Almost one year on, many companies in the UAE and Saudi Arabia still need help to set up their tax treatment correctly, while businesses in Bahrain will need to be VAT compliant from 1 January 2019.
The United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA) were the first of the six Gulf Cooperation Council (GCC) member states to introduce VAT in January 2018, at a rate of 5%. Almost one year later, we see many companies struggling to be properly compliant.
So, what has tripped companies up in the UAE and Saudi Arabia? And what challenges will those operating in Bahrain face from January?
Here are some key lessons that businesses across the Gulf can take on board as the VAT rollout continues. If you need help complying with VAT rules, don't hesitate to get in touch with us.
1. Linkage and validation is a work in progress
Businesses have experienced issues linking their tax registration number and Customs registration to official systems in order to finalise and submit their VAT return – but this is no fault of their own.
Under the GCC's VAT agreement, VAT due on imported goods in member states will be paid at the first point of entry, deposited and then transferred to the final destination state within the framework of the GCC Customs Union. However in order for this to happen in practice, each member state needs to create its own electronic tax system and link with the GCC tax information centre that will operate through a central website. Since not all GCC states have implemented VAT, the unified GCC tax information 'hub' is not yet linked to each local tax system. In the interim, the UAE and KSA consider transactions between them to be outside of the GCC.
Until all six GCC states introduce VAT, many transitional rules remain in play and local tax complexity will stay elevated. The impact on business can be seen, for example, in the 'use and enjoyment rules' as all member states are treated as 'non-GCC' – impacting cashflow.
Once the remaining four GCC states introduce VAT, companies will need to readjust their tax treatment for inter-GCC transactions and comply with the unified GCC VAT agreement.
You can read more about accounting and tax complexity in the UAE by downloading our free report.
2. Know your VAT from your accounting requirements
In the UAE and KSA we have seen VAT reporting requirements confused with accounting rules.
Regardless of the date of issue of a sales invoice, the arising VAT liability is determined based on the period in which the related payment is discharged or the products or services are delivered. Company ERP systems must be tested accordingly to ensure that the charging VAT is accurately adopted.
3. Different zones = different tax treatments
In the UAE, different tax treatments apply to designated zones (DZs or free zones) and mainland entities. DZs are designed to offer incentives for business and be tax-free zones for goods. They are therefore outside the UAE for VAT purposes.
This doesn't mean, however, that a company established as a DZ or free zone entity is exempt from VAT. It depends on the way company activities are handled inside the zone.
For example, "if a supply of goods is made within a designated zone to an entity to be used by them or a third person, then the place of supply shall be in the state unless the goods are to be incorporated into, attached to or otherwise form part of or are used in the production or sale of another good located in the same designated zone which itself is not consumed" (Executive Regulations Art. 51).
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4. Consistent reporting is crucial
In the UAE we have seen Emirate-level reporting requirements applied inconsistently, with businesses sometimes wrongly accounting for VAT on sales based on the location of their customers. Working with local tax experts is recommended to ensure you're reporting in accordance with the correct requirements.
Businesses will face administrative penalties for violations of the VAT law, including missed payment and filing deadlines. The VAT return must be filed with the tax authority no later than the 28th (in the UAE) or before the last day (in KSA) of the month following the end of the tax period.
5. Business X personal expenses
Some expenses under a company name can be input VAT recoverable, however only if they are used - or intended to be used - for making taxable supplies (standard rated or zero rated). The input tax may not be recovered if the business provides exempt supplies (non-taxable).
The VAT law has also provided a Capital Assets Scheme to recover the input tax paid at the time of acquiring new assets. The initially-recovered input tax is adjusted based on actual use during a specific period.
Talk to us
With GCC VAT implementation still very much ongoing, business operating in the region can easily find themselves at risk of falling foul of the reporting regulations. Our local tax experts can keep you updated on the latest changes, and help to make sure your business is complying with all VAT requirements.
Have your questions answered on the 12 December webinar - The road to understanding VAT implementation in GCC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.