise systems configuration and testing to ensure the requirements are set up properly and allow them to comply by January 1, 2018 and file their first VAT return in a timely and accurate manner.
What will the UAE VAT implementation mean for Businesses?
The primary requirement for businesses in the UAE is recording all of their financial transactions and ensuring their financial records are accurate, up-to-date, and VAT compliant. A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. However, the companies can voluntarily register your business for VAT if the taxable sales and imports within UAE exceed the voluntary registration threshold of AED 187,500.
Startups and small businesses can voluntarily register for VAT if their expenses exceed the voluntary registration threshold – a smart decision if they want to be eligible for tax credits.
How Do Businesses Comply with VAT in UAE and what do they need to do?
To comply with VAT in UAE, you’ll need to make the necessary changes to your financial management processes, your bookkeeping software, and your accounting staff to fulfil your role in allowing the FTA to understand your business activities and review your transactions. Tax-paying Businesses must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, depending on the timeframe the FTA decides) within 28 days from the end of the tax period.
The most important records to keep (for a minimum of 5 years) to stay VAT compliant include the invoices, Credit notes, Debit notes.
What would be the impact of VAT on UAE inflation?
Inflation in the UAE is expected to be circa 2.5 percent in the current year. Introduction of VAT in 2018 is likely to see this rise to over three percent. would certainly increase the price of goods and services for the end consumer leading to a spike in inflation. In the long term, he said, the inflationary impact of VAT depends on the policy considerations of government such as deciding the basket of items that will be under the purview of the tax and the magnitude of the levy to be imposed on these items. Inflation can be expected to smoothen in the medium term.
The increase in inflation will normalise after the initial rise of 1.5 percent to two percent in the introductory year. However, the impact on consumer demand could possibly change the scenario, which means the real impact might be negligible post the introductory period. Certain sectors such as construction, commercial real estate and luxury retail are expected to be taxed at five percent, pushing the prices of output from these sectors higher. The impact on residential real estate could be lower compared to the commercial real estate, as first-time transactions for new properties are exempted from the VAT. Apart from the rising cost of goods and services, compliance cost and system upgradation would be other pressure-points for businesses.
How will VAT impact the lives of UAE residents?
There will be no VAT applicable on the amount remitted, however, VAT will be charged on exchange house charges. VAT will be charged on utilities, telephone and Internet bills, according to regulations set by authorities. VAT will also be charged for vehicle service and repairs, as well as on fuel.
What are the small steps that can help big time?
The advice that we give right now is to accept that the VAT is going to be a reality. Once businesses understand this, then they should also look at it not just as a cost that they have to incur, but a value that they can bring to their efficiency software.
Start with a VAT impact assessment that will zero in on each and every transaction of the business, and understand what is the implication of that. The second step is implementation, which involves getting the proper systems in place and reworking your processes. The third step is the execution of the implementation, which involves changing your contracts and the way your business practices happen. Break it down into baby steps; you can’t do everything together.
The law itself is very clear about what is required, but the real challenge is shifting your systems to ensure that you have the proper data.
Aditya Shinde’s background and expertise: Director of VAAAS Global and partner at V.P. Shinde & Co., Chartered Accountants, Aditya is trying to make accounting and taxation easier for the customers, with a strong diversified team of Chartered Accountants, by providing one of the best solutions for all regulatory needs of a business. His expertise lies in accounting and tax needs, tax affairs, GST, dealing with Companies House and considerably more. Aditya is a known name in the commerce industry for his interactive sessions, lectures and seminars on various tax issues.