VALUE ADDED TAX - VAT

1. VALUE ADDED TAX - VAT By Venkat

2. Training Disclaimer • These materials are intended to assist employers, employees, and others as they strive to understand the concept of UAE VAT law and regulations. While we attempt to thoroughly address specific topics, it is not possible to include discussion of everything necessary to ensure compliance with the local laws. Thus, this information must be understood as a tool for addressing UAE VAT related issues, rather than an exhaustive statement of an employer’s legal obligations, which are defined by statute, regulations, and standards. • Likewise, to the extent that this information references practices or procedures that may enhance compliance, but which are not required by a statute, regulation, or standard, it cannot, and does not, create additional legal obligations. • Finally, over time, regulators may modify rules and interpretations in light of new technology, information, or circumstances; to keep apprised of such developments, or to review information on a wide range of VAT topics, you can visit regulatory web sites or contact your auditor or legal consultant

3. Session 1 - Agenda • Meaning of VAT • Understand the concept of VAT and its impact on the economy • Understand the impact of VAT on the operational and the financial performance of the business • Calculate Input VAT and Output VAT • Categorize the supplies for VAT calculation • Understand the VAT registration process

4. WHAT IS VAT? • VAT – value-added tax – is a tax imposed on consumption, and is collected at each stage of production and distribution where there is “value-added”. • Although each business in the supply chain of production and distribution plays a role in the collection and remittance of the tax, a central feature of VAT is that the burden of the tax rests on the end consumer.

5. Interesting Facts • VAT has been implemented in more than 150 countries around the world • All OECD countries except for the US have VAT (or a variation) • The concept of VAT was first proposed in 1918 by a German industrialist, Dr. Wilhelm von Siemens • VAT was first implemented in 1954 by Maurice Lauré, Joint Director of the France Tax Authority (Direction Générale des Impôts)

6. What is Value Added Tax (VAT)? • Consumption tax on supplies of goods (tangibles) and services (intangibles) • MostbusinesseschargeVATandaregenerallyentitledtoreclaim mostifnotalloftheVATtheyincurwhichrelatestotheirbusiness activity • VATisultimatelypayablebytheendconsumer(i.e.private individualsandentitiesnotentitledtorecoverVAT) • ConsumerspayVATasa additional costwhereasbusinessesusuallypay VATandhavetomanagetherelatednegativecashflowspending recoveryofthatVATfromtheTaxAuthorities

7. What is Value Added Tax (VAT)? • A VAT is a tax on consumption • VAT flows through a supply chain • Burden of VAT is with the final consumer • A final consumer could be • Customer • Retail purchaser • A business whose activities are exempt from tax

8. Important definitions • Economic activity means an activity conducted in a continuous and regular manner and includes commercial, industrial, agricultural or professional activities • Taxable person means any person (corporation or not) conducting an economic activity for the purpose of generating income • Such person is registered or obligated to register for VAT as per the registration threshold in a member state • Taxable persons can include businesses located outside the GCC territory • A Taxable Person can be any natural person conducting an economic activity • Supply means any form of supply of goods or services in exchange for a consideration

9. Important definitions • Input tax : Tax payable by a taxable person on supply of goods and services received or on import of goods and services for the purpose of carrying out economic activities • Taxable supply: Supplies on which tax is charged according to the VAT Agreement, whether at standard rate of 5% or at zero rate. A deduction of input tax can be claimed against the VAT payable on taxable supplies • Exempted supplies :Supplies on which no tax is payable and for which deduction for input tax cannot be claimed • Reverse charge mechanism :A mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier, when the supplier is not a taxable person in the member state where the supply has been made • Tax group :Member states may allow two or more persons that are residents of the same member state to register for VAT as a Tax group; such group will be treated as a single taxable person for

10. Important definitions • Goods-The passing of ownership of physical property or the right to use that property as an owner, to another person. • Services- Anything which is not a supply of goods is a supply of services.

11. Important definitions • Consideration • Consideration equals anything received in return for a supply • If the consideration for a supply is just in money, the value of that supply is the amount of money received • The consideration is treated as VAT inclusive, so the amount received in payment includes an element of VAT for taxable supplies • VAT is normally calculated by applying the VAT rate to the VAT-exclusive price

12. Important definitions • Business means: •Any continuing activity making supplies for consideration •Frequency activity to be continued over a period of time •Not an isolated transaction •Not activities purely private or personal (non business) • Where any of the criteria set out above are not met, the transaction is outside the scope of VAT

13. Mechanics of VAT (Figures in AED)

14. Impact of VAT on business • Profitability • Cash flow • Accounting systems need to be upgraded and kept in line with changing regulatory requirements • Additional Legal and audit costs

15. Introduction of VAT in the GCC Countries Likely rate of VAT: - 5% rate expected to be introduced in all 6 GCC Countries Dates on which VAT will be introduced: 1 January 2018 confirmed as date for both UAE and Kuwait Other GCC Countries Bahrain, Oman, Qatar & Saudi Arabia can introduce VAT at anytime between 1 January 2018 and 1 January 2019

16. WhyVATisbeingIntroduced ? • Moving income away from an almost complete reliance from the sale of oil and gas, to taxation as a diverse economy. • Set up a system for sustainable government revenues that will be in place long before oil and gas reserves start to run out • Move to a GCC Common market

17. WhyVATisbeingIntroduced ? • Significant reduction in the prices being achieved from the sale of oil • To enable the Governments of the GCC Countries to maintain the current high standards of public services and meet the budgetary deficit • Projected collection from VAT and Excise expected to be AED 7 billion annually

18. FTA (Federal Tax Authority) • Formed by the Government to administer VAT and Excise Taxes, plus any future taxes, introduced in the UAE. • Responsible for collecting taxes and reviewing Taxable Person compliance. • Available to provide guidance and direction to Taxable Persons in order to support them in meeting their tax compliance obligations. • Decision making capacity in areas of tax technical complexity. • Responsible for conducting tax audits and administering penalties.

19. Excluded Items from VAT • Basic foodstuffs • Health related services • Educational services in certain cases • Full scope of supplies qualifying for VAT exemption not yet announced by July first draft • No distinction yet made between exemptions and exemptions with credit/zero rating

20. Why are GCC Governments focusing on Indirect Tax as opposed toDirect Taxes (i.e. Personal/Corporate Taxes) as a means ofraising additional tax revenues? • Less controversial – effectively consumers have a choice not to buygoods or services so can avoid paying VAT, etc. • Indirect Tax rate increase can generate significant additional tax revenues compared to similar increases in Direct Tax rates • Personal Tax increase can act as disincentive to productivity as employees pay higher taxes as a result of working longer hours

21. ExampleofOperationofVATassuming5%VATrate( Figures in AED)

22. ExampleofOperationofVATassuming 0%VATrate( Figures in AED)

23. ExampleofOperationofVATassumingVAT exempt( Figures in AED)

24. VAT vs. Sales Tax

25. Input and Output Tax • Net Tax Payable • VAT-registered businesses will submit a “VAT return” document to the FTA on a periodic basis mentioning all output tax due and input tax recoverable for the period • INPUT TAX-VAT paid to suppliers • OUTPUT TAX-VAT collected from customers • NET VAT PAYABLE OR CREDIT(to/from the FTA) • “Final consumers” (i.e. persons not registered for VAT) do not submit VAT returns and cannot recover the VAT they are charged

26. Business Responsibility • VAT is self assessed – Business will be required to determine the VAT treatment if their activities • They should install proper accounting System • Develop introduce and manage accounting system capable of producing accurate VAT accounting data • Comply with various laws and regulations related to VAT • Submit the returns and pay Tax in time to avoid fines and penalty

27. When does liability for VAT arise? • Goods • Date of removal of goods (in case of supply of goods with transportation) • Date on which goods made available to customer (in case of supply not involving transportation) • Date of assembly/ installation (supply of goods involving assembly or installation) • Services- • Date on which performance of service is complete

28. When does liability for VAT arise? • Basic tax point for services • If any of the following event take place before the basic tax point, it will considered as the tax point for accounting for VAT : •Payment is received or •Tax invoice is issued

29. When does liability for VAT arise? • Tax point for supply of continuous services • In case of continuous services over a period of several months or years, the time of supply for will be the earlier of : • Receipt of payment or • Issuance of tax invoice

30. VATCompliance • GenerallyspecifiedformatforVATinvoices,creditnotes,etc.tobe Issued • NotallVATincurredisreclaimable,evenifallsuppliesliabletoVAT (e.g.food,accommodation,carhire,entertainment,etc.)invariouscountries • InsomecountriesVATcanonlybereclaimedwheninvoicehasbeen discharged • OtherTaxAuthoritiesobligetherepaymentofanyVATcredits previouslytakenintheeventthatinvoicesarenotdischargedwithinacertainspecifiedtimeframe

31. VATRegistrationThresholds • Every taxable person resident of a member state whose value of annual supplies in the member state exceeds or is expected to exceed the mandatory registration threshold • The threshold for registration will be: – Mandatory registration threshold: AED 375,000 – Voluntary registration threshold: at least AED 187,500 • Threshold will be calculated as follows: • – Total value of supplies made by a taxable person for the current month and the previous 11 months; or • – Total value of supplies of the subsequent 30 days – Value of exempted supplies will not be considered for computing the annual supplies • No threshold applies to non established taxable persons – they may be required to register

32. VAT Mechanism • Net Tax Payable • VAT-registered businesses will submit a “VAT return” document to the FTA on a periodic basis mentioning all output tax due and input tax recoverable for the period • INPUT TAX - VAT paid to suppliers • OUTPUT TAX -VAT collected from customers • NET VAT PAYABLE OR CREDIT-to/from the FTA • “Final consumers” (i.e. persons not registered for VAT) do not submit VAT returns and cannot recover the VAT they are charged

33. VAT Mechanism • Input Tax Recovery Conditions • In order for input tax to be deductible by a person, a number of conditions must be satisfied by the recipient of the supply: • Recipient must be a taxable person and must be registered for VAT • VAT on the purchase must have been correctly charged by the supplier • The goods or services have been acquired for an eligible purpose • Recipient must have received and retained a tax invoice evidencing the transaction • The amount of VAT which the recipient seeks to recover must have been paid in whole or in part, or intended to be paid in whole or in part • Certain incurred VAT is specifically blocked from being recoverable as input tax regardless of whether the above conditions have been met

34. De-registration VAT De-registration A Taxable Person who is registered for Tax purposes shall apply for de-registration in the following cases: ➢Cessation of the Economic Activity ➢Cessation of Taxable Supplies ➢The value of the Taxable Person’s supplies falls below the Voluntary Registration Threshold • The Taxable Person may apply for de-registration if the total annual revenue of its business falls below the Mandatory Registration Threshold but is over the Voluntary Registration Threshold • Each Member State may determine a minimum period to keep the Taxable Person registered for Tax purposes as a requisite for de-registration • Each Member State may determine the terms and limitations necessary to reject a deregistration application or to de-register a Taxable Person in cases other than those mentioned in the first and second clauses

35. VAT Groups VAT Groups - Registration ➢ Each Member State may treat the Tax Group as a single Taxable Person ➢ Two or more persons carrying on a business are able to apply for a single “Group” VAT registration where: • Each person has a place of establishment or a fixed establishment in the UAE • The persons are “related parties”, and • Either one person controls the others, or two or more persons form a partnership and control the others

36. ImportofGoods • Import of goods: place of supply is the UAE − The recipient accounts for VAT under the reverse charge mechanism EXCEPT where goods will be re-exported to another GCC State

37. Reverse Charge mechanism • VAT registered purchaser has to account for VAT in respect of supplies •Typically used for cross-border transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of the purchaser •The purchaser will account for VAT on its normal VAT return and he may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules •It will apply in UAE in the situations where a VAT registered person imports goods or services into the UAE which would be subject to VAT if purchased in the UAE

38. Bad&ForgivenDebts • Bad-debts • IfVATischargedonsuppliesofgoodsorservicesanddebtisnotdischargedduetoinsolvency,bad-debt,etc.,creditcansometimesbetakenifTaxAuthoritiesaresatisfiedthatallreasonableeffortshavebeenmadetorecoverthedebt– only applies if supplier is on “invoice basis” • Forgivendebts • Ifasupplierdoesnotpursueadebtforagoodcommercialreason,VATcreditcanalsobetakenincertaincircumstances. • Creditnotesaregenerallyissuedifagreedprice • betweenthevendorandthecustomer

39. Q & A

40. Conclusion • VATsystemsaregenerallyaveryeffectiveandefficient meansofcollectingsignificanttaxRevenuearoundtheworld • VATcompliancesystemsarenowonlineinmostcountries • VATisaSelf-assessmentsystemunderwhichbusinessesareobliged tosubmitcorrectreturnsandpayliabilitiesintimelymanner • VATsystemsarepolicedthroughregulartaxauditsandtheongoing monitoringofexceptionaltrendsbytheTaxAuthoritiesacrossthe globe