KSA Approved the VAT Executive Regulations. A link to the Arabic-English version is below:
The U.A.E Federal Law N0 8 of 2017 on VAT has been published and is available at the following link:
NAFL Review talks to Markos Brotzakis, a tax expert and founding partner of Gulf Tax Consultants (www.gulftax.net), a boutique financial & tax consultancy firm specializing on VAT and tax advisory services about VAT and here’s what he says on some of your most common questions.
Why should companies take VAT seriously? What are the consequences if they don’t follow the rules on VAT?
VAT is a tax aiming to raise state revenue to meet public spending. It is taxing the end-consumer of goods and services and is designed to be neutral to businesses, thus, having no P&L impact. It is accounted and collected by businesses and paid to the state.
Companies should take VAT very seriously because of the following reasons:
1. VAT is a state law and companies must adhere to it.
2. Companies act as collectors for the state, collecting and paying money, that technically are not theirs. Therefore, they must be prepared to correctly apply the VAT legislation, make sure they collect and pay the correct amount of tax and have in place such procedures and controls to comply with VAT legislation, thus minimize their tax risk exposure.
3. VAT will have an impact on the cash-flow of companies. Therefore, they need to assess the impact and plan ahead.
Tax audits determine whether companies are compliant or not with VAT.
Non-compliance can have both direct and indirect adverse effects.
Direct Effects: Penalties for tax evasion can be high. UAE’s FTA has informally announced an administrative penalty equal to 500% of the unpaid tax. KSA has published in its draft law an administrative penalty equal to 100% of the unpaid tax. An additional penalty of SAR 1.000.000 or two (2) years imprisonment will be applicable should the Tax Authorities refer the case to the Administrative Court. Additionally, punishment from other laws (e.g criminal) might apply.
Indirect: Companies might face the cost of adverse publicity if they are caught red-handed and published in the press as tax evaders.
In your expert opinion, what steps should small/medium companies do to make their businesses VAT-ready? Should they invest on a new sales software or train at least one staff to oversee that VAT is complied with?
VAT is a transaction tax, affecting all functions of the company (Finance, HR, Operations, Sales etc.). Small and medium companies should take the following general steps:
1. Review their business model and prepare a GAP analysis determining the steps need to be taken to move to VAT.
2. Prepare an action plan and mobilize the necessary resources. In that step an internal VAT-champion must be appointed. That will be the person driving the project forward as well as the knowledge keeper.
3. Implement the Action Plan.
4. Test the Implementation.
5. Assure Post Implementation Assistance. It is critical that from VAT start date until the first or second submission the company tests regularly its transactions and its compliance procedures, safeguarding the correct application of VAT Law.
We must stress the need for constant training of all company employees handling VAT transactions and a continuous update on all the new VAT Law developments. VAT Knowledge will build eventually in the companies, but it needs effort and time.
In the logistics industry, how important is it in fully understanding VAT? Why?
The logistics industry and companies active in trading and offering services between the GCC countries will be the most challenged ones from the introduction of VAT. If we wanted to classify VAT transactions according to place of supply we could categorize them as domestic (within a country) and cross-border (between two countries).
Cross-border transactions in the case of GCC and EU only, being a single market of independent countries, can be further classified to supplies between any GCC country and a 3rd country and intra-GCC or Internal supplies being supplies between two (2) GCC countries (e.g. forwarding services from a UAE forwarder to a Kuwait company).
Logistics companies will have to deal with the full spectrum of transactions in VAT, must be able to identify and invoice correctly all steps in a transaction (e.g. shipping, clearing, handling, storing, transporting etc.), as well as offer correct advise to their clients on VAT during import and cross-border movement of goods.
In our view, logistics companies will have to invest in training their operations, sales & finance personnel, adapting their IT systems as well as in drafting & putting in place compliance systems to assist them during any tax audit. Additionally, they will have to improve their KYC (Know-your-customer) procedures & update their Customer & Vendor Masters with more detailed information & the VAT TIN to be issued.
Closing, the introduction of the new electronic systems for monitoring the Internal Supplies (movement of goods between member states) will create the need to adjust internal procedures and increase the amount of work handled.
The interview was taken from Markos Brotzakis, Gulf Tax Consultants Founder, for the June 2017 issue of the magazine of NAFL.
Federal Law 7 of 2017 on Tax Procedures applies to Federal Tax Authority tax procedures related to the administration, collection and enforcement of federal taxes. Executive Regulations will follow giving detailed procedures on a number of issues described in the Law.
The team at Gulf Tax Consultants has compiled, for information purposes, a list of the most important points for the business community.
Should you require to learn more about VAT in U.A.E and the G.C.C, please contact our team.
Main points addressed by the Law, impacting U.A.E businesses to be registered for VAT and excise taxes are:
Accounting Records and Commercial Books
Submission of Tax Returns, information, records and documents to FTA must be in Arabic. In case they are in any other language a translation might be needed at the expense of the taxpayer.
- Taxable Persons must apply for Registration.
- Use of Tax Registration Number (TRN) in all communications with FTA
- Changes in taxable person’s information affecting its Tax record must be communicated within 20 business days
- Appointment of Legal Representative must be communicated to FTA within 20 business days from appointment
- Incomplete Tax Returns are considered will be treated as not having been received.
- Taxable Person is responsible for the accuracy of the Tax Return data.
- Payment less than the Payable Tax amount, will trigger the issue of a Tax Assessment by the FTA and the relevant penalties.
In the Law is allowed to provide voluntary disclosure correcting errors in Tax Returns and Tax Refund Applications.
- Tax Agents are persons appointed to act on behalf of a Taxable Person with regard to its Tax affairs with the FTA.
- Tax Agents must meet certain conditions and be registered with the Authority.
- Tax Audit can be performed at FTA office or at the place of business of the Taxable Person.
- In case of an audit at the place of Business, FTA has to inform the business 5 business days in advance.
- In certain cases, FTA can shut for 72 hours any place where the Business carries its business, stores its goods or keeps its records subject to a prior written consent of Director General.
- Audited Person has the right to:
- request the Tax Auditors show their job identification cards.
- obtain a copy of the Tax Audit Notification
- attend the Tax Audit which takes place outside the Authority
- obtain copies of any original paper or digital documents seized or obtained by FTA
A number of violations is prescribed in the Law, where an Administrative penalty will be issued. The amount and the procedure will be issued by the Cabinet, but it will not be less than AED 500 and more than 3 times the amount of Tax in respect of which the Administrative penalty was levied.
Tax Evasion Penalties
Tax evasion carries penalties of monetary penalty not exceeding five times the amount of evaded tax and/or imprisonment. More severe penalties applicable under any other law (e.g criminal) might also apply.
In the Law is set the framework for resolving disputes between the Taxable Person and the FTA. The steps are:
- Apply to FTA to reconsider. If rejected or reconsideration is not satisfactory than appeal to:
- Tax Disputes Resolution Committee.
- For total Tax and Administrative penalties up to AED 100.000, its decision are considered final.
- Court. Committee’s decisions can be challenged at the competent court.
Refund and Collection of Tax
The Law sets some procedures relevant to application for Tax Refund and collection of payable taxes.
- 5 years from the end of the relevant Tax Period, for cases where there is no tax evasion.
- 15 years in case tax evasion is proven.
- 15 years in case of non-registration for Tax purposes.
For a more detailed reading and a download of the English text of the Law, you can access it in our Knowledge Base, following the below link: