Value Added Tax (VAT) is an indirect tax on consumption and it applies to most goods and services. VAT is levied on business transactions, i.e. on goods and services supplied in the course of business.
Even though VAT applies to most goods and services, in all countries where VAT operates some exceptions were released.
By 2018, The Gulf Cooperation Council (GCC) States are expected to implement a standard VAT system with a single rate (most probably 5%) which will apply to most goods and services. There might be some potentially limited exceptions applied to basic food items, healthcare, education and financial services.
Currently five countries in the Middle East region already adopted VAT or a similar consumption tax system. The countries without a VAT system are UAE, Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, Syria, Iraq and Libya.
Worth mentioning that VAT is a tax which is imposed at each stage in the chain transactions and is collected by businesses on behalf of the VAT authorities and ultimately is paid by the final consumer.
Each GCC state is anticipated to release its own national VAT legislation based on the agreed common principles. This should happen most probably before 2017, allowing necessary time for companies to get ready.
Why GCC needs VAT
In the last years, countries in GCC paid attention and tried to diversify their income sources due to recent oil crisis. VAT is seen for many governments, the perfect way to raise revenue and in the same time a real method in achieving government objectives and still protecting the neutrality for businesses.
Only in UAE, Government is expected to generate around Dh10 billion to Dh12 billion as a result of introducing VAT in the first year of implementation alone.
Will VAT impact my business transactions?
Even though VAT is applied and collected by companies on behalf of the Government and should not be seen as a cost, there will be additional burdens in terms of administration and compliance in coping with the new regulations.
Companies will need to make some changes, within the systems, processes and procedures that are currently used and will need to make sure they comply with the new requirements. In the meantime, your business can try to prepare by:
- Agreeing to an initial review – how VAT will impact your company;
- Creating a team to manage the implementation;
- Deciding a strategy in terms of implementation resources;
- Preparing the implementation plan within an established timeline;
Is VAT a cost for my business? Will VAT affect my margins?
If your business is involved in the supply of goods or services which are subject to VAT (including zero rate transactions) your business will be entitled to reclaim VAT on your costs.
If your business is involved in VAT exempt activities, you cannot reclaim VAT incurred on costs and will be a cost to your business (suppliers will charge VAT that you cannot reclaim).
As VAT is a tax charged on consumption and is imposed further on the price charged to the customer it is expected that prices will increase by the amount of VAT. It is eventually a supplier’s concern to establish the final price for the goods / services provided. The final price will need to take account of VAT, i.e. whether you charge AED 1000 or AED 1050 the amount will have to include VAT.
For example, if a supplier charges AED 1050 now and AED 1050 after the introduction of VAT (at say 5%) then the supplier will only hold AED 1000 after the introduction as AED 50 would be payable to the tax Authority. If the supplier wants to hold the AED 1050 then the price needs to be increased by the amount of VAT (say 5%) to AED 1102,5.
Therefore, if the supplier will not increase the selling price when VAT is implemented will affect his margins as VAT will be due on the amount received.
What actions should your business take?
Unfortunately, there is not that much time to analyze the implications of VAT implementation and to make the necessary changes, especially if your business doesn’t have someone with the required knowledge. The volume of work will depend on the size and complexity of your company and it is crucial for you consider the impact now and determine how best to deal with it.
What if I don’t comply?
We should expect that in case non-compliance or in case of errors a penalty regime would be imposed to your business. That is why is crucial to have all procedures in order, to avoid such issues. Examples of error you may find below:
- submission and payment of VAT due, after the date established by tax authorities;
- applying incorrect VAT rates to your supplies;
- failure to obtain and keep valid documentation to serve as proof, in order to support your VAT reclaim.
How Level can help your business?
Level’s VAT specialists have the resources and knowledge, to guide your business through all complexities that may arise. We have the expertise and experience in order to assist you in understanding how VAT works, how it will impact your company and to assist with the implementation and compliance process.
For more information on VAT, please get in touch with a member of Level’s VAT team.
Direct: +971 2 671 0033