TRANSFORMATION OF VAT FROM 2018 TO 2021
Value Added Tax (VAT) was introduced in the United Arba Emirates (UAE) on 01 January 2018 to reduce the UAE government’s dependence on the income derived from oil and other hydrocarbons. VAT is an indirect tax levied on the consumption of goods and services in the country. Though the ultimate consumer bears the VAT, it could become a cost or burden to the businesses if not implemented well.
Since the introduction, the FTA has published multiple public clarifications and guides to help the businesses interpret and implement the VAT law. Despite such generous efforts from the FTA, there are many grey areas the businesses struggle to look through.
Transformation of FTA procudures
Compared to Q4 2017 and Q1 2018, FTA now reviews the documents submitted for VAT registrations on a minute level to determine the eligibility for the VAT registration. Though this process benefited FTA by cutting down the volume of applications under review, businesses in the UAE struggle to manage to keep the documentation to the level of expectation by the FTA. The templates of declaration letters issued by the FTA have little impact on these struggles as these declarations are treated ancillary. FTA requires the invoices and/or contracts of revenue as proof of the applicant’s registration eligibility. Many group or individual applications are rejected due to the unavailability of such proofs.
FTA clarified the registration of sole establishments and the owner resulting in a sweeping change to the registration and VAT compliance position of the owner of these sole establishments. It is our opinion that many sole establishments in the UAE are yet to review their position vis-à-vis the public clarification. For example, where the unregistered owner and unregistered sole establishments should now subject the revenue to VAT and report to the FTA without applying the registration threshold. Where the owner and the sole establishments have obtained separate registration before the issue of the public clarifications, FTA shall review case by case and inform the corrective steps to be taken.
The input & output summary required for the VAT refund applications is no longer selected on a sample basis. The applicant is required to submit an input & output summary for each period for which the refund is being applied. The scrutiny of the FTA regarding the refunds, particularly the medical, hotel, motor vehicle, fuel, mobile expenditure, etc., is enhanced, resulting in penal consequences to the VAT registered business.
Additionally, FTA requests the businesses to submit a detailed summary of the supplies outside the scope of UAE VAT both at the time of refund and de-registrations. This explains that FTA is keen on getting a holistic view of the business model of the registered taxpayer.
With the changing procedures of the FTA, it is evident that the business in the UAE must apply internal controls and review procedures at the transactional level to avoid the penalties in the long run.
Impact of VAT on Company setup
VAT is now a vital factor in deciding the free zone in which the company or the warehouse should be set up. The benefits available for the trading companies in designated zones vs. free zones alter the companies’ decisions. On a similar note, VAT plays a vital role in the Investment Fund Business structure as the implications in the UAE differ from other countries.
Impact of VAT on Accounting procedures
Even though the businesses in the UAE predominantly follow the international standards for accounting in the UAE, the introduction of VAT changed the perception towards the accounting of revenues and the costs. The SME business in the UAE now reviews their cost-sharing arrangements and apportionment methodologies to report the recoverable VAT accurately.
With the increased scrutiny from the FTA, businesses must obtain expert opinions on the accounting of the VAT, train their staff in recording and reporting VAT accurately.
How can we help?
Over the past three years, we have seen many companies taking advantage of the Free VAT Health Check we have been offering to the UAE business community. Without exception, 100% of the checks performed have uncovered non-compliance issues within the operating companies’ VAT returns.
If you wish to minimize or eliminate any potential tax fines and penalties, please take advantage of this Free VAT Health Check available on a first-come-first-served basis until the end of May 2021.
Who are we?
Rethink as an entity provides VAT advisory, optimization, registration, implementation, compliance, and training services in Bahrain, UAE, KSA, and the GCC.
Our team is here to guide you through the VAT law and regulations and ensure full compliance with the law. Based on our local and international experience, we understand that VAT is a complex tax and would certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.
PARTNER & DIRECTOR OF ACCOUNTING & CFO SERVICES
Senior Manager (Indirect Tax)