“The introduction of VAT regime is not merely a change in taxation. It’s a change in how we do business”
Grid: With implementation of VAT around the corner in UAE, what more can you tell us about the proposed VAT legislation, with an emphasis on financial services?
Jigar Doshi: UAE VAT law has been designed in such a way that, at a macro level, it will cover almost all the supplies of goods and services including import of goods / services, real estate, energy and even water supplies.
There are certain relaxations offered in the manner of zero rating and exemptions in the UAE VAT law. For instance, exports, international transport, certain education services are to be zero rated, whereas certain financial services, supply of empty land, local passenger transportation are to be exempt from the VAT levy. All other supplies will attract the standard rate of 5%.
The legislation provides a detailed VAT framework applicable to businesses that are required to register. Firms need to understand the provisions of the VAT law and identify the treatment under VAT for their specific business operations.
A firm in the financial sector, for instance, will need to first understand the provisions of VAT Law and identify to which financial services the exemption will be applied (or likely to be applied); what types of financial services will be taxable and when is a tax invoice supposed to be raised etc.
For those financial services firms that have branches across the GCC, another important aspect is to understand in which country VAT is applicable on business transactions and what will be the VAT treatment for intra-company transactions.
The Grid: How are firms impacted by VAT implementation and what steps should they take to make their business VAT-ready in the UAE?
Jigar Doshi: The introduction of VAT regime is not merely a change in taxation. It’s a change in how we do business. Businesses have to undergo a plethora of changes as they migrate from a ‘no tax regime’ to the new VAT regime. Some points to consider:
- Changes in invoicing documentation
- Changes in accounts / records
- Alignment of IT system to the new law
- Changes to a prevailing business model or pricing to incorporate VAT
The Grid: What are some immediate action points for businesses to take?
Jigar Doshi: Essentially, there should be an organised approach towards VAT implementation planning and project execution. At this stage, we advise that following steps should be taken for a smooth transition
- Start a VAT analysis on the business, based on the information available and expectations.
- Identify business transactions such as revenue and expense streams and check VAT applicability / impact.
- Be conservative in your approach. For instance, expect fee-based financial transactions to be taxable.
- Initiate the process of obtaining VAT Registration (at least collate all the information required).
- Based on the above, devise solutions which are tax efficient. For instance, if a firm that is partly exempt and partly taxable, a solution needs to identify taxes paid on expenses that are recoverable and those which would add cost.
- Review business and IT process and identify areas where change is required.
- Chart a step-by-step action plan for implementation.
- Conduct user acceptance testing of systems to check whether the changes are being rolled out properly.
- Train staff to understand the impact of VAT and the subsequent changes to business processes.
The Grid: We understand that more specific details regarding VAT implementation are expected soon. What is the situation of free zones? There seems to be some uncertainty there.
Jigar Doshi: Yes, the question whether free zones will be covered under ‘Designated Zone’ in the VAT Tax law or treated as ‘outside UAE’ is still to be confirmed. There are also some other ambiguous areas:
- Whether supplies made by FTZ will be covered under VAT in the UAE and hence whether VAT online registration is required (deadline of which end of October/early November this year).
- Whether a company that has a non-free zone company in addition to a free zone entity can obtain registration as a “Tax Group” or needs to obtain separate registrations.
- Whether consultants, professionals or vendors who are providing supplies to free zones are covered under the zero-rating (i.e. exports) and therefore not required to obtain VAT registration.
As per the VAT Law, only certain financial services will be exempt. The Executive Regulations should specify the exemptions. As Regulations are yet to be released, the major grey area for financial services firms is whether services provided by them will be fully or partially exempt and accordingly, if they need to obtain VAT registration or not. What will be extent of impact on their procurements given the exemption and tax cost associated with it?
In our opinion, waiting for release of Executive Regulations for initiating VAT implementation preparatory work is not recommended given the fast approaching VAT implementation date and time available for firms to complete entire VAT implementation along with testing process.
The Grid: Could you provide oversight over the penalties for non-compliance?
Jigar Doshi: Yes, any non-compliance under VAT Law may yield heavy fines and penalties. Failure to apply for registration is AED 20,000 and failure to maintain records, required as per the VAT law, attracts a penalty of AED 10,000.
Our overall take on the VAT law is that the basic theory behind it is conceptually simple but in practice, rules can often be quite complex. Businesses need to undertake a robust VAT self-assessment to mitigate any penalties going forward.
This is an extract from an interview with Jigar Doshi, Partner, Indirect Tax, SKP Business Consulting Group.
SKP Group is a 50+ year old global professional services firm serving clients from 48 countries in the area of taxation, assurance, business advisory and compliance.
Interview by May Khizam, Founder & Chief Strategist, The Grid Media Ltd
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