Article by A.Munem Al Rubaie, B.Com (Hons.) – Leeds, FCA – ICAEW – London, Managing Partner, ARCA, AlRubaie Chartered accountants since 1979
VAT is a GCC Decision
The United Arab Emirates has been a tax haven for investment capital, however, acting on the recommendations of the International Monetary Fund with regards to the falling prices of oil, the GCC countries recently decided to find a sustainable substitute to fund public services and adjust their fiscal affairs. They recently reached an agreement on the introduction of value-added tax (VAT) at a rate between 3 and 5% in 2018. The implementation grace period of VAT will be from January 1, 2018 to January 1, 2019.
UAE Decision on VAT Application
The UAE will implement value added tax (VAT) at the rate of 5% from January 1, 2018, according to the UAE Minister of State for Financial Affairs.
Although health services, education and 94 essential food items will be exempt, VAT will be applied on goods and services at each stage of the supply chain which is borne mainly by the consumer. The announcement of VAT introduction has already stirred concerns among entrepreneurs and consumers.
The impact may vary depending on household income and spending behaviour, how much will be levied on goods and services and whether it can be claimed back. Considering the purchasing power of residents in the country, a 5% VAT may generally be hardly noticeable, especially that the essential food items are exempt. However, those who regularly purchase luxury products will be the ones to shoulder a greater portion of the burden.
Diversifying The UAE Economy
The UAE is the second largest economy among the Arab Countries, which up to 2009 was 85% dependent on oil and natural gas exports; since then the UAE has succeeded in diversifying its economy and lessening the oil dependency. However, the falling prices of the oil had its impact on the economy around the world, not only the UAE and the GCC.
The country's efforts to diversify its economy away from oil and its efforts to develop a knowledge based economy will make it less susceptible to oil price cycles. During the last year, the UAE government had also reduced subsidies on Gas, Water and Electricity as a first step in applying economic reforms.
Contribution of VAT to UAE
The UAE is expected to earn up to 12 Billion Dirham as revenues of VAT in the first year alone.
Unlike corporate or income taxes, a one-digit VAT won’t be a big disincentive to businesses for future investment in the UAE.
VAT Impact on Business
The government will surely be studying closely the impact of such implementation and will act accordingly. However, business owners have shown real concerns following the news of the introduction of VAT in UAE as it is expected to reduce the spending of the consumers especially those with low income.
Businesses may slow down initially depending on the manner in which the VAT is introduced, but the minor percentage will not be a big stone if compared with European or American VAT rates in addition to corporate and Income taxes levied elsewhere. Naturally more planning will be considered as to where businesses will be set up and perform their activities. Trading inter-Free zones may become more popular.
It is not yet clear how the VAT will be implemented as details of the law are not yet published, however business owners are concerned that if they do pass the cost to buyers this will discourage the consumers from buying their services/goods which will eventually affect their business nonetheless. However, it depends on the nature and importance of products. Otherwise, the sellers may absorb most of the VAT if their current margin is high enough to maintain their competitiveness.
Registration of Businesses for VAT
When a VAT registered business charges VAT on a sale, it collects that money on behalf of the Tax authority. The business can reclaim the VAT they have paid on purchases. Registered businesses are those whose annual turnover from supplies of taxable goods and services, exceed or are likely to exceed certain thresholds are obliged to register for VAT. It has been expected that the threshold will be set at 1 million UAE dirhams.
Compliance by Business to VAT
While the cost of compliance maybe a burden on medium size institutions, its fulfilment will enhance the application of rules and regulations and will result in more robust controls and transparency in reporting.
In most cases, VAT will be reclaimed, but there may be a potential delay and uncertainty with refunds, and time borne by the business to get that refund back. The key role that professional bodies and advisory firms will play in building the knowledge, skills and awareness of those who will be impacted.
New positions will open within companies and opportunities available for outsourcing to carry out VAT returns
Also naturally the application will require proper audits of companies’ financials, ensuring appropriate records keeping and supporting documents well organized within the company.
Opportunities may arise within the tax authority and the government, as they will need qualified personnel for education and training on the subject, for interaction with businesses, to process returns and refunds, and handle enquiries.
Specialized committees will be formed to solve and clarify unclear matters and exceptions - there will be some grey areas till implementations take place.
The Future of TAX
Despite the hustle & bustle, we believe that such introduction won’t affect expatriates’ decision on leaving the UAE or not accepting job offers in the GCC because this introduction is considered a minor tax as no corporate or income taxes will be implemented, at least in the coming few years.
Regarding the possible introduction of corporate tax, this would require a well developed institutional framework which may not be available yet. Such an introduction depends on many factors as committees and taskforces are already formed to study the socio-economic impact of the imposition of VAT and the proposed percentages.
We believe that the UAE will remain attractive for investors from all over the world even if a low Corporate Tax rate is introduced because of the advantages of lower labour costs & no minimum wage set yet & the whole conducive business environment of encouraging investment, while, Income tax is not yet on the agenda.
Preparation for VAT
It is important to understand that the introduction of VAT will affect the whole of a business, not just the finance department. For example, those in sales will need to have the knowledge of how it’s calculated; the pricing department will have to reach the most attractive price, etc.
Therefore it’s time for companies to start preparing for VAT, as there is a lot to apply; tax codes, invoice format, invoice content per regulations. They will have to consider price- which will affect sales projections- how to minimize cost, review contracts & agreements, as well as consider if VAT can be charged, and if it can be reclaimed / recovered.
Companies will be required to be strict with their record-keeping and file returns – VAT will be filed on a monthly basis – maintain full records and a complete audit trail. There will be interest/ penalties to be considered.
Munem AlRubaie has been practising in the UAE heading a firm of Chartered Accountants since 1979 & offered professional services for a multitude of Companies from all over the world & expresses most sincere interest in serving the business community in the most beneficial manner for all concerned.
To contact the firm please forward all queries on subject & any other matter to info@arca.ae
0+
