PHILIPPINE BUSINESS COUNCIL ABU DHABI presents · PDF file• Increasing global trade –consistent taxation principles; ... • Rules on Free Zones have yet to be ... •The basic

Speaker: Mr. Michael Vaughan | Director

PHILIPPINE BUSINESS COUNCIL – ABU DHABI

presents

© 2017 Grant Thornton UK LLP. All rights reserved

GCC – VAT

Mike Vaughan

Tax Director

2

Introduction


GCC – VAT

3

Transformation in the GCC

• Economic diversification, derived as a

result of the global slump in oil prices

• Large and growing youth population

• Accelerated investment needed in order to

enhance infrastructure

• Shifting emphasis from Public-to-Private


GCC – VAT

Why VAT?

• Adopted by over 150 countries worldwide and increasing;

• Countries need to raise tax revenues

• VAT less controversial than direct taxes;

• Contributes 20% of worldwide tax revenues and 7.5% of GDP;

• Increasing global trade – consistent taxation principles;

• Relatively simple to enforce and operate;

• Efficient as businesses act as unpaid tax collectors


GCC – VAT

Where are we? - GCC

• GCC member states have all signed the VAT framework agreement;

• Sets out in broad terms how the VAT system will operate. But not yet published;

• The system will be very similar to the EU;

• Each country will publish its own legislation and regulations – none have so far.

• Qatar cabinet approved national VAT leg and executive regulations.

• UAE have announced that legislation will be published in July

• Introduced from 1 January 2018

(although there may be a 1 year delay in

some countries)


GCC – VAT

Which countries affected? The GCC

• Saudi Arabia;

• UAE;

• Bahrain;

• Oman;

• Kuwait;

• Qatar.


GCC – VAT

7

Background

• VAT shall be introduced in most GCC countries on 1 January 2018.

• The VAT rate is confirmed at 5%.

• The mandatory registration threshold will be AED 375,000.

• A voluntary registration option will be available for businesses making supplies of 50% or more of this figure (AED 187,500)

• Businesses that primarily make Exempt supplies would not be liable to register for VAT purposes. Further details will be provided in the law and regulations.


GCC – VAT

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Background

• The VAT law is expected be issued by the summer of 2017 with detailed regulations will be issued later in the year.

• Federal Tax Authority (FTA)

• No draft law is likely to be issued.

• Rules on Free Zones have yet to be clarified.

• Medical Services and Education sector will be Zero Rated in the UAE. Further clarity will be provided on what fees are zero rated and which of these will be Standard rated if these are strictly beyond Medical Services and Education i.e. cosmetic surgery, school transport etc.


GCC – VAT

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Background

• Special rules will apply for charities.

• Property development industry - VAT on first sale of residential property is a zero-rated supply and subsequent sales are likely to be an exempt Supply.

• Commercial and residential property - Rental of commercial property would be subject to VAT at the standard rate and residential property rentals will be exempt.

• The MOF are now considering a Tourist VAT refund scheme.

• The GCC VAT model will be like the model in the EU.


GCC – VAT

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Background

• Banks and Financial Institutions – Exempt Supplies for interest received.

• Fee based income such as commissions, ATM charges etc. will be standard rated.

• Provision of Life Insurance is to be treated as an Exempt Supply for VAT purposes.

• All other forms of local insurance, such as car insurance, medical insurance, house insurance etc. will be standard rated.


GCC – VAT

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Impact on businesses

• Understanding the VAT laws and regulations;

• Enhancement of technology platform, revision of operational transactions, training and development of teams;

• Cash flow management;

• Up-to-date financials and reporting deadlines;

• Periodic financial review from tax authorities;


GCC – VAT

Updates from the Ministry of Finance

• Non synchronised implementation of VAT amongst the GCC countries – 1 January 2018 and 1 January 2019

• Transitional rules – If a contract does not have any mention of VAT, the starting point is that this is a VAT inclusive contract. However, if the customer is in business, this is over-ridden and VAT can be charged.

• Voluntarily registering for VAT - If the business expenses are over the AED 187,500.

What is VAT?


GCC – VAT

What is Value Added Tax?

Borne by the end

consumer

Multi-stage, transaction

based

Based on invoices

Periodic reporting

• a tax on consumption

• charged and collected by businesses

• levied on the value-added at every stage of the supply chain

• wide scope - goods and services

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GCC – VAT

Supply Business transaction

Goods Transfer of rights in property as owner

Services Anything else done for a consideration

Output tax VAT payable on supplies

Input tax VAT recoverable bought in goods and services

Taxable person Making supplies in the course of business

Taxable supplies Transactions with right to recover input tax

Exempt supplies (no

recovery)

Transactions with no right to recover input tax

Some definitions

15


GCC – VAT

How does VAT work

Raw materials Manufacturer Wholesaler Retailer Customer

+VAT +VAT +VAT +VAT

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GCC – VAT

Basic Mechanics of Value Added Tax

There are four types of transaction covering everything that happens in UAE

Taxable

supplies

1. Standard rated supply All withinVAT

system

2. Zero rated supply

3. Exempt supply

4. Outside the scope

of VAT


GCC – VAT

What do we know? – VAT rates

• Standard rate = 5% • Certain foods

• Zero rate (0%) will apply to:

• Certain medicine and medical supplies;

• International transport;

• Supplies taking place outside the GCC e.g. exports of goods and most services;

• Investment gold;

• Oil & gas derivatives (member state discretion).


GCC – VAT

Basic concepts – Input and Output Tax

INcoming invoice Purchase INput Tax

OUTgoing invoice Sale OUTput Tax


GCC – VAT

VAT recovery

If a business only makes taxable supplies

→ fully taxable business

✓ can recover all VAT incurred on purchases

✓ the VAT does not 'stick'

✓ not real cash cost to business

(nil net effect – subject to certain restrictions)

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GCC – VAT

Evidence

• To recover input tax a business needs to hold a valid tax invoice

• Costs have to be used in making taxable (standard or zero-rated) supplies.

• Input tax recovery is not specifically blocked

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GCC – VAT

VAT recovery

• If a business only makes exempt supplies

→ exempt business

x can not recover any VAT incurred

x the VAT 'sticks'

x real cost to business

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GCC – VAT

VAT recovery

• If a business makes both taxable & exempt supplies

→ partially exempt business

✓can recover VAT directly linked to making of taxable supplies

x can not recover VAT directly linked to making of exempt supplies

✓can recover proportion of the VAT it incurs on overhead costs

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GCC – VAT

VAT recovery – linking costs to income

Allocation to income (onward supply)

Costs

CostsCosts

Taxable Outputs Exempt Outputs

100% 0%x%

Taxable ExemptResidual

24


GCC – VAT

Reverse Charge Mechanism

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The EU created the concept of the reverse charge. It means that in

certain situations the VAT cost is transferred from the person making

a sale to the person receiving the sale, i.e. VAT is declared by the

customer rather than supplier.

For example, you may have hired a translator in Bahrain to translate a

webpage for you. If you'd hired someone in the UAE to do this

work, the cost would have been standard-rated for VAT at 5%. If this

service was worth 100 AED, the amount of the reverse charge would

be 5 AED.


GCC – VAT

Reverse Charge Mechanism

26

Jo Blogg's business is to buy televisions from China, and then resell them in the UAE.

He is VAT registered in the UAE.

Goods imported from China: Jo Bloggs will account for the input VAT on his VAT

return, and at the same time account for the output VAT.

These two declarations offset each other from a cash payment point of view, but the

authorities have full visibility of the transactions.

This will be known as postponed accounting.

*The entries would not cancel each other out if the goods were being used for exempt

purposes


GCC – VAT

Reverse Charge Mechanism – Services

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In a B2B transaction of services, the place of supply is where the customer belongs. If

Jo Bloggs is VAT registered in the UAE, and uses the services of an accountant in the

UK, the accountant in the UK will raise an invoice to Jo Bloggs in the UAE without

VAT. This is because the place of supply is the UAE. (where the customer is based).

Jo Bloggs will have to account for VAT under the reverse charge mechanism.


GCC – VAT

Place of supply

• Transactions will only be subject to VAT in GCC if they take place here. Charge VAT at 5% and account for it to the authorities.

• Important to know who is being supplied (B2C or B2B).

• B2C:

➢ Private individual

➢ Not VAT registered

• B2B:

➢ Customer VAT registered


GCC – VAT

Place of supply – Goods

• move within one country– taxable

• imported into the GCC – taxable on import – Postponed Accounting

• exported – Zero rated - evidence


GCC – VAT

Place of supply – Goods

Taxable

Taxable on import

Taxable (may be relieved)


GCC – VAT

Place of supply – Services

• B2B: Where customer belongs

• B2C: Where supplier belongs

Exceptions

• Where performed – e.g. work on goods, education, cultural, transport, land related services

• Where recipient is based – e.g. consultancy, advertising

• Used and enjoyed – e.g. internet services, telecoms, broadcasting


GCC – VAT

Imports

• Tax payable when goods imported into GCC

• No VAT due on import into free zone – to be confirmed

• Postponed Accounting – Good comes into UAE, recipient accounts for VAT under the reverse charge mechanism

• Goods trans shipped to another GCC country – destination is treated as country of import – see next slide

• Evidence

• Understanding of Customs procedures – prevent disruption to transport


GCC – VAT

Imports – Goods trans shipped to another GCC country

• Good enters UAE (usually would reverse charge/postponed accounting

• However…goods trans shipped to another GCC country e.g. Saudi

• VAT at import is now paid to customs who will pay the VAT to Saudi (so UAE is effectively acting as Saudi's agent)

• Saudi is treated as country of import, so to recover the VAT from Saudi, must VAT register in Saudi.


GCC – VAT

Free Zones

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No comment as of yet as the law will not be released until after July

2017.

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Documentation


GCC – VAT

When is tax due• The basic tax point is when:

─ goods: Usually the date you send them to your customer or when the customer takes them away.

─ goods: The date you make them available to a customer

─ services: The date when the service is performed.

• The basic tax point can be overridden by the earlier of:

─ Issue of an invoice within a certain time or

─ Cash paid (e.g. deposit in advance) BEFORE the basic tax point


GCC – VAT

Tax invoice

A sequential number

Time of the supply (tax point) and date of the

issue of invoice

Name, address and VAT registration

number of the supplier

Name and address of the customer

Description sufficient to identify the goods/services supplied, the

quantity of the goods or the extent of services

Rate(s) of VAT and the net amount payable, excluding VAT,

expressed in any currency

Gross total amount payable, excluding VAT, expressed in any

currency

The total amount of VATchargeable, expressed in local

currency


GCC – VAT

Inter Emirate Accounting of sales

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Sales within the UAE must be recorded on an emirate by emirate basis. This

is statistically important for the emirates.

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Compliance and Reporting


GCC – VAT

What do we know? – VAT registration

• Required to be registered if making taxable supplies in the GCC

• Mandatory registration 375,000 Arab Emirates Dirhams (or equivalent)

• Voluntarily registering for VAT - If the business expenses are over the AED 187,500.

• Registration opens July 2017.


GCC – VAT

Returns- contents - minimum

Categories

Output tax

Input tax

Tax payable

Value of taxable sales

Value of taxable purchases

41


GCC – VAT

Returns

• Filing requirements vary throughout the world

• Probably either monthly or quarterly – UAE has announced quarterly

• Some countries have annual returns

• Filing and payment dates – usually within 30 days of month end

• Information required is not universal – varies considerably

• Penalties for errors

• Where fraud is suspected a business may be closed down for 72 hours

• Up to 500 percent may be applied in addition to the primary VAT owing

42


GCC – VAT

What do we know? – Transition

• Services /goods supplied after 31 December within scope of tax

• Even if invoiced and paid for prior to 31 December 2017

• Contracts spanning VAT introduction will be affected

• Do contracts protect the business – review

• Impact on pricing particularly services / goods provided to consumers


GCC – VAT

Q&A

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Documents

PHILIPPINE BUSINESS COUNCIL ABU DHABI presents · PDF file• Increasing global trade –consistent taxation principles; ... • Rules on Free Zones have yet to be ... •The basic