Upcoming VAT rules in GCC – Exemptions and Penalties

As all businesses prepare for VAT introduction in UAE on 1st of January 2018, AIQUAL is keeping a lookout for all rules as they get published so we can support our customers ensure compliance, take advantage of any tax relief, and to avoid incurring any penalties.

 

What is VAT?

Value Added Tax (or VAT) is an indirect tax collected by businesses from consumers on behalf of the government. It is imposed on most supplies of goods and services that are bought and sold.

VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain. To explain how VAT works we have provided a simple, illustrative example below (based on a VAT rate of 5%):

Who should register for VAT?

Any UAE business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.

Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.

Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.

How will the government collect VAT?

The UAE Ministry of Finance states that businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

 

How to ensure my business will be VAT compliant on-time?

There are many consulting and accounting and training firms in UAE who are gearing up to support you with VAT. The VAT compliance rules and processes are not simple. Below are a few examples of the VAT rules related to exemptions and penalties so you get a feel of the issues, the risks, and the opportunities.

1) What sectors will be zero rated?

VAT, as a general consumption tax, will apply to the majority of transactions of goods and services unless specifically exempted or excepted by law. VAT will be charged at 0% in respect of the following main categories of supplies:

  • Exports of goods and services to outside the GCC
  • International transportation, and related supplies
  • Supplies of certain sea, air and land means of transportation such as aircraft and ships
  • Certain investment grade precious metals (e.g. gold, silver, of 99% purity)
  • Newly constructed residential properties, that are supplied for the first time within 3 years of their construction
  • Supply of certain education services
  • Supply of certain Healthcare services

Important note: Even if your business sells zero rated products only, it may still be buying VAT rated products. So there is an advantage to voluntary VAT registration so you can receive money back in terms of VAT refunds.

2) What sectors will be exempt

The following categories of supplies will be exempt from VAT:

  • The supply of some financial services (to be clarified in VAT legislation)
  • Residential properties
  • Bare land
  • Local passenger transport

3) What are the cases that would lead to the imposition of penalties?

Penalties will be imposed for non-compliance.

Examples of actions and omissions that may give rise to penalties include:

  • Failing to register when required to do so
  • Failing to submit a tax return or make a payment within the required period
  • Failing to keep the records required under the issued tax legislation
  • Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issues tax legislation

Besides government penalties, many suppliers and organizations are reluctant to do business with companies and SMEs that are not VAT registered. Companies may be unwilling to deal with companies who are unable to produce a proper VAT.

4) Can businesses just raise their prices by 5% to cover VAT?

No, there is no simple work-around like that. The government intention is that VAT will help improve the economic base of the country. Therefore, the law will include rules that require businesses to be clear about how much VAT buyers are paying for each transaction. So a lot of changes have to be planned by management and performed within each business throughout its supply chain and across systems and departments to achieve VAT compliance.

Why should I partner with AIQUAL to ensure VAT compliance?

We at AIQUAL are part of that supportive VAT compliance ecosystem. We are ready to make your compliance efficient and transparent by providing the following:

  • Cross-system and cross-transaction data analytics
  • Giving you reports and dashboard to visualize the VAT process and calculations end-to-end
  • Keeping you informed of VAT impact on your cash flow
  • Electronic filing of your VAT reports with the government and readiness to support the numbers in case of an audit

Please contact us to setup an initial consultation.

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