NAFL holds series of awareness seminars
The UAE freight and logistics sector is preparing for the impact of the 5 percent value-added tax (VAT) set to be imposed on all goods and services rendered in the country starting January 1, 2018, an unprecedented move in the oil-rich Arab world which never levied taxes before.
Because of the constant movements of goods and services in and out of the import-driven UAE economy, the freight and logistics sector would be the most impacted among the industries, experts said. Personal incomes will remain nontaxable.
The National Association of Freight and Logistics (NAFL) had since carried out several VAT-related seminars among its more than 400 members to help them seamlessly go through the transition phase.
NAFL President Nadia Abdul Aziz said VAT is a very important technical issue that group members should know more about to fully comply with the UAE laws and avoid penalties.
All sessions were well attended by industry executives who are all eager to learn more about the new tax measure which the UAE government is implementing for the first time.
Other GCC countries are expected to follow the Emirates’ lead in the coming months.
Markos Brotzakis, CEO of Gulf Tax Consultants, a boutique accounting consultancy firm with expertise in VAT, international financial planning, direct and other tax practices, spoke at length about VAT in March and May. NAFL members eagerly asked him with questions and advise on some anticipated complex issues.
Brotzakis said VAT is something new in the Middle East and that business owners should carefully learn and practice how it should be applied in their operations to avoid penalties that could amount to 500 percent of the amount that was not paid if detected in an audit.
“Correct application of tax legislation can save a lot of money and time spent on penalties and litigation,” said the tax expert whose clientele includes fashion giant Prada, Autogrill (Benetton Group), among other multinational companies based out of Europe and the Middle East.
Brotzakis, who is also a consultant at the law firm United Advocates, said the new law would essentially turn business owners unpaid tax collectors of the government for the common good of the country.
He said every company must take precaution in recording all their business transactions and the VAT applied preparation for random auditing as discrepancies could mean monetary penalties of five times of the amount not paid.
He suggested that companies train their employees about VAT and how it should be applied in their operations and sale transactions to ensure compliance with the law.
The UAE VAT
Under the GCC VAT agreement, the new tax law would be implemented first in the UAE in 2018 and the rest of the states would follow. For humanitarian considerations, some foodstuffs and goods for education and healthcare would be VAT exempt.
Officials believe VAT will positively impact the UAE economy as the money levied will be used to launch new developmental projects.
The Ministry of Finance said VAT will provide the government necessary funds to continue providing quality public service to both residents and expatriates who live in the UAE.
“The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets,” the ministry stated on its website dedicated for VAT.
“VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue,” it added.
Rashid Al Blooshi, CEO of Abu Dhabi Securities Exchange, ADX, was quoted as saying in the Emirates State News Agency WAM: “The proposed five percent VAT will be applied to consumption and not on savings or investments. It will not have a significant impact on businesses and financial markets.”
The 5 percent UAE VAT is the same as in Japan, the lowest in the world. European countries have the highest VAT rates.
The UAE government mandates all businesses to submit tax declaration statements on a quarterly basis after the VAT law took effect next year.
The Ministry of Finance said companies concerned can file their declaration statements electronically after responding to all the questions raised on its website. Mandatory registration is mandatory for companies with taxable goods of Dh375,000. Compulsory registration begins on the fourth quarter of 2017.
In May, H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and UAE Minister of Finance, headed the first meeting of the Federal Tax Authority, FTA and Board of Directors, at the Ministry of Finance.
During their meeting, it was stressed that VAT will be levied on the sale of all goods and services unless they are subject to a zero rate or tax exemption such as food, commercial property, hotel services, etc. VAT will either be the basic 5 percent tax or zero-rate tax, which is tax-free.
Businesses will be able to recover VAT on the purchase of goods and services used for business purposes. Businesses exempt from VAT will not be able to recover the tax incurred on the cost of a good or service that is not exempt.
Zero-rated supplies include local transportation, imports and exports, majority of healthcare and education services, investment gold, and sales and leasing of residential properties. Some financial services, residential buildings, and vacant land will also be exempted.
What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain. To explain how VAT works we have provided a simple, illustrative example below (based on a VAT rate of 5%):
What is the difference between VAT and Sales Tax?
A sales tax is also a consumption tax, just like VAT. For the general public, there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
Why is the UAE implementing VAT?
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
Why does the UAE need to coordinate VAT implementation with other GCC countries?
The UAE is part of a group of countries which are closely connected through “The Economic Agreement Between the GCC States” and “The GCC Customs Union”. The GCC group of nations have historically worked together in designing and implementing new public policies as we recognize that such a collaborative approach is best for the region.
When will the VAT go into effect and what will be the rates?
VAT is likely to be introduced across the UAE on January 1, 2018. The rate will be low and is likely to be 5%.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of reliefs may be granted.
Will the cost of living increase?
The cost of living is likely to increase slightly, but this will vary depending on the individual’s lifestyle and spending behavior. If your spending is mainly on those things which are relieved from VAT, you are unlikely to see any significant increase.
What measures will the government take to ensure that businesses don’t use the VAT implementation as an excuse to increase prices?
VAT is intended to help improve the economic base of the country. Therefore, we will include rules that require businesses to be clear about how much VAT you are paying for each transaction. You will have the required information to decide whether to buy something or not.
Will all businesses need to register with the government for VAT?
No, not all businesses will need to register for VAT. In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT. We have made this decision to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires. Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.
Please note that we have not yet finalized the specific conditions (such as minimum annual turnover) that will help identify businesses that do not need to register for VAT. Once that information is finalized, it will be shared with the public.
What are the VAT-related responsibilities of businesses?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
- Must charge VAT on taxable goods or services they supply;
- May reclaim any VAT they’ve paid on business-related goods or services;
- Keep a range of business records which will allow the government to check that they have got things right.
SOURCE: UAE Ministry of Finance
NAFL Review talks to Markos Brotzakis, tax expert and founding partner of Gulf Tax Consultants (www.gulf-tax.net), a boutique financial & tax consultancy firm specializing on VAT and other forms of taxation. 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:
- VAT is a state law and companies must adhere to it.
- 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.
- 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 them VAT-ready? Should they invest on a new sales software or train at least one staff to ensure 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:
- Review their business model and prepare a GAP analysis determining the steps need to be taken to move to VAT.
- 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.
- Implement the Action Plan.
- Test the Implementation.
- 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 to fully understand VAT and 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.