UAE to implement VAT on 1 January 2018
The UAE Minister of State for Financial Affairs, His Excellency Obaid Humaid Al Tayer was speaking in Dubai on 24 February
after a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF).
VAT is expected to be introduced at a rate of 5% with some limited exceptions including basic food items, healthcare and education.
The UAE are planning to implement on 1 January 2018 - other GCC countries may do so at the same time or by 1 January 2019 at the latest.
The GCC Member States are in the process of approving the long anticipated common framework for the introduction of a Value Added Tax (VAT) system in the GCC. The common VAT framework will form the basis for the introduction of a national VAT system by each Member State. While there are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes. The exact details of the VAT regime which will need to be set out in the common framework and national legislation are yet to be made available.
From our experience in other markets, the establishment of clear regulations and efficient administrative processes is vital for VAT introduction to be a success. Businesses in the UAE (and GCC) should start planning now how the changes could impact their business, to ensure a smooth transition.Businesses will have to adapt to the changes by identifying the impact of VAT on their business, and key
immediate considerations are to:
- Assess capability of existing systems
- Identify VAT implementation strategy
- Identify contracts that need a VAT action
- Identify intercompany transactions
- Undertake training / awareness
A potential VAT implementation will also have immediate effects on consumer behaviour which gives opportunities for companies to assess their business direction and to plan strategically.
For a sneak-peek into the VAT regime and its impact, take a look into these FAQs we have gathered from experts across the globe –
Your Guide to VAT
Why is VAT being considered by the GCC?
Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.
What is the anticipated rate of VAT?
It is expected that the standard rate of VAT will be 5%.
Will VAT apply to everything?
Some exceptions may apply, mainly driven by socio-economic policy considerations. For example, some items may be subject to VAT at 0% (zero-rated), such as basic food - where no VAT applies but the related VAT incurred on purchases can be deducted.
Other areas such as healthcare and education may be exempt from VAT - where VAT will not apply and the related VAT incurred on purchases cannot be deducted.
While VAT is charged and collected by businesses on behalf of the government and as such should not be considered as a cost, there will be an additional burden in terms of administration and compliance with the new legislation. Businesses will need to amend systems, processes and procedures and will need to ensure they comply with the new requirements, such as for example:
* Charging VAT on supplies at the correct rate
* Calculating VAT deductible on purchases;
* Calculating the overall net amount of VAT to pay/ refund;
Will VAT be a cost to the business?
Where you are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) you will be entitled to reclaim VAT you incur on costs. Where you are engaged in activities that are exempt from VAT and you cannot reclaim VAT incurred on costs, VAT will be a cost to your business (as suppliers will charge VAT that you cannot reclaim).
Will it affect prices/margins?
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods/services. The price will need to take account of VAT, i.e. whether you charge Dh100 or Dh105, the amount will be deemed to include VAT.
Do I need to start preparing for VAT? What should I be doing now?
There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of your business and it is essential you consider the impact now and determine how best to deal with it.
At this stage, and until there is more clarity on the VAT legislation, we recommend you:
* Understand how VAT impacts your business and operational model and assess the capability of existing systems to cater for VAT
* Identify a VAT implementation strategy and create a project team to manage implementation
* Undertake an initial review and determine a plan/timeline for implementation
* Identify contractual arrangements that need action
* Identify your business transactions including intra-GCC transactions and inter-company transactions
What if I get it wrong?
We can expect that there will be a penalty regime applicable in cases of errors made, and this is why it will be key to have the right systems and procedures in place to limit your exposure.
Any error that effects the amount of VAT you pay may be subject to penalty.