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VAT in the GCCLatest Developments and Business Impact
Latest Developments
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VAT recent developments
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A common VAT frameworkThe GCC Member states are in the process of agreeing a common framework for the introduction of a VAT system in the GCC. A formal announcement of the Treaty is expected shortly afterwards. Upon ratification of the GCC Treaty, each Member State is expected to issue its own national VAT legislation based on the agreed common principles.
Go live The introduction of VAT across the GCC is expected to take effect from 1 January 2018.
VAT regulationsThese regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT legislation is issued.
VAT legislationEach Member State will issue its own VAT legislation in accordance with the common principles outlined in the GCC Treaty. It is expected that some countries will issue VAT legislation shortly after announcement of the treaty by the GCC.
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VAT in the GCC
Our understanding of the
GCC VAT system
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VAT in the GCC
• Expected transition period between 12 to 15 months
• Envisaged system is a standard fully-fledged VAT system applying on most supplies of goods and services with possible exemptions/exceptions
Standard rate 5%
VAT at Import
Minimum annual turnover
VAT on goods & services
Possible VAT exemptions
Exports subject to 0%
Deduction of input VAT
Periodical filing and reporting
Designing the VAT law to deliver a
‘win-win’ taxation model
• An ideal tax system should help governments raise essential revenue, and should do so without discouraging economic activity and without deviating too much from tax systems in other countries
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Criterion Key results for both the business community and the tax authorities
Simplicity Easy to implement and to apply
Efficiency Low compliance costs
High collections and self-policing
Certainty Limited need for litigation
High voluntary compliance
Broad-based Limited special systems and exceptions
Proportionality Taxable amount not to exceed consideration actually paid
Competitiveness Appropriate exemptions
Non-distortionary Neutrality in competition between the States and Industries
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VAT in the GCC
VAT/GST design benchmark
• The design of the VAT/GST system has a direct impact on cost of compliance and cost of collection
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Low
Single VAT rate
Few exemptions
Simple and clear regulation
E-filing
Proportional penalties
High
Multiple VAT rates
Multiple exemptions
Complex and inefficient obligations
Lack of facilitating instruments
Burdensome fines
SingaporeAustraliaChileNorwayBrazil
Low
Mexico
New ZealandEU
High
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VAT in the GCC
VAT Key Features
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What is VAT?
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• Value Added Tax (“VAT”) is a tax on consumption
• Transaction based tax – VAT is levied at each stage in the chain of production/distribution
• VAT charged on supplies/VAT deducted on purchases
• Collected by businesses on behalf of the VAT Administration
• Self-assessment system - Businesses submit a periodic VAT return to the Tax Authority in which they calculate the Net VAT amount and either pay or get a refund for this amount
VAT in the GCC
How VAT works
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VAT in the GCC
Business charges VAT on sales(output VAT)
Business pays VAT on purchases (input VAT)
Net VAT (output VAT– input VAT)
Payable to the VATAdministration
Refundable by the VAT Administration
NegativePositive
Equals
Less
Taxable supplies
A taxable supply at the standard rate is a supply on which tax is charged at 5% and
for which the related input tax is deductible
Retail purchases
Car sales and rentals
Hotels and Restaurants
Repairs and maintenance
services
Common Standard rate Supplies
A taxable supply at the zero rate – a zero-rated supply - is a taxable supply on which tax is charged at zero percent and for which the
related input tax is deductible
Common Zero-Rated Supplies
Basic FoodMedicines and
Medical Equipment
ExportsCertain means of Transport
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Exempt Supplies
An exempt supply is a supply on which tax is not charged and for which the related input tax is not deductible
Healthcare EducationResidential Dwellings
Domestic Passenger Transport
Common Exempt Supplies
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Reverse Charge (Or self
assessed VAT)
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VAT in the GCC
ServiceCo
UAE
Company X
Service flow
• Reverse charge rules typically apply to services received from suppliers established outside the country
• The recipient accounts for the VAT due on the supply on his VAT return (instead of the supplier) • The VAT accounted for by the recipient is deductible as input VAT on the same VAT return
VAT Groups
Corporate entity
Legally independent but closely bound to
the other members by financial,
economic and organisational links
Established and registered for VAT
in the relevant countries
Not a member of another VAT group
in the country
General conditions to be met by each member of a VAT group in a country
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VAT in the GCC
• Under VAT groups, independent legal persons are allowed to be treated as a single taxable person under certain conditions
• A VAT group scheme allows for two or more companies to be considered for VAT purposes as a single taxable person
• Intra group supplies are disregarded for VAT purposes
Example 1 – Fully Taxable
Business
Sales
$100,000,000 Taxable Supplies
Costs
$50,000,000 Local purchases/imports
$20,000,000 Salaries
$10,000,000 Services from abroad
VAT Return
VAT due on sales $ 1,500,000
VAT due on reverse charge $ 500,000
Total due $2,000,000
VAT deductible on purchases $ 2,500,000
VAT deductible reverse charge $ 500,000
Total Deductible $3,000,000
Net amount Refundable ($1,000,000)
• 70% of exports sales subject to 0% VAT
• 30% sales subject to 5% VAT
• Purchases and imports subject to 5% VAT
• Entitlement to claim input VAT = 100% of input VAT
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VAT in the GCC
Example 2 – Exempt Business
Sales
$100,000,000 Supplies
Costs
$50,000,000 Local purchases/imports
$20,000,000 Salaries
$10,000,000 Services from abroad
VAT Return
VAT due on sales $ 0
VAT due on reverse charge $ 500,000
Total due $ 500,000
VAT deductible on purchases $ 0
VAT deductible reverse charge $ 0
Total Deductible $ 0
Net amount Payable $ 500,000
Non-deductible VAT$3,000,000
• Sales exempt from VAT
• Purchases and imports subject to 5% VAT
• No Entitlement to claim input VAT
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VAT in the GCC
Example 3 – Mixed Business
Sales
$100,000,000 Supplies
Costs
$50,000,000 Local purchases/imports
$20,000,000 Salaries
$10,000,000 Services from abroad
VAT Return
VAT due on sales $ 2,500,000
VAT due on reverse charge $ 500,000
Total due $3,000,000
VAT deductible on purchases $ 2,000,000
VAT deductible reverse charge $ 400,000
Total Deductible $2,400,000
Net amount Payable $ 600,000
• 50% of sales subject to 5% VAT
• 30% of sales subject to 0% VAT
• 20% of sales exempt from VAT
• Purchases and imports subject to 5% VAT
• Entitlement to claim (taxable supplies / total supplies) = 80% of input VAT
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Compliance Requirements
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VAT Records – Normal
requirements
VAT records must be kept for a specific period of time. Records may be kept on paper or electronically. Records must be accurate, complete and readable.
1. Copies of all issued invoices
2. Originals of all received invoices
3. Debit or Credit notes
4. Import and Export records
5. Records of any goods given for free or allocated for private use
6. Records of all zero-rated or VAT exempt supplies and purchases
7. A VAT General Ledger Account
Examples of records that need to be kept
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VAT in the GCC
VAT Invoices – Normal
requirements
Ref Number Description Quantity Unit Price exclusive of VAT
Unit Priceinclusive of VAT
Total exclusive of VAT Total inclusive of VAT
DateInvoice Serial Number
Name of Taxable PersonVAT Registration NumberAddress and Contact Details
Name of CustomerVAT Registration NumberAddress and Contact Details
Total
Applicable VAT rate
VAT amount
Subtotal
VAT INVOICE
• Only VAT-registered businesses can issue VAT invoices.• Valid invoices should be kept.• VAT invoices are a requirement for deducting input VAT - Invalid
invoice, pro-forma invoice, statement or delivery note are not accepted.
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VAT in the GCC
VAT Return example
• Self-assessment system • Businesses submit a
regular VAT return to the Tax Authority
• Must report all VAT on sales and purchases made in the period, including intra-GCC transactions
• Calculate the Net VAT amount and either pay or get a refund for this amount
VAT Return For the period 31-Jan-18
VAT on Sales 1 x
VAT due on acquisitions from other Members States 2 x
TOTAL VAT Due (sum of Boxes 1 and 2) 3 x
VAT reclaimed on purchases and other inputs(including acquisitions from the GCC)
4 x
NET VAT to be paid to Tax Authority 5 x
Total value of sales and all other outputs excluding any VAT 6 X
Total value of purchases and all other inputs excluding any VAT 7 x
Total value of supplies of goods and related costs, excluding any VAT, to other GCC Member States
8 x
Total value of acquisitions of goods and related costs, excluding any VAT, from other GCC Member States
9 x
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Industry Focus
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Construction
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VAT in the GCC
Construction services likely to be subject to VAT at 5%
Need to consider time of supply / when VAT is due
Invoicing (progress payments, valuations, etc)
Long term contracts / transitional arrangements
Refunds
Suppliers / sub contractors
Documentation to reclaim VAT on costs (self billing / other arrangements)
Unregistered suppliers
Real Estate
Complex / different types of supplies
- Commercial / Residential
- Land, buildings, or both
- Sales / Leases
Commercial Sales should be taxable at 5%
Residential sales may be exempt
Leases may be exempt (possibly with an option to tax for commercial)
Long term v short term – definitions – different treatment
Time of supply
VAT recovery on costs
Can be complex / apportionment of VAT
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Education
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The institution must not systematically aim to make a profit;
Any profits made, may not be distributed, but must be reinvested to improve education or to maintain.
Education most likely to be exempt
This applies to primary education to higher education, even if carried out by an independent contractor
No output VAT, VAT non recoverable
VAT would be a cost on organization
Providing taxable and non taxable supplies: Pro- rata deductibility
Only exempt supply: no VAT return
Food Services
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VAT in the GCC
Basic food (list): zero-rated
Food: standard VAT rate (5%)
Food services: standard VAT rate (5%)
Invoices (B2B and B2C) / till receipts
Reporting
Records, returns
Manufacturing
• Goods manufactured and sold within the country is subject to 5% VAT
• Imports:
• Goods imported from outside the country into a (fenced) Free Zone are considered to be outside the customs / VAT territory of the relevant country
• Goods stored in (fenced) Free Zone are not subject to customs duties nor VAT
• VAT is charged at a rate of 5% on the value of the sale upon removal from free zone into the country
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Retail
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Rates
5%, 0%, exempt / importance of correct coding
Pricing / Retail price inclusive of VAT
Business promotions – Vouchers – Gift cards – Free products –Free supplies
3 for the price of 2 / buy one get one free / mixed rate goods
Loyalty schemes
Delivery charges
Online sales
VAT Implementation Considerations
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Business impacts• Potential effects on margins and pricing• Cash tax impact from VAT leakage• Cash flow: funding of timing differences
between paying and collecting/receiving VAT• VAT issues when undertaking deals
Technology and Systems• Systems changes for VAT compliance and reporting
(e.g. financial and point of sale systems) • VAT coding of accounts payable and receivable • IT architecture impacts• Process and compliance automation• Electronic documentation• Data and analytics to enhance compliance
Sales and Marketing• VAT treatment of sales and exports • Effect on demand• Pricing strategy and payment terms• Customer management• Impact on current contracts and
commercial arrangements
Procurement • VAT treatment of purchases and
imports • Procurement strategy• Vendor management• Contracts and arrangements
Compliance – throughout the value chain• Map business flows including procurement,
production, logistics, sales and marketing activities • Establish VAT management framework covering
governance, controls, roles and responsibilities• Tax knowledge and training• Tax registrations and filing requirements• Process and procedure guides
Reflecting the VAT law• Identify correct VAT treatment of
every business transaction• Industry sector specific issues• Inter-company transactions• Intra GCC transactions • Apply any exemptions/Zero rate
What does VAT mean for
businesses
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What VAT means for
you
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VAT in the GCC
Claims & Documentation
Calculations and adjustments
Incorrect rates applied to sales/sales omitted
Delays with VAT payment/invoices
Invalid or missing documentation
Invalid/insufficient documentation to support VAT claim
Invalid VAT claims e.g.:
Claiming VAT in relation to Exempt/non business transactions
Claiming foreign tax on returns (i.e. VAT incurred in other countries)
Errors in calculation of VAT due/reclaimable
Clerical/manual/system errors
Omitting inter-company transactions
Journals adjustments
Manual corrections
Transactions outside system/one off/irregular
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VAT in the GCC
Challenges
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VAT implementation
• Have you the appropriate resources to be compliant• Who will be responsible • Do you understand the new law/regulations• How do you keep up to date with changes
Interaction with tax authority
• Refunds/enquiries/audits • Records/supporting documents to deal with
audits/enquiries• Unclear matters/process to deal• Education/resources/training• Potential delays with refunds/time incurred by business
Manage change
• Transitional VAT tax issues – existing and future contracts• Understand tax planning and fraudulent VAT practices• Test drive overall VAT commercial chain before going live• Manage increased administrative costs• Manage cash flow, understand possible P&L impact
Communication
• Educate stakeholders internal and external – “top down” approach / contractual obligations / financial and accounting prerequisites / system and accounting requirements / training and workshops at all levels
• Interview sessions with all key stakeholders• Compile information through standard VAT templates – line
by line characterization and location analysis of revenues/expenses
VAT Implementation Project
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A phased approach will
facilitate smart choices in
effort and sequencing
VAT technical
Project management
Business processes
Technology
People & organization
Impact assessment
Design Implement OperatePre announcement
Business impact modelling.
Undertake a gap analysis to assess the systems, people and process changes required to be VAT compliant.
Build awareness.
Assess high level business impacts.
Review contracts that need a VAT action.
Shape project.
Design VAT approach for: • Tax technical
considerations • Governance• Financial, sales
and supply chain systems
• Filing and reporting.
Implement system design requirements.
Transitional measures.
Training and communications
Simulate and test before go-live date.
Ensure VAT compliance and efficiency.
Monitor new developments.
Ongoing staff training.
Mobilisation VAT readiness assessmentVAT Blueprint Re-configured systems, processes and people
Ongoing compliance and continuous improvement.
Outcome:
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VAT in the GCC
VAT Implementation – What
you can do now
• Understand VAT treatment of business economic activities
• Perform Financial Modelling to estimate liabilities and costs
• High level understanding of existing systems (i.e. ERP) to identify capability to cater for VAT
• Start VAT awareness
• Assess resourcing and training needs
VAT Technical
Business Processess
Technology
Learning & Development
• Understand how VAT impacts business functions and processes
Project Management
• Identify VAT implementation strategy: in-house, outsourced, combined
• Identify and engage key stakeholders
• Appoint VAT implementation project manager
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VAT in the GCC
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• Jeanine Daou
• Middle East Indirect Tax Leader
• T: +971 (0) 4 304 3744
• Nadine Bassil
• Middle East Indirect Tax Director
• T: +971 (0)4 304 3688
