A unanimous decision between the Member States of the Gulf Cooperation Council (GCC), resulting in the GCC VAT Agreement led to the introduction of VAT (Value Added Tax) in the UAE on 1st January 2018. As declared, the UAE government has decided to apply a flat 5% VAT on most goods and services, barring a few special ones, which have been classified as either zero-rated or VAT-exempt.
The VAT strategy adopted by the GCC countries potentially widens the economic scope of the countries by incorporating an additional source of revenue in the wake of the oil crisis. The main objective lies with providing a high quality of life to people by shifting to a more sustainable consumption system.
How will it impact the UAE economy?
The VAT is believed to cause a paradigm shift in the economic sector of the country with a significant impact seen in the business dynamics. Hence, businesses have to assess how VAT is going to affect their businesses.
The VAT is seen as a way to add to government revenues; a total of AED 12 billion is expected in the first year of VAT implementation. The UAE government aims to plough back this money into the economy to create even better infrastructure and facilities for residents. Being a federal tax, VAT brings all businesses under a common system.
At a macro level, VAT will surely have an inflationary effect, as consumers have to pay more to avail the same service now. How it impacts purchase and consumption patterns across different products and services will become evident a few quarters down the line.
Key Challenges Of VAT During Its First Quarter Roll Out
Whilst the government is taking measures to educate and support businesses so that they are able to adopt VAT, ensuring complete compliance might remain a challenge, especially in the first few months of VAT implementation. It will also take significant effort on the part of the government to create and implement a system to monitor business’ VAT alignment and compliance.
On the business front, VAT is leading organisations to bring in systemic changes to their business operations. While the impact of VAT is all pervasive, a case in point can be businesses that operate on high volumes and narrow margins. Such companies might find it extremely challenging to steer their way through VAT, as it is equally tough for them to absorb VAT or to pass it on to their customers. Therefore they will have to look at new ways to increase margins and drive efficiencies in their business.
While organisations started planning for VAT before 1 January 2018, the operational challenges came to the fore only in the first few months of implementation – right from changing the invoicing, to transferring the tax receipts to the government and filing timely reports.
At the consumer level, VAT is adding to the cost of living. Since VAT straddles almost all products and services, consumer expenditure patterns are going to see a shift. As one would sense, spending on non-essential items will see a decline, especially in the first few months, till consumers get a good understanding of the impact of VAT on their finances.
VAT Awareness Among Businesses
As VAT is a new concept in the UAE, a large number of businesses are still getting used to the new ‘way of life’. Regulatory authorities and experts across the region have been conducting seminars and presentations across the UAE to educate people about how the new tax system will work, along with the benefits and challenges that VAT is going to bring. This education will need to continue so as to minimise the instances and impact of lapses.
One of the more fundamental changes that the VAT regime will bring is that now organisations will have to have a fresh look at their business model. Sound maintenance of accounting records will be one of the preliminary requirements for any business to survive the new legislation. Appropriate recording of all the invoices, expenditures, etc. will be crucial so that VAT return filing can be made timely without any errors.
For the businesses that lack internal capabilities and sufficient resources to support VAT implementation, outsourcing all accounting services stands as the best option.
Updating IT Systems
IT business systems in the UAE had been developed based on the simplistic requirements of the pre-VAT era. This posed a unique IT challenge, and organisations are having to work on their internal systems as well as developing new external partners, to ensure VAT compliance.
Businesses that lack the IT knowledge and key software skills to correctly position their businesses have surely looked at outsourcing IT migration with the following considerations:
- Putting in place appropriate systems and processes – businesses require appropriate software systems to perform as per the FTA requirements – software standards incapable of supporting VAT-based functions open up unidentified risks. FTA has made it mandatory for IT companies to first register their VAT enabled software with the FTA, and only then start distributing it.
- Putting in place skilled resources and training of internal resources – When updating IT systems, businesses need to train their staff to understand and operate the new software. Businesses need to build up a new set of skilled resources to help them carry out day to day activities smoothly.
Responsibilities Of A Business in the VAT Era
With the advent of VAT, organisations now have to take care of the following:
- All businesses above the stated threshold turnover level, need to register for VAT.
- All VAT-registered businesses must charge VAT on taxable goods or services they deal in. Invoices have to clearly state the tax amount collected.
- They need to collect the right tax amount and passed it on to the UAE tax department.
- Both, VAT-registered and non-registered businesses need to maintain financial records with due accuracy and appropriate detail.
- Keep reporting VAT collection and payment details to the FTA, on a regular basis as per the law.
Penalties For Non-compliance With VAT Laws
Enforcing a new law becomes one of the foremost challenges for the government, especially in the early stages. Given the broad effect of VAT, the FTA is taking all due measures to ensure that businesses start complying with the VAT regulations. Apart from taking steps to educate people about VAT, the FTA has announced certain penalties for non-compliance.
As a part of the VAT framework, the penalties for non-compliance are subject to a minimum threshold value of AED 500. Under recent regulations issued by the government, some of the most common criteria placed under the VAT violation laws are:
- AED 10,000 (first time) and AED 50,000 (repeated violation) – for failing to keep required records and documents
- AED 50,000 or 50% of tax (considering the higher paid on the goods that resulted in the violation) – for failing to comply with keeping the taxable goods in a designated zone or shifting them to another designated zone as per the terms and conditions
- AED 500 – for failing to attest registration certificate
- AED 2,000 per year – for failing to register a designated zone with the respective authority
- AED 500 – for failing to issue an official printed warehouse keeper certificate
PKF UAE As Your VAT Consultants
Businesses in the UAE need to imbibe the new VAT regulations and establish for themselves a tailor-made VAT-oriented business system. As VAT implementation is gathering momentum, companies will need to rethink internal manpower as well as external partnerships including business partners, tax advisors and accountants. PKF is one such leading firm that provides professional financial advisory and VAT services in UAE.
PKF UAE brings world-class capabilities and high-quality service to clients helping them to align their working model to government reporting and compliance requirements. PKF UAE can help businesses with VAT registration followed by comprehensive management of the post-implementation processes. Our role as tax advisers could include:
- Analysing the impact of VAT on your business – A complete analysis of the VAT effect on your business helps us provide tailor-made solutions for the financial, operational and legal aspects of your business
- Advising on managing the VAT transaction process – Our expert advice will help your business manage VAT transactions effectively without any room for errors
- Advising on required accounting systems under VAT – with VAT implementation the accounting systems of businesses will need to be changed. Our global level expertise in VAT accounting systems help businesses to achieve a well-structured accounting system that complies with the VAT requirements
- Invoicing under VAT – we help you to create and manage invoices in accordance with the VAT system
- IT Migration – as discussed above, the IT systems will also need to be replaced with the updated ones. Hence, our team of technical experts guides you towards choosing and adopting new IT systems
Having more than four decades of experience, PKF UAE ensures full guidance on how businesses can duly comply with VAT. While the ultimate responsibility and accountability to comply with the law are with the business, PKF UAE can advise you at every stage of your business operations. PKF UAE works with an agenda that not only helps your business meet the required VAT standards but also provides inclusive solutions to run the business effectively.