uae vat and its implication - ircoca & asil vat event presentation

VALUE-ADDED TAX(VAT)

ANALYSIS OF VAT & ITS IMPLEMENTATION IN UAE

ISHTIAQ RANA COMPANY &ASIL & Company Chartered Accountants

ASIL & Company Chartered Accountants

Introduction


Ishtiaq Rana & Company was established in 2004. It has developed a strong professional team

capable of offering integrated consultancy services in management, software development and

finance to public, private and NGOs sectors under Its the consultancy wing. ASIL & Company

Chartered Accountants is the sister company of IRCOCA.

ASIL & Company Chartered Accountants’ mission is to achieve a leadership position in UAE and

international markets by providing services to our clients for their business needs with the highest

standards of integrity, quality and efficiency. We strive to create an environment to promote group spirit

and commitment to excellence amongst our partners and staff, thereby providing opportunity for growth of

individual members.

Portfolio Of Services


Audit and Assurance Services

•Statutory Audit

•Internal Audit

•Quality Audit

•Information System Audit

•Management Audit

•Forensic Accounting and Investigations

•Industrial Audit

Accounting Services

•Book Keeping and Accounting Consultancy

•Accounts Supervision

•Financial Reporting

Management Services

•Tax Planning (Income Tax, Sales Tax, Value

Added Tax, Etc.)

•Human Resource Development

•Business Consultancy

•ISO Consultancy & Services

•MIS Set-up & Reporting

•Marketing Consultancy

•Management Training

Corporate and Secretarial Practices

Specific Industry ERP Solutions•Spinning Industry

•Weaving Industry

•Knitting & Stitching Industry

•Engineering Concerns

•Pharmaceuticals Industry

•Sugar Industry Modules

•Dairy System Model

Portfolio Of Services


General Software

Solutions•Integrated General Ledger

•Inventory Management Module

•Supply Chain Management Module

•Local & Import Purchase Module

•Production Module

•Costing & Budgeting Module

•HR, Payroll & Advances Module

•Receivable & Payable Modules

•Fixed Assets Module

•Toll Manufacturing Control Module

•MIS & Documentation System

•Government Accounting System.

VAT Services •Registration

•Tax Planning

•Documentation

•VAT Record Keeping

•VAT Filing

•VAT Audit

•VAT Adjudication

•VAT De-Registration

IR VAT Portfolio


•Across Pakistan IRCOCA has conducted 104 Training sessions with the collaboration of IMF

& World Bank

•Training Given to High Rank Officials,

• Strategic training for executives to understand the commercial impact of VAT on their

organization, how VAT will impact pricing, margins, systems and resources

•Tactical training for finance managers to understand how to administer and control VAT within

their business

•Operational training for staff working on a transactional level dealing with the processing of

VAT on a daily basis

OVERVIEW Of VATVAT impacts every phase of the tax life cycle. The Organization for Economic Cooperationand Development (OECD) has recognized it as the third most important source of globaltax revenue for governments — the one that accounts for approximately 20% of total taxcollected.

Currently, more than 160 countries have VAT or goods and services tax (GST) regime inplace and the number continues to grow. Governments in the GCC region have confirmedtheir commitment to introducing VAT. With this in mind, businesses in the region willneed to focus on developing a holistic VAT strategy to manage the associated costs anddemands on internal resources.


• Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred toas a type of general consumption tax. In a country which has a VAT, it is imposed on mostsupplies of goods and services that are bought and sold.

• VAT is one of the most common types of consumption tax found around the world. Over150 countries have implemented VAT (or its equivalent, Goods and Services Tax), includingall 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore andMalaysia.

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

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


WHAT IS VAT?

Illustrative example

Sales 5% charge on the sales VAT recovered on the purchases

Net VAT payable

Manufacturer 20,000 1,000 1,000

Retailer 30,000 1,500 1,000 5,000

Total VAT Paid by end consumer* 1,500


Manufacturer CustomerRetailer

Tax authority

Sells goods Sells goods

AED 20,000 + 1,000VAT

AED 30,000 + 1,500VATRepayment

(credit) of AED 1,000 VAT

Payment of AED 1,500 VAT

How Does VAT Work?

• VAT is a tax on business transactions that potentially affects all purchases andsales. It is not a tax on profits.

• Any VAT paid by businesses on their purchases is called ‘Input VAT’.

• The VAT charged by VAT-registered businesses is called ‘Output VAT’

Input VAT

Output VAT

VAT Payable


Compliance requirements under VATOther requirements of the VAT will include:

• Mandatory registration for VAT for all businesses exceeding the mandatory VATregistration threshold.

• Filing of periodic VAT returns with the tax authorities (either monthly orquarterly).

• Remitting any VAT payable by a specified date.

• Record keeping in respect of all business transactions: – Tax invoices

– Debit or credit notes

– Import and export records

– Records of goods/services provided for free or allocated for private use

– Zero rated or VAT exempt supplies and purchases


Registering for VAT

• VAT registration is mandatory for businesses with an annual turnover of AED375,000 (or its equivalent from any other GCC member state currency).

• Nevertheless, businesses that generate 50% (187,500) of this thresholdannually can voluntarily register for VAT.

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


Calculating and Reporting VAT


M/S ABC Trading LLC, a registered person under Federal Law No. (7) of 2017, has following data

available for Jan 2018 – March 2018 Quarter.

Value Tax

Purchases:

Domestic taxed 112,5005,625

Domestic exempt 15,000 -

Imported taxed 550,000 27,500

Sales 800,000 40,000

Assuming that there were no opening and closing stocks what will be the amount of output tax

chargeable to tax payable by ABC Trading LLC for quarter ending March , 2018.

VAT Implementation Considerations


VAT is a tax on business transactions that potentially affects all purchases and sales. It is not a tax on profits.

VAT is going to be charged at 5% on most supplies, though some are taxed at either 0 or more.

Zero-rated supplies include most food, children’s clothing, construction of new houses, books, printed

matter and prescription drugs.

• A business that makes only zero-rated supplies can register for VAT and reclaim VAT paid on purchases

even though they do not charge their customers VAT. Exports to customers outside the EU and to VAT-

registered customers within the EU can also normally be zero-rated. Special rules and procedures apply.

Reduced-rated supplies include domestic fuel; residential conversions and certain refurbishments;

installing energy-saving materials in residential accommodation; and children’s car seats. Even though

VAT at 5% is charged on reduced-rated supplies, all associated VAT paid on business purchases,

regardless of the rate paid, should be reclaimable.

VAT Implementation Considerations


Once registered for VAT, a business must issue VAT invoices — and retain a copy for its file — for every

sale to a VAT-registered customer. This does not apply to sales of exempt or zero-rated supplies unless

they are included in a sale with other VAT-able items — in which case the invoice should show separate

totals.

Full VAT invoices Information required in all cases

•Date of issue

•Unique sequential number identifying the invoice

•Customer’s VAT identification number (if the customer is liable for the tax on the transaction)

•Supplier’s full name & address

•Customer’s full name & address

•Description of quantity & type of goods supplied or type & extent of services rendered

•Date of transaction or payment (if different from invoice date)

•VAT rate applied

•VAT amount payable

•Breakdown of VAT amount payable by VAT rate or exemption

•Unit price of goods or services – exclusive of tax, discounts or rebates

VAT INVOICE TEMPLATE



Introduction To TAX Reform GCC Overview

Managing VAT Implementation Framework


BUSINESS PLANNING FOR VAT IMPLEMENTATION

• Business strategic planning

• Operational planning for implementation

• Implementation and its impact on Budgeting

• Accounting system mapping for implementation

• Compliance

Managing VAT Implementation Framework

Impact Assessment

Design Implement Operate


Operations

Compliance

Finance

IT

• High level VAT impact • Mapping of transactions • Identify compliance requirements • Review of business functions • Communication plan • Review of IT changes• VAT awareness training

• Implementation plan

•Review legislation • VAT decision flag • Business impact modeling • VAT add-on system • IT design • VAT compliance function

• IT testing • User training • VAT manual and procedures

• Registration • Review of first returns

The GCC VAT Framework Agreement

• The Unified Agreement for VAT for the GCC Region includes the following key features:

• VAT will apply to goods and services at the standard rate of five percent (5%).

• Most VAT compliance requirements and procedures are left to the discretion of each member state under its

local legislation. For example,

1. the modalities and conditions to treat a group as one taxpayer (VAT grouping)

2. the tax period (but should not be less than one month),

3. the content of the VAT invoice and the deadline for its issuance.

4. Taxable persons will be allowed to deduct input VAT that is incurred for making taxable supplies of

goods and services.

• Input tax credit at the end of each tax period may be allowed as a refund or carried forward, depending on

each member state’s modalities.


• The VAT treatment of some sectors, namely, education, healthcare, real estate and local transport is left to

the discretion of each member state (i.e. whether these sectors are subject to tax at standard rate, zero rate

or exempt).

• The VAT treatment of financial services: The standard rule stipulated in the Treaty is to exempt these

services from VAT with a right to reclaim the input tax credit according to specific rates determined by each

member state. However, each member state may opt for a different VAT treatment for financial services.

• Food products shall be subject to the standard rate of VAT, however each member state will have the right

to apply zero rate on food as per the unified list of commodities (e.g. basic foods: bread, milk etc.).

• Medical equipment and medicines will be subject to zero rate.

• Oil and gas including oil derivatives sector may be subject to VAT at a standard rate or zero rate, at the

discretion of each member state and in accordance with the modalities and conditions they each set out.


Consideration for Specific Industry

• Real Estate

In particular, consideration should be given to the following:

• The complexities in determining the VAT treatment in joint

venture arrangements with local government authority and

other developers and investors.

• Whether sale and purchase agreements enable the

property developer to either recover or pass on the increased

VAT costs to the purchaser, to ensure margins are not

impacted.

• Whether property developers who have entered into long

term build-and-sell contracts with purchasers have taken VAT

into consideration when pricing their properties.

• VAT provisions in construction contracts, since they

typically span a number of years, to prevent any adverse VAT

impacts.

• Free Zones

• The VAT position of free zones gives rise to a range ofcomplex questions in terms of the implementation of VATand consideration should be given to the following:

• The VAT classification and treatment of goods andservices obtained inside the free zone, brought fromoutside the free zone, and from overseas.

• The VAT treatment of supplies from one free zoneto another.

• The VAT treatment of entities operating in free zones(fenced) and free trade zones (unfenced) and whether thiswill be different.

• Any organizational and structural changes required to

optimize competitiveness.ASIL & Company Chartered Accountants

Consideration for Specific Industry

• Manufacturing

In particular consideration should be given to thefollowing:

• Pricing impact on end consumers.

• Cash flow efficiencies.

• Cross border transactions within the GCC andthe associated reporting and documentationrequirements (including imports and exports).

• Invoicing requirements.

• Retail

• For retailers, VAT compliant invoicing and pricing as well as correct VAT classification of sales will be critical. Business promotion schemes, such as loyalty programs and voucher arrangements, can offer technically complex VAT scenarios and implications.

• Additional consideration should be given to the following:

• The timing of any significant capital expenditure near to the VAT start date to avoid cash flow implications due to VAT refunds stuck with the tax authorities.

• Reviewing payment terms with your customers and vendors to manage cash flow and allow the claiming of input tax at the earliest opportunity.


Example VAT Case 1 CASE 1:

Star Enterprises has submitted the following data for the Quarter ended June 2018.

AED

Total Sales registered 6,000,000

Export Sales 2,500,000

Exempt Supplies 500,000

Gross Purchases from Registered suppliers 6,500,000

Gross Purchases from Unregistered suppliers 500,000

Purchase Return to Registered suppliers 650,000

Required:

You are required to compute the sales tax liability of Star Enterprises for the Quarter ended June 2018.Show proper workings for VAT return.


Example VAT Case 2 CASE 2:

• Following is the pertinent data relating to VAT Record of the company

• Company has a policy to sell goods on 30% profit of purchase price with a trade discount of 8% and sometime a special discount. In the quarters above the company has provided discount in the following manner

• In Quarter ending March 2018 trade discount was provided on the 20% of the sales and special discount was provided on 5 % of the sales @ of 15%.

• In Quarter ending June 2018 trade discount was provided on the 30% of the sales and no special discount was provided.

• In Quarter ending September 2018 trade discount was provided on the 12% of the sales and no special discount was provided.

You are required to compute the VAT payable along with the Quarterly VAT tax return for the Quarter Ending March, June and September 2018 with brief explanatory notes, where relevant. Also compute Input Tax Stock on each Quarter Ending.


Quarter Ended Purchases Closing Stock

AMOUNT (AED)

March 2018 12,890,800 245,890

June 2018 16,867,980 567,600

September 2018 9,890,767 85,000

Example VAT Case 3 CASE 3: Goods imported to Dubai warehouses are:

• Sold in local market

• When the goods are sold in the local market, 5% VAT will be collected and paid to the authority. No input VAT can be claimed once again. It was claimed under reverse charge mechanism.

• Sold to customers in Muscat (GCC country)

• Sold to customer in Muscat. Until VAT is implemented in Oman (Muscat) it will be treated as a country outside GCC for VAT purpose. Hence, the treatment will be similar to sales to the case given below.

• If the customer is registered under the respective VAT Law of the country (Oman), no tax will be collected from the customer. The place of business will be the place where transportation terminates; i.e. Muscat. Hence Tax liability will be as per the provisions of the Law in the Land of Oman.

• In case, the customer in the Muscat is a nonregistered customer, the company ABC LLC can supply the materials by paying 5% tax to the UAE Tax Authority (till such sales reach to AED 375,000/ for a particular year).

• Sold to customers in Malaysia.

• Sold to customer in Malaysia. It is an export and hence tax rate will be zero%.


How can ASIL HELP you?

Finance & TAX Consulting

Planning & Advice

Implementation & Monitoring


ASIL can provide a complete range of services to address all elements of VAT implementation and ongoing compliance.

Reporting and compliance

Our Team of Consultants

Ishtiaq Ahmed RanaMD & PartnerTax and Corporate ServicesT: +971558918372E: [email protected]

Laeeq Ahmad RanaPartnerIndirect TaxesT: +971558161946E: [email protected]

Mohammed Zeeshan MalikSenior ManagerManagement ConsultingT: +971559658884E: [email protected]
