value added tax (vat) in uae
TRANSCRIPT
MOTIVALUATE PRESENTS
VAT WORKSHOPDUBAI, U.A.EMARCH 2017
Agenda8.30 a.m. to 10.00 a.m.
Session1: Introduction & Basic Concepts of VAT and how it works
10 a.m. to 10.15 a.m.
Coffee/Tea Break
10.15 a.m. to 11.45 p.m.
Session 2: How VAT is applied on Goods and Services – Case Studies / Examples
11.45 a.m. to 12.45 p.m.
Prayer and Lunch Break
12.45 p.m. to 2.15 p.m.
Session 3: Commercial Implications of VAT and how to get prepared
2.15 p.m. to 2.30 p.m.
Coffee/Tea Break
2.30 p.m. to 4.00 p.m.
Session 4: VAT related challenges - Lessons to be learnt from other countries
4.00 p.m. to 4.15 p.m.
Feedback and Summary session
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Session 1:Introduction
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• The person paying the tax to the Government directly bears the incidence of tax
• It is progressive in nature – high rate of taxes for people having higher ability to pay.
• Eg. Income Tax
Direct Tax
• The person paying the tax to the Government collects the same from the ultimate consumer.
• The incidence of tax is shifted to the other person.
• Regressive in nature – all consumers equally bear the burden, irrespective of their ability to pay.
• Eg. Customs Duty, Excise Duty, VAT
Indirect Tax
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Basic Concepts of VAT
& How it works!?
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Value Added Tax• Tax on the value added to the commodity at each stage in
production and distribution chain.• It is a system to collect tax on the value at the final or
retail point of sale.• VAT is a consumption tax because it is borne ultimately by
the final consumer of goods.
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Under VAT the tax paid on
commodities B, C, D and E are
allowed to be set off from the final tax liability on
Product A
Double tax increases
production cost & price of final
product
Total tax on A = Tax on A
+ Tax on B,C,D & E
Tax paid on B,C,D & E by manufacturer at the time of purchase
Raw materials: B,C, D & E
Manufacturer produces A
VAT on Manufactured Product
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VAT on Goods & Services
A combined grand system of
VAT on goods and services is
known as Goods and Services
Tax
In the same way, one can think of a system of VAT
dealing with input and output
of Services.
VAT on Trading - the VAT paid on
inputs purchased will be allowed as a
credit and set off against the tax liability on the value of sales
When the same goods are sold tax is levied on
them
Tax is paid on
purchased goods
Trader buys goods
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MANUFACTURER Sale Price AED 300Gross VAT AED 15
Net VAT AED 4(AED 15-(5+6))
WHOLESALERSale Price AED 320Gross VAT AED 16
Net VAT AED 1(AED 16 – AED 15)
Raw Material X
Sale Price AED 100
Gross AED 5Net Vat AED 5
Raw Material Y
Sale Price AED 120
Gross VAT AED 6
Net VAT AED 6
RETAILERSale Price AED 350
Gross VAT AED 17.50
Net VAT AED 1.50(AED 17.50 – AED
16)
Inputs for ManufacturerHow it
works!?
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Variants of VAT
Gross Product Variant
Income Variant
Consumption Variant
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Gross Product Variant
• Deductions for taxes paid on all purchases of inputs (raw materials and components)
• No deduction for taxes paid on capital inputs
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Income Variant• Deductions on purchases of inputs (raw materials and components)
• Depreciation on capital goods (as specified)
• This method provides incentives to classify purchases as revenue expenditure to claim set-off
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Consumption Variant• Deduction for all business purchases including capital
assets.
• Gross investment is deductible in calculating the value added.
• Neither distinguishes between capital and revenue expenditures, nor specifies the life of assets or depreciation allowance for different assets.
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Variant of VAT - Summary• Gross Product Variant: allows deductions for taxes paid on all purchases of raw materials and
components, but no deduction is allowed for taxes paid on capital inputs• Income Variant: allows for deductions on purchases of raw materials and components as well
as depreciation on capital goods. This method provides incentives to classify purchases as revenue expenditure to claim set-off
• Consumption Variant: allows deduction for all business purchases including capital assets. Thus gross investment is deductible in calculating the value added. It neither distinguishes between capital and revenue expenditures nor specifies the life of assets or depreciation allowance for different assets.
• Note: The Consumption Variant is the most widely used variant of the VAT. Most of the European countries and other continents have adopted this variant. It does not affect decisions regarding investment because the tax on capital goods is also available for set-off against the VAT liability. The system is tax neutral and obliviates the need to distinguish between purchase of inputs and capital goods
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Methods of Computing
Tax
Addition method
Invoice method
Cost subtraction method
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Addition method of computing VAT• This method aggregates all the factor payments
(excluding value of material) including profits to arrive at the total value addition on which the tax rate is applied to calculate the tax.
• This calculation is used with income variant. • The drawback in this method is it does not facilitate
matching of invoices for detecting evasion as tax liability is calculated period-wise and not invoice-wise.
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Invoice method of computing VAT• Most common and popular method.• Tax is imposed at every stage of sales on the entire sales
value and tax paid at the earlier stage is allowed as set-off.
• At every stage the differential tax is paid. • At every stage, the tax is to be charged separately in the
Invoice. • This method is also called the Tax Credit Method or
Voucher Method. • This method is widely used in Europe and in India this
method is followed under the State Level VAT and the Central Excise Law.
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Cost Subtraction method of computing VAT• Tax is charged only on the value added at each stage of
sale of goods.• Since the total value of goods sold is not taken into
account, the question of grant of claim for set-off or tax credit does not arise.
• This method is applied where the tax is not charged separately.
• Direct Subtraction method - deducting the aggregate value of purchase exclusive of tax from the aggregate value of sales exclusive of tax.
• Intermediate Subtraction method – deducting the tax inclusive value of purchases from the sales and taxing difference between them.
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Input Tax
• It is a tax paid or payable in the course of business on the purchases of any goods or services from a registered dealer
Output Tax
• It is a tax charged or chargeable under the VAT Act by a registered dealer for the sale of goods or services in the course of business.
Input Tax & Output Tax19
Input Tax Credit• The essence of VAT is in providing set-off for the
tax paid earlier and this is given effect through the concept of Input Tax Credit/Rebate.
• Input Tax Credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.
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VAT Liability• VAT is based on the value addition to the goods and the
related VAT Liability of the dealer is calculated by deducting Input Tax Credit from the Output Tax payable.
Net Tax
payable
Output Tax
Input Tax
*If the Net Tax is negative refund is collected from the Government (Input Tax paid is more than Output Tax)
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Registered & Unregistered Business• If you are a VAT-registered business, in most
cases you:‐ Charge VAT on the goods and services you provide
‐ Reclaim the VAT you pay when you buy goods and services for your business
• If you are not VAT-registered then you cannot reclaim the VAT you pay when you purchase goods and services
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Registered Business• In UAE VAT is applicable in phase 1 to all companies with
annual revenue of more than AED 3.75 Million.• In phase 2 the VAT will be applicable to all entities
irrespective of their annual revenue.
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Goods and Services - Categories
Standard Rate 5%
Zero Rate 0%
Exempt Category
Out of Scope
Category
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Supplies under different categories
Standard-Rated Supplies• Most local supplies of goods and services in a country are
generally included in this category, for example, wholesale and retail sales, the consumption of food in a restaurant, and the provision of services by law and accounting firms.
Zero-Rated Supplies• Goods and services exported out of a country may be zero-
rated, that is, are subject to VAT at a rate of 0%.VAT-Exempt SuppliesThe following businesses are often exempt from VAT in order to reduce its impact on the population:• educational institutions;• pharmaceutical supplies;• financial services, including both banks and life insurance
companies; and• sale or lease of residential property.Out-of-Scope Supplies• Supplies where goods and services are delivered by an
overseas supplier to another overseas person are generally included in this category as do private and non-business transactions.
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Exempted CategoryThe UAE government has already announced that • 100 food items• Health• Education• Bicycles and • Social services would be exempted from VAT.
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Exempted Category• Exempt supply means that you will not charge VAT to your customer. • Any VAT incurred on those purchases will not be claimable. • Wholly exempt businesses will not be entitled to register for VAT nor claim
any VAT incurred on their purchases.• Partially exempt businesses (i.e. mixed business) will be able to register for
VAT and claim those expenses to the extent that it is incurred for the making of taxable supplies. This will mean that VAT incurred on common costs and general overheads (such as marketing and promotional expenses, utilities, professional fees, purchases of office furniture) will not be fully claimable and must be apportioned.
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Zero Vs. Exempt Category• Zero-rated Category: they count as taxable supplies, but you
don't add any VAT to your selling price because the VAT rate is 0 per cent. However Input Tax Credit is allowed and hence generally in refund position.
• Exempt Category: you don't charge any VAT and they're not taxable supplies. This means that you won't normally be able to reclaim any of the VAT on your expenses. (Healthcare, Education, Financial Services, etc.)
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Input Tax Credit (ITC)
Taxable Supply
Non-Taxable Supply
Standard Rated
ITC Available
No ITC
ITC Available
ITC Available
Exempt
Out of Scope
Zero Rated
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Point of TaxGoods Services
Earlier of:(a) Date of Payment(b) Date at which
goods are made available
(c) Date of issue of VAT Invoice
Earlier of:(a) Date of Payment(b) Date at which
services are rendered (completed)
(c) Date of issue of VAT Invoice
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VAT Invoice• The process of charging VAT on supplies of goods and services requires
businesses to issue VAT invoices. • A VAT Invoice is a document that must be produced and issued by VAT
registered businesses to provide documentary evidence of the sale of goods and services in compliance with the VAT law.
• A VAT Invoice is also required by the business as documentary evidence to support VAT credit claims, i.e. VAT incurred on the acquisition of goods and services for the purposes of the business can only be claimed if the business holds a valid VAT Invoice from the vendor.
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Outputs & Output TaxOutputs Output Tax Income
The VAT exclusive business income arising in a VAT Accounting Period
The VAT due on the Outputs
Income is deemed to be inclusive of any VAT properly due, whether or not VAT has been separately charged
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Inputs & Input TaxInput Input Tax
The VAT exclusive value of external costs incurred by a business and excludes:• Salaries• Inter-departmental
charges within a taxable person made for accounting purposes
The proportion of VAT incurred on inputs which the business is entitled to recover
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Filing of returns• VAT registered business to file returns on annual or
quarterly or monthly basis• Outputs/Output Tax; Inputs/Input Tax are all entered in the
VAT Return• VAT actually payable is the net of Output Tax Due less
Input Tax recoverable• Net Amount is payable or to be claimed as refund
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VAT Registered Business’s Role• VAT is self-assessed • Responsibility is on the VAT registered business to
collect, account, pay and prove to the Government
• Responsibility coupled with Accountability with huge financial and legal implications
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Agenda8.30 a.m. to 10.00 a.m.
Session1: Introduction & Basic Concepts of VAT and how it works
10 a.m. to 10.15 a.m.
Coffee/Tea Break
10.15 a.m. to 11.45 a.m.
Session 2: How VAT is applied on Goods and Services – Case Studies / Examples
11.45 a.m. to 12.45 p.m.
Prayer and Lunch Break
12.45 p.m. to 2.15 p.m.
Session 3: Commercial Implications of VAT and how to get prepared
2.15 p.m. to 2.30 p.m.
Coffee/Tea Break
2.30 p.m. to 4.00 p.m.
Session 4: VAT related challenges - Lessons to be learnt from other countries
4.00 p.m. to 4.15 p.m.
Feedback and Summary session
36
Session2:How VAT is applied on Goods & Services –
Case Studies / Examples
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Case Study No.1• ABC LLC, a manufacturer of Aluminium Frames, sells its
products to distributor for AED1,000. The Distributor sells the goods to a wholesale dealer for AED1,200 and the wholesale dealer sells the goods to a Retailer for AED1,500. The Retailer sells the goods to consumers at AED2,000. The rate of tax on the goods manufacturer is 5%.
Requirement:• Compute the VAT Liability at every stage of the sale
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Case Study No.2• Red Chilli restaurant has collected VAT on various invoices during the
month amounting to AED 500,000.• During the month there were purchases made on which VAT paid
amounted to AED 125,000.
• Rent paid for various outlets during the month included VAT amounting to AED 100,000.
• One of the suppliers issued a credit note in respect of supplies made in the earlier month and the VAT component of the credit note worked out to AED 12,000
• Expenses incurred during the month on which VAT paid in total amounted to AED 18,000
Requirement:Prepare the VAT Account for the month for Red Chilli Restaurant.
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Case Study No.3• Batman Building Materials Trading has purchased goods worth AED
12,000,000 during the month. The goods are normally bought on 60 days credit.
• During the month the Sales of building materials was worth AED 20,000,000 and the average terms with customers is 90 days.
• VAT paid on the various operating expenses of the company amounted to AED 35,000
• During the same month Professional Fee paid to consultants and lawyers amounted to AED 150,000.
• Corporate Expenses allocable to Batimat Building Material Trading amounted to AED 200,000 of which expenses which suffered VAT amounted to AED 80,000
Requirement:Prepare the VAT Account of Batman Building Materials Trading.
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Real Estate Business• Sale and lease of commercial property is likely to be treated as taxable as opposed to
the sale and lease of residential property which is likely to be exempt under VAT. As a result, businesses such as property developers who sell residential property are likely to be in the position of being a ‘final consumer’, that is, unable to claim input credits for the VAT incurred on costs.
• 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.
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Retail Business• 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.
• Cancellation fees/retained deposits – deposits or advance payments from a customer could be considered as taxable or compensation and outside the scope of VAT where no supply has taken place.
• Timing of the issue of invoices – for example consideration to invoices being issued at the start of the month (instead of the end) to enable ample time to collect from your customers.
• Serious consideration to pricing to ensure that the business is not found or perceived to be profiteering
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Industrial Products Business• The Industrial Products sector players face similar challenges and
therefore ensuring efficiency of VAT implementation and addressing cash flow implications will be priorities for this sector.
• In particular consideration should be given to the following:• Pricing impact on end consumers.• Cash flow efficiencies.• Cross border transactions within the GCC and the associated
reporting and documentation requirements (including imports and exports).
• Invoicing requirements.
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Agenda8.30 a.m. to 10.00 a.m.
Session1: Introduction & Basic Concepts of VAT and how it works
10 a.m. to 10.15 a.m.
Coffee/Tea Break
10.15 a.m. to 11.45 a.m.
Session 2: How VAT is applied on Goods and Services – Case Studies / Examples
11.45 a.m. to 12.45 p.m.
Prayer and Lunch Break
12.45 p.m. to 2.15 p.m.
Session 3: Commercial Implications of VAT and how to get prepared
2.15 p.m. to 2.30 p.m.
Coffee/Tea Break
2.30 p.m. to 4.00 p.m.
Session 4: VAT related challenges - Lessons to be learnt from other countries
4.00 p.m. to 4.15 p.m.
Feedback and Summary session
44
Session 3:Commercial
Implications of VAT and How to get
prepared
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- Who is the Supplier and Who is the Customer?- Are either party or both parties registered?- Is the Supplier or Customer overseas?- Is it in course or furtherance of business?
- Is this supply of goods or services?- Is this single or multiple supplies?
- Where is the supply deemed to take place? (Jurisdiction and rate applicable)
- When is VAT Accounted, payable and/or recoverable as the case may be?- When due what are the documents required to satisfy the Government authority?
- What is the Value of supply, the nature of supply and rate applicable to it?
Get Prepared – 5 W’s
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Place of Supply• Goods – place of supply is determined by location of goods when the
supply takes place• Services -
• B2B – place of supply is where the recipient belongs• B2C – place of supply is where the supplier belongs
Note: There could be exceptions to the above basic rule
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Commercial Implications• Services provided over a lengthy period of time
- Construction- Facilities Management Services
• Continuous Supplies- Periodic invoicing- Part payments made during the duration of service
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Commercial Implications• Pricing Policy• Invoicing – inclusive of VAT or
excluding VAT• Price Increase• Assess capability of existing
systems• System requirements and
corrections• Manpower requirements and
corrections• Awareness within the organization
• Educating the Customer• Dealing with the existing
contracts• Cut-off Procedures• Inventory as at 31st December
2017• Identify the intercompany
transactions• Training and awareness
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Commercial Implications• Smart Dubai has announced on 14th March 2017 that the Dubai
Government will adopt “Blockchain Technology” and it would design a build a Blockchain Platform.
• A blockchain is simply a chronological database of transactions recorded by a network of computers. Each block is encrypted and organized into smaller datasets referred to as “blocks.” Every block contains information about a certain number of transactions, a reference to the preceding block in the blockchain, as well as a consensus notation indicating that the current block has been validated.
• 2018 adoption of a VAT in the GCC may come with the blockchain application
• The blockchain consensus mechanism is the last stage before the issuance of the formal VAT invoice.
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BitCoin & VATCoin• Bitcoin is the world’s first peer-to-peer cryptocurrency. • VATCoin is similar, but it is used in tax compliance• Both Bitcoin and VATCoin are distributive ledger applications built upon
blockchain technology.• Bitcoin’s ledger is public; VATCoin’s is private. • If adopted, VATCoin could well become the world’s first government-
mandated cryptotaxcurrency. • Unlike Bitcoin, VATCoin will not be a speculative currency. It is always
fixed to the home currency
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VAT Impact on BusinessVAT implementation is likely to have a significant impact on business operations, as follows:
• business processes;• IT and other related systems;• supply chain:• cash flows;• human resources;• legal;• marketing and pricing; and• fiscal and accounting
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VAT Impact on Business• Contracts - “inclusive” or “exclusive” of any applicable sales
or value added tax - a provision should allow for a valid tax invoice to be issued against payments - indemnification against loss or penalties.
• Supplier - responsible for VAT - if the contract is silent - account to relevant authority - may be unable to recover the VAT from customer - leaving the supplier short changed.
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DESCRIPTION AMOUNT IN AED AMOUNT IN AEDRevenue 60,000,000Add: Cost of Goods Sold 40,000,000Add: Operating Costs 10,000,000
110,000,000Less: Depreciation 2,000,000Less: Staff Cost 3,000,000 5,000,000
105,000,000VAT rate of 5% 5,250,000Potential Liability based on throughput (x7 years)
36,750,000
Potential Penalty of 100% 36,750,00073,500,000
1% Error in accounting VAT 735,0005% Error in accounting VAT 3,675,000
Sensitivity of VAT Accounting
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Agenda8.30 a.m. to 10.00 a.m.
Session1: Introduction & Basic Concepts of VAT and how it works
10 a.m. to 10.15 a.m.
Coffee/Tea Break
10.15 a.m. to 11.45 a.m.
Session 2: How VAT is applied on Goods and Services – Case Studies / Examples
11.45 a.m. to 12.45 p.m.
Prayer and Lunch Break
12.45 p.m. to 2.15 p.m.
Session 3: Commercial Implications of VAT and how to get prepared
2.15 p.m. to 2.30 p.m.
Coffee/Tea Break
2.30 p.m. to 4.00 p.m.
Session 4: VAT related challenges - Lessons to be learnt from other countries
4.00 p.m. to 4.15 p.m.
Feedback and Summary session
55
Session 4:VAT Related Challenges –
Lessons from other countries
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Carousel Fraud in Europe
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Lessons from Malaysia• Malaysia is the most recent economy to introduce a Value Added Tax.
A Goods and Services Tax was implemented in Malaysia on 1 April 2015.
• The key ‘lesson learnt’ from that experience is that businesses who began planning for the implementation project early had successful implementations and were ready on go-live date.
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Lessons from Other CountriesAn early start enabled them to:• Facilitate early management responses to issues where guidance from senior
management was required which enabled early resolution of issues.• Identify IT systems impacted by VAT implementation and assess the level of
upgrades, modifications (or new acquisitions) required. • This in turn enabled them to accurately budget for the project and secure
scarce external IT resources for the project’s IT work stream.• Decide whether to use in-house resources to handle the project or to
outsource to third party consultants.• Identify the necessary head count and skills set to deliver a successful and
timely project.
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Lessons from Other Countries• Identify any adverse impact from VAT laws on the business. This in turn
enabled them to approach and raise the issue with the tax authorities early. Businesses in such situations had a far higher chance of receiving responses from the authorities (as opposed to those who made submissions 3 months out from VAT go-live date).
• Plan their capital expenditure and cash flow management.• Manage the risk of a late announcement by the Government providing a
shorter time span to implement the tax.• Address (and renegotiate with counterparties) long term contracts adversely
impacted by VAT.• These are some of the critical success factors to consider to ensure a
successful implementation of the tax.
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Merits of VAT• No Tax evasion – only with proper records credit can be claimed for
purchases/inputs – perfect system of VAT will be a perfect chain where tax evasion is difficult
• Neutrality – it has anti-cascading effect – how much value is added and at what stage is of no consequence
• Certainty – system is simply based on transactions• Transparency – buyer knows out of total consideration what is tax
component• Better revenue collection and stability – minimum possibility of
revenue leakage for the government – if invoices is not demanded credit cannot be claimed
• Better Accounting system – better accounting to ensure credit for input tax
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Demerits of VAT• Increase in consumer price• Cascading Effect can be distorted if there are differential rates• Cost of Accounting will increase• Increase in working capital requirements• VAT tends to be regressive as the proportion of income spent on
consumption is larger for the poor than the rich – moderation is possible by exempting essentials
• Cost of administration is high for the Government
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