UAE President Shaikh Khalifa Bin Zayed Al Nahyan has issued the landmark Federal Law No. 7 of 2017 for Tax Procedures, which sets the foundations for the planned UAE tax system, regulating the administration and collection of taxes and clearly defining the role of the Federal Tax Authority (FTA).
The law covers tax procedures, audits, objections, refunds, collection, and obligations, which include tax registration, tax-return preparation, submissions, payment and voluntary disclosure rules – in addition to tax evasion and general provisions.
When the Tax Procedures Law goes into effect on January 1, 2018, all UAE-based businesses will be required to keep accurate records for five years.
Sunstream Research and Consulting published in July a pre-legislative guide on VAT in the UAE.
The following is an interview with Danyal Tirmazi, Engagement Manager, Sunstream Research, on the new VAT legislation in the UAE.
VAT implementation is not only an economic measure; it could also be a new socio-economic measure in the region. How can we get businesses ready for this new shift on their way of thinking and implementation?
Firstly, it is important to understand that VAT is not a tax on business, it is a tax on the consumer of a good or a service. Companies act as collectors of tax from their customers. Their responsibility is to collect it and send it to the government.
Practically, more than anything else, firms will need to add an extra tax recording function onto processes such as invoicing and payments. For many, it will mean more stringent book-keeping.
That said, businesses should know the circumstances that have led to the implementation of VAT and the advantages that it brings.
There is a need for the government to spend, while at the same time fight off public deficits, when oil prices have fallen. Three years ago, crude was traded for over $100 per barrel; today it is less than $50 on international markets. With the UAE and the Gulf economies being largely dependent on this resource for income, the resulting effect has meant a slowdown in government spending and downward pressure on growth. This hinders economic and social development. Similarly, it has a negative effect on private sector progress and quality of living.
As for advantages that VAT represents, its purpose is to stabilize government revenue streams, and help deficit and debt management during economic cycles. It allows for the realisation of mid and long-term planning of economic, infrastructure and social development programmers. This in turn enhances living standards and opportunities for investment. Hence the prospects for those doing business and residing here should be for the better. Just ask anyone who depends on the roads, the ports or the metro coming into work. How far and how fast would we move without the transport networks set up by government?
Let’s talk about most profitable business in the region, don’t you see that the implementation of these VAT measures will increase the level of accountability and governance? VAT reform could drive operational transformation especially that corporates are required to be more visible with their financial statements? This might also have a positive effect on how businesses are operating for the long term. Especially that the report mentions that companies are starting to consider working with a third party to do their financials and auditing.
VAT will require companies to be more transparent with their financial accounts and this will be across the board - from the largest firms to the smallest.
With the bigger organizations, added compliance and greater responsibility to government authorities should increase investor confidence in the region in as much as there will be the need for stronger governance.
Another perspective considers businesses that, until now, have not been necessarily stringent with their reporting. The opportunity now presents itself to establish robust internal monitoring systems. An absence of tight book-keeping can lead to financial loss, hence increased governance and compliance can only offer benefit.
Transformation is thus represented by the potential for greater accountability, greater investment potential and better financial control.
How will the UAE government monitor such policy implementation and what are the penalties on businesses? Is there a VAT committee? or maybe a benchmark of other VAT systems similar to what the UAE is trying to implement?
The tax is governed by the newly established Federal Tax Authority, an arm of the Ministry of Finance. Here it has its team of auditors
Also, as our report mentions, in terms of similar VAT systems, we think many parallels can be drawn with the European Union.
We expect many similarities between the two structures since the tax in the Emirates is part of a GCC framework that comprise Saudi Arabia, Oman, Kuwait, Bahrain and Qatar. With EU VAT having evolved and matured, there are many benefits for using this as a benchmark. We also see a number of European VAT specialists working with the Ministry of Finance and this again indicates that there may be similarities between the two systems.
Do you believe that these measures will effect business growth and new business establishments in the region, especially that UAE has been for so long an attractive destination for foreigners who comes here for its tax-free measures?
In short, measures should bring positive change. As previously mentioned, VAT is not a tax on companies. For these, there is a responsibility for compliance, recording and submission. Therefore, it should not deter valid businesses from coming into the Emirates and exploring opportunities offered. On an individual level, wages and salaries are not taxed, though spending habits are and this may not be a bad thing. As such, the country in our belief, still very much holds its panache as an attractive place for doing business
From interviewing these eight individuals, where did you find the real gap between the introduction of VAT and implementation? and who is responsible to bridge this gap?
The good news is that everybody is aware of the upcoming VAT implementation deadlines. However, the gaps are represented by ambiguities in knowledge and experience and moreover how the new tax will affect industries and companies. A typical example being understanding what services are considered standard rate or excluded.
At least one respondent felt that the respective business would not be considered for tax as a result of providing services to government, which is not the case. Another was not clear on the difference between exempt and zero-rate, while some were concerned about the increase in pricing and the effect this will have on accounting, costs and clients.
As for responsibility in bridging the knowledge gap, the Ministry of Finance has started awareness sessions that we expect will continue. In addition, specific understanding will be much clearer once VAT legislation is published. Ultimately within firms, senior, finance and accounts managers should be depended upon for transferring information. To add support, there are specialists in the UAE who can be sought for guidance on potential impact and compliance.
Do you believe VAT could lead to inflation?
In some cases, yes, but possibly not such a significant change. I say this because although the price for food, automobiles and consumer products will generally increase; unlike inflation which affects everything across the economy, there are some sectors not considered, being zero-rate or exempt, for example. These include healthcare, education and public transport The Ministry of Finance has also disclosed that residential real estate will be exempt from VAT, meaning if you are paying rent or purchasing a property the cost will not go up for tax. Hence, unless, VAT in itself is inflationary, I think the introduction of this standard rate of 5% will have some but not considerable effect on the cost of living or doing business.
What could be the most affected sector for VAT implementation in UAE? and what are the implications on VAT on various sectors? If you can discuss two.
Essentially, all sectors are affected one way or another – whether they are included as standard rate, zero rate or exempt. It is difficult as such to define where VAT will have greatest impact.
For example, while industries such education, healthcare and public transport benefit from a zero rate, meaning they do not charge tax and can claim back tax paid on supplies, they will still have to comply to standards.
As for sectors that are required to charge a standard rate, businesses that sell price-sensitive products which are difficult to differentiate, such as supermarkets, may wish to consider new pricing strategies – absorbing part or all the tax, say. This will as a result affect profit margins.
Importantly with all industries, cash flow will have to be managed effectively, since there will be time lags between submitting tax and expecting returns on any claims made.
How about the industrial sector. Do you have an idea on how will this affect their business operation?
The impact on the manufacturing sector is similar. We expect this sector to be affected in terms of preparation, compliance and pricing strategy. As for those plants working in the free zones, it is still not clear as to how these will be treated for tax.
What is the way ahead?
We await the imminent VAT legislation for the Emirates. This should be released in the next few weeks. Meanwhile, companies will need to begin looking at their book keeping, financial and IT processes, working out how to become compliant. We are aware of organizations that began preparing in 2016.
Some businesses will need to engage with advisors on preparation and compliance. They may also want to outsource the filing of VAT returns. With the clock ticking to registration on October 1 and implementation on January 1, for those companies, that generate revenue in excess of the Dh 375,000 threshold, the time to act is now if not already started.
Many will want to seek out a partner who clearly understands the requirements for compliance, while being cost effective. In similar regard, a four-step framework that offers some guidance on taking an approach to VAT compliance, is covered in Sunstream’s pre-legislative report.