April 14, 2016

VAT: A Real Paradigm Shift


The introduction of VAT in the UAE / GCC and broader tax reforms have been discussed for some time. In the early 1990s, the GCC nations analysed the feasibility of implementing corporate taxes and VAT to support further economic diversification. VAT has been discussed in great depth at various GCC meetings and conferences, but the plans were repeatedly shelved, most recently due to the global economic recession in 2008 and various socio-geopolitical concerns.

The GCC countries have been under pressure from the IMF and others to broaden revenue streams for some time. The introduction of any new taxation system is a major change in the UAE/GCC. Individuals and organisations, as well as the government itself, are going to take some time to adapt to a new system.

Currently, information relating to VAT regime, coverage scope (Free Zones and Mainland), principles, list of covered goods…etc. are unknown and unavailable in the public domain. There has been no official statement from the Ministry of Finance officials whether the UAE Free Trade Zones (FTZs) will be exempt from VAT. FTZ entities will have to assess the impact of VAT on their operating models in both scenarios (VAT applicable or VAT exempt). It is very critical for the FTZ businesses to understand VAT implications even if FTZs are exempt from VAT. The FTZ entities may still have to comply with requirements like VAT registration and filing VAT returns…etc.

What is VAT?

VAT is a broad based consumption tax that is intended to be a tax on the end user. It is a key revenue generator for governments across the world. VAT will help GCC governments to diversify their economies and expand their revenue base. An efficient VAT regime will strengthen the accounting practices and promote a Compliance culture among the GCC businesses.
VAT is collected at various stages of production-distribution chains. It is charged on the amount by which the value of an article has been increased at each stage of its production or distribution, that is, on the amount of value added to goods and services. If properly designed and implemented, the tax, at any stage, is effectively collected on the pure value generated at that stage of sale. Businesses are required to register for VAT and file VAT returns on a monthly or quarterly basis.

The UAE – First Mover

A framework agreement on the implementation of VAT across the GCC is expected to be signed off in June 2016. Depending on the readiness of each GCC country, a 12 to 18 month implementation and preparation window has been guaranteed. However, media reports and announcements from senior officials suggest that VAT will be introduced in the UAE in 2018.

Based on media statements made by UAE Ministry of Finance officials, we understand that VAT will be introduced across the UAE on 1 January 2018 at 5%. UAE Ministry of Finance officials have announced an 18 months preparation window after any VAT law is approved.

Media reports suggest that healthcare, education, a number of food items and social services will be exempt from VAT. Other information, such as scope (if it apply to FTZs or just mainland companies), principles or covered goods and services are currently unclear.

It is impossible to accurately predict the impact of VAT in the FTZs (including the FTZ Authorities). If the FTZ entities are VAT exempt, then, businesses must find a way of recovering the VAT paid on purchases from the mainland suppliers. Will the FTZ companies have to register for VAT and file returns, even if exempt? Will there be a voluntary registration mechanism even if the businesses are under the registration threshold?

Although timelines are not yet confirmed and the above details are not yet available, the introduction of VAT now seems certain. Businesses should immediately start assessing the impact of VAT on their operating models and begin preparing for implementation. This will include a number of areas such as changes to IT systems, review of the business and supply chain models, legal and contractual arrangements…etc.

KPMG will continue to keep you updated on any further developments.

This article is powered by Nilesh Ashar, Partner - Head of Tax, KPMG in the UAE.
Tel: +971 (4) 424 8900
Email: Nashar@kpmg.com

Topics: Legal Corner

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