VIEWPOINT

The recent announcement to implement VAT has undoubtedly called for a complete scrutiny and overhaul across the GCC. While the taxation itself is not a cause for concern owing to its low rate, its implementation and execution is still under the scanner. Most firms operating in the region will have to redesign their core operational process to incorporate the tax. With the Federal Tax Authority publishing the draft Executive Regulation with reference to the implementation of the said tax, the firms are hard pressed to adhere to the deadline issued. VAT is not only related to the finance department but also has considerable effect on other departments such as IT, human resources and legal. Since the tax affects all the levels of production, it will have an impact on vendor management as well. In preparation of the inclusion of VAT, a firm will be better served if its processes are in line with VAT requirements. Revising enterprise resource planning (ERP) will aid in the seamless inclusion of VAT into the business mechanism. There are three slabs for the VAT tax reform — zero per cent, five per cent and exempted. Regardless of the category you fall in, each firm is required to register with the system by the second phase to ensure compliance with the law. After registering with the authorities, each firm will be issued a unique VAT taxpayer identification number (TIN) that will be used in all further transactions of the firm and will be essential to file returns. Ensure that your invoices henceforth feature this number prominently for effortless tracking of operations. A “live” phase is expected to start from January 1, 2018, where firms can test whether their business systems are compliant with the prescribed procedures. The implementation of VAT is a new phenomenon for many firms in the Middle East who have enjoyed a tax-free existence so far. In doing so, both their people and processes are grossly under-prepared. While the processes can be easily modified to include the new component, the people will require a thorough introduction to ensure no manual error disrupts the adoption of the taxation system. Since it is not limited to the finance department only, all personnel in the firm must be educated about the same. It is a good idea to employ the services of an expert to help them with the training and possibly guide them through the initial period of acclimatisation. The companies should clean their master data of suppliers, customers and inventory to avoid duplicating of records. Both the cash flow accounting and bookkeeping practices will have to be updated to provide the correct accounting picture that will aid in the computation of the tax amount. Consulting VAT experts to do a complete VAT impact study will be essential in both compliance and minimising of the tax legally. Firms can also employ accounting softwares that take into account both VAT owed and VAT to be paid. Since VAT regulation stipulates a regular filing of returns every quarter, firms must reform their prevalent practice of closing books on a yearly basis. The bookkeeping system under VAT requires the firms to maintain their records and book of accounts for the next five years. In addition to this, additional information such as ledger, purchase day books and invoices may be required for further verification. Although the VAT tax rate is at a meagre five per cent, its implementation will have an effect on the cost of doing business for most firms and will adversely affect prices as well. We must understand that since all stages of production come under the tax umbrella, even the prices that vendors charge the firm will be affected. Planning and accounting for the rise in cost at various levels in the organisation should form the basis of all future operational decisions, particularly in IT, supply chain management and human resources.

VAT is an unknown entity to most firms in the region and has been a cause of much debate and anticipation. However, with strong fundamentals and thorough knowledge, a firm will be able to easily implement and adapt to this reform.

The business community and auditing and tax professionals have welcomed further clarity in valueadded tax (VAT) following the Executive Regulations and believe that there won’t be much impact on consumers as the tax rate is quite low.

They, however, noted that all those businesses — especially SMEs — and individuals who were under the impression of the delay in the implementation of VAT must proceed with efficiency and promptness as the Executive Regulations have also come out and delay will result in penalties.

His Highness Sheikh Mohammed bin Rashid Al Maktoum, VicePresident and Prime Minister of UAE and Ruler of Dubai, last week approved Executive Regulations for VAT, which would come into effect on January 1, 2018. According to auditing professionals, most of SMEs — especially groceries — are not yet ready and will be struggling to meet the deadline. However, they do not see a major impact on consumers’ spending trends.

According to Naveen Sharma, chairman of the Institute of Chartered Accountants of India (ICAI), Dubai Chapter, almost all sectors have been taken cared of under the Executive Regulations and there are no surprises.

The regulations have clarified about all fenced and non-fenced free zones and about imports and exports, Sharma said, adding that, for example, the Dubai Multicommodities Centre is an open free zone, where no customary boundary is there and goods can move in and out easily.

Another important clarification came with regards to real estate, where companies have to maintain their record books for 15 years compared to five years for other sectors.

“The Executive Regulations have made life easier for the businesses and individuals. You can see people appreciating the regulations. It will be an easy and smooth implementation of VAT,” said Sharma.

He added that in the last three days alone, the tax agent details and Executive Regulations means the government will implement VAT from January 1 and businesses have to align themselves to the rules.

“Despite the government giving businesses enough time, many had not started the process. I don’t see 100 per cent smooth transition but even 75 per cent will be considerable because every body didn’t start at the same time,” Sharma added. Suresh Panwar, chairman of the ICAI Abu Dhabi Chapter, says rent, education and healthcare services costs are the highest in the UAE.

“I believe by keeping these services at zero rate — subject to certain conditions, government tried to put the least burden on the general public. However, due to VAT, consumers are expected to feel the burden of tax on telecom, electricity and water and food bills, which I believe will also lead to effective utilisation of these items particularly electricity and water. Overall, I believe there will be an impact of around one per cent to 1.5 per cent on household budgets,” he added.

According to Panwar, SMEs, which were historically working on cash books without proper accounting, will have to maintain proper accounting records which will help the businesses in monitoring and reviewing their cost structure and do business in a more informed manner.

Thomas Vanhee, founding partner of Aurifer Middle East Tax, noted that any businesses that were still waiting for the publication of the full legislation now no longer have an excuse not to register for VAT purposes.

The Federal Tax Authority (FTA) has communicated relatively extensively on the introduction of VAT, and its message has been consistent with the publication of the current executive regulations.

However, many businesses, including large corporations, still today have not registered for VAT purposes with the FTA.

“The majority of our clients who have applied for group registration, still have not received approval of their application,” Vanhee said. “However, since the VAT rate is fairly low in comparison with other jurisdiction such as Europe, we do not expect VAT to greatly affect consumer behaviour. Therefore we can expect the market to stabilise again shortly after the introduction of VAT.”

Mayank Sawhney, director of MaxGrowth Consulting, states that the long wait of all UAE businesses and residents on getting some clarifications on a number of grey areas of the VAT Decree Law seems to be over to a great extent. However, it is not completely over, as there are still a number of areas that are still grey, on which further clarifications and guidance are expected from the Ministry of Finance and the FTA over the coming days.

Anthony Peter, director of corporate communications and operations division at Panasonic Marketing Middle East and Africa, says “unlike goods that are essential, consumer electronics do not fall in to that category and as such, consumers may take time to adjust to the increase. This may cause a temporary slowdown of sales but as with all changes, consumers will get used to the same”.

— waheedabbas@khaleejtimes.com

ICAI Abu Dhabi Chapter

The impact on travellers will be very minimal as most areas are covered under zero-rated like int’l passenger tickets and ancillary services booked as part of a flight

The Executive Regulations have not notified the list of healthcare services that fall within the definition of basic and healthcare services, which will be zerorated. Similarly, the Cabinet notification for the list of pharmaceutical products or medical equipment, which will qualify to be zero-rated, have not been released yet. Therefore, the healthcare industry is still waiting for these clarifications. The Executive Regulations have not explicitly clarified as to whether school transport services (provided by third-party transport companies or qualified educational institutions themselves), corporate transport services (provided by third-party transport companies for pick-up and drop-off of staff of companies from the home to work place and back), chartering services for transport, transport services provided by companies like Uber who are aggregator of transport services, etc, will or will not fall within the definition of local passenger transport and whether they will be exempt from VAT or subject to the standard rate of five per cent. With regards to supply of goods, only if the goods are supplied by a company or person in a designated zone to a company or person in a non-designated