VALUE ADDED TAX

Introduction to GCC VAT Agreement and VAT in the UAE

18 July 2017

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 AGENDA
VAT IMPLEMENTATION- WHERE ARE WE NOW?

PRINCIPLES OF VAT

GCC VAT AGREEMENT

UAE UPDATE

KEY QUESTIONS WHEN CONSIDERING VAT ISSUES

KEY CONCEPTS: VAT TERRITORY, TAXABLE PERSON, TRANSACTIONS

SCENARIOS

VAT IMPLEMENTATION TECHNIQUES

VAT ERRORS

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 VAT IMPLEMENTATION
Where we are now?
Organization Published treaty or Engaged in peripheral
law? activities?

GCC Final N/A

KSA Draft Yes

UAE No Yes

KUWAIT No (but has published No

draft excise law)

QATAR No (but has publicly No

stated that a draft law
has been approved by
a Cabinet)
OMAN No No

Bahrain No No
PRINCIPLES OF VAT -Introduction

A tax (indirect) on consumption, not on profits

VAT flows through a supply chain

VAT is borne by the final consumer

A final consumer could be:

A private, retail purchaser
A business whose activities are exempt from tax
A business which is not otherwise required to be VAT registered

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PRINCIPLES OF VAT -Introduction

AED1000 + AED2000 +
AED50 (VAT) AED100 (VAT)

AED150(VAT
AED3000 +

)
AED5000 +
AED250

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Consumer bears VAT in full, the tax authority would receive
the VAT in stages.

AED1000 + AED2000 +
AED50 (VAT) AED100 (VAT)

AED150(VAT
AED3000 +

)
AED5000 +
AED250

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PRINCIPLES OF VAT -Introduction

VAT collected by a business from their customers is

called output VAT

VAT paid by a business on its costs is referred to

input VAT

A VAT registered business will only pay the difference

to the tax authority
Tax payable= output VAT Input VAT
Input VAT is greater than output VAT= Tax refund
The standard rate of VAT in the GCC is 5% as per the
draft GCC agreement
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PRINCIPLES OF VAT -Introduction
Yarn Factory 1 Factory 2

AED1000 + AED2000 +
AED50 (VAT) AED100 (VAT)

AED150(VAT
100 50 = AED50

AED3000 +

)
250 200 = AED50

AED5000 +
AED250

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 SUMMARY OF VAT PAYMENT
Organization INPUT VAT OUTPUT VAT PAYABLE
(AED) (AED) (AED)
Farmer 0 50 50

Factory 1 50 100 50
Factory 2 100 150 50
Stitching Unit 150 200 50

Retail 200 250 50

Customers 250 - -
Total VAT Paid to FTA AED250
 GCC VAT AGREEMENT

SCOPE. It sets the legal framework for the introduction of VAT in the six GCC States.

KEY PRINCIPLES: Each of the 6 States will draft its own VAT legislation with the principles set
out in this Treaty. Each State will levy VAT on import and supply of goods and services.

CONTENT- It contains fifteen chapters and one of the key provisions contain items that
Member State may or shall zero rate and exempt supplies.

RATE:. The VAT rate has been set at a standard rate of 5% for all GCC States.

IMPLEMENTATION : The treaty does not set the date VAT will be introduced. However, it
is anticipated that the target date is 1 January 2018.

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GCC VAT Registration

TIN- Tax
REGISTRATION Identification
number

Voluntary Compulsory
Registration Registration

>AED375,000
>AED187,500 OR
OR (USD100,000)
(USD50,000)
 UAE update from MOF sessions
In April and May 2017, the UAE Ministry of Finance conducted
more than 20 awareness sessions updating businesses regarding
the impending implementation of VAT and excise tax

Each session provided high-level information regarding the

proposed structure of VAT and certain aspects of the VAT rules,
including such topics as:
Place of supply
Time of supply
Zero-rated and exempt supplies
VAT recovery
VAT grouping

A summary of some aspects of the UAE VAT from the awareness

sessions

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 UAE update from MOF sessions
Registration for VAT VAT registration rules will mainly mirror GCC
Treaty rules, with some changes:
The mandatory registration threshold is AED 375,000
The voluntary registration threshold is AED 187,500
To register for VAT, the threshold has to be exceeded in the previous
12 months or expected to be exceeded over the next 12 months

VAT groupings
will be allowed for UAE resident businesses
Only one VAT return
Choice to choose group representative

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 UAE update from MOF sessions
Zero-rated supplies

Exports of goods and services to outside the GCC member states

International transportation of passengers or goods

Supply of air, sea and land means of transport used to transport

passengers and goods, and related goods and services

Supply of investment precious metals

First supply of newly constructed or converted residential building

Supply of educational services

Supply of healthcare services

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 UAE update from MOF sessions
Exempt supplies:
Supplies of certain financial services
Supply of residential building unless it falls under the zero-rating rules
Supply of bare land
Supply of local passenger transport

Date of supply:

Basic tax points will include:

Date of removal of goods
Date on which goods made available to customer
Date of assembly/installation where the supply of goods involves
assembly or installation
Date on which performance of service is complete
The date of payment for any goods or services
However, any of the above tax points can be overridden by a tax
invoice being issued in respect of the supply
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 UAE update from MOF sessions
Compliance

VAT return filings expected to be done online

Small errors can be corrected in the next VAT return

5 years time bar on corrections

Administrative and evasion penalties for errors and fraud

3-stage dispute resolution process

Request for reconsideration to the FTA,
appeal to the disputes resolution committee, and
litigation still to be clarified

Free zones the MOF has refused to answer any questions on this topic

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 UAE VAT ADMINISTRATION
FTA- Federal Tax Authority will be responsible for the following:

Collecting taxes and reviewing taxable persons compliance

Provides guidance

Decision making in areas of technical tax complexity

Tax Laws interpretation

Conducting tax audits

There will be a single VAT filing where we have to separate the

information at three levels

1. Emirates Level

2. GCC Level and

3. International

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UAE VAT - Introduction
Our VAT? Who? Which? Where?

(Territory)
(Taxable Person) (Transactions) (Place of taxable
transactions)

What about
digital
Services? When? And on What? How much?

(Chargeable event and Taxable (Rates)

Digital Services
amount?)

Any
What not Deduction Special Refund What to
and Why? Procedure Observe?

(Exemptions) (Right to deduct) (VAT Refund) (Obligations)

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 GCC VAT Territory
The importance of the territorial scope

For transactions carried out Third Countries

within the VAT territory, GCC VAT will GCC VAT
apply.
GCC VAT
outside the VAT territory, GCC VAT
does not apply.
Customs
TH
The three main territories are displayed
in the graphic

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 Taxable persons
Definition
of
There are two conditions that must be Economic
activity
satisfied for a taxable person:
An
1) Carrying out economic activity economic
Article 1 (8) GCC VAT agreement activity is an
activity that
is carried
out in a
regular and
2) Independently continuous
manner for
the purpose
of
generating
income

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 Taxable Person

A taxable person is any individual, partnership,

company, which is, or is required to be registered
for VAT

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VAT Concept- Supplies

SUPPLIES
(Goods and
Services)

Non-taxable Taxable
Supplies Supplies

Standard
Exempt Zero Rated
Rated

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 Transactions

Supply of goods: Tangible property with

no service element included.

Supply of services is any transaction

that does not constitute "supply of
goods

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 What constitutes supply of goods and
services?
The following supplies shall constitute supply of
goods [Article 5; GCC VAT Agreement]:

Transfer of ownership of goods or the right to

dispose such goods as the owner

Financial leasing arrangements

Granting the right to use real estate property

Compulsory transfer of ownership in goods

for a consideration pursuant to a court order

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 The mechanics of VAT a taxable supply

A taxable
supply
[Article 1(28);
GCC VAT
Agreement]:
Supplies on
which tax is
charged
according to the
VAT Agreement,
whether at
standard rate of
5% or at zero
rate. on taxable
supplies

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 Intra GCC goods

An intra-GCC supply in one Member State is matched by a (usually)

taxed intra-GCC acquisition in another Member State

Intra-GCC acquisition: Subject to VAT at the standard rate in the

Member State of arrival (self-assessment)

Intra-GCC self supplies or transfer of goods: Movement of a business

own goods from one Member State to another Member State

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 REVERSE CHARGE EXAMPLE
Global Maintenance Services Co. (a UAE company) supplies
maintenance services to Arab Gulf Co. (company located in KSA) with
amount 2,600,000 AED.

IF Arab Gulf Co.'s taxable supplies were 10,000,000 AED and its related
purchases were 8,000,000 AED , what would be the VAT output and
input?

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 PRIOR TO REVERSE CHARGE
EXAMPLE

Description Value Total

Arab G. Co Output VAT(10,000,000 x 5%) 500,000

Output VAT KSA 500,000

Arab G. Co Input VAT (8,000,000 x 5%) 400,000

Input VAT KSA 400,000

VAT PAYABLE 100,000

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 REVERSE CHARGE EXAMPLE
Description Value Total
Arab G. Co Output VAT(10,000,000 x 5%) 500,000

Reverse Charge Output VAT for service 130,000

from Global (2,600,000@5%)

Total Output VAT 630,000

Arab G. Co Input VAT (8,000,000 x 5%) 400,000

Reverse Charge Input VAT for service 130,000

from Global (2,600,000@5%)

Total Input VAT 530,000

VAT PAYABLE 100,000

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 Export supplies

In non GCC countries, export is described as the dispatch of goods to

another territory (other country)

In the GCC, for VAT purposes, export is described as the dispatch of

goods from a GCC Member State to a third country (i.e., a country
that is not a member of the GCC)
Subject to the VAT 0% rate provided specific conditions are met

Documentation proving export of goods is in place (the exact set of

documents may vary from jurisdiction to a jurisdiction)

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 Export of goods

GOODS ARE DELIVERED VAT IS ZERO RATED

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 Import supplies

In non GCC countries, import is described as the arrival of goods

from another territory (other country)
In the GCC, for VAT purposes import is described as the arrival of
goods in a GCC member state from a third country (i.e., a country
that is not a member of the GCC)
Customs duties may be due upon importation in accordance
with commodity code
VAT is due in accordance with local VAT legislation
 RIGHT TO DEDUCT INPUT VAT
INPUT VAT

The right to deduct is linked to the input VAT recovery. The

business will only be able to recover the input VAT if it met the
following six compulsory conditions.

1. Taxable person

2. Business purpose

3. Tax invoice

4. VAT must have been paid

5. Correct amount

6. Item claim must not be blocked e.g business entertainment

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 OBLIGATIONS
As a VAT registered business, the business has following
obligations

Maintain the accounting records i.e. sales ledger, purchase

ledger, invoices etc.

File the correct VAT return with the FTA within 28 days after
quarter end i.e. for the first quarter (ended 31st March) business
must file the VAT return by 28th April

Make the payment for the VAT within 28 days of the quarter
end

Provide the record to the tax authorities on request i.e. the full
records must be available for the tax authorities when they
visit the business for the tax audit or record checking

As per the information available from the FTA, there is no

obligation for the audited financials to file a tax return.

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The mechanics of VAT - tax points
Complications

Services provided
over a more lengthy
period of time
Construction services
Accounting and
legal services

Continuous supplies
Periodic invoicing /
payments made
during the duration of
the service

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The mechanics of VAT outputs and output
tax

Outputs Output tax Income

The VAT The VAT Income is

exclusive properly due in deemed to be
business relation to inclusive of
income arising outputs any VAT
in a VAT properly due,
accounting whether or not
period VAT has been
separately
charged

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The mechanics of VAT inputs and input tax

Inputs Input tax

The VAT exclusive The proportion of

value of external costs VAT incurred on
incurred by a business inputs which the
excludes: business is entitled to
recover
Salaries
Inter-departmental The proportion of
charges within a import VAT incurred
taxable person which the business is
made for entitled to recover
accounting
purposes

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VAT AND UAE Business
Compliance cost

Revision of the Existing contracts

Corporate re-organization and restructuring

Updating accounting system

Restructuring supply chain

Record Keeping Process

Restructuring Inter-group transaction (transfer pricing)

Reviewing IT capabilities of the Business

Staff education and Training at all level of the business operation

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Your VAT strategy

Begin to plan for its introduction

Consider the application of the VAT provisions

to your business

Review and develop VAT compliant

accounting systems

Train personnel at all levels to consider the effect

of VAT on their role

Outsource VAT function

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 VAT as a strategic business issue

Cash
and
VAT
cash
payable
flow
before it is The cost of
collected irrecoverable
Input tax on
from the VAT
major purchases Budgeting to
customer
the relationship include
between the irrecoverable
payment of VAT VAT into
to the supplier project
and its recovery costing
as input tax

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 VAT invoicing and Record keeping
VAT Invoice
The invoice date and invoice number

The type of supply

The quantity and a description of the goods supplied,

Companys name and address

The name and address of the customer.

Companys VAT registration number.

The date of supply (the tax point).

The rate of VAT for each supply.

The VAT-exclusive amount for each supply.

The total VAT-exclusive amount.

The amount of VAT payable.

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 VAT invoicing and Record keeping

Conditions for VAT Invoice

Company must issue a VAT invoice when it makes a standard
rated supply to a VAT registered customer.

A VAT invoice is not required if the supply is exempt, zero-rated,

or if the supply is to a non-VAT registered customer.

A VAT invoice should be issued within 28 days of the date that

the supply of goods is treated as being made.

VAT invoices Record Keeping

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Implementation Skills Requirement

Project
Management

People VAT technical

Management knowledge

Leadership

Change Accounting
management Techniques

Project
Mapping IT Expertise

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VAT Errors
Record keeping

Time of supply

Supply, purchases, expenses and liability

Valuation and calculation

International transactions

Credit notes and bad debt relief

Business gifts and deemed supplies

Private and non-business use

Partial exemption

Business entertainment

Cars and motoring expenses

Disaggregation
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 DISCLAIMER

This is not advice but general discussions based on our

interpretation of the GCC VAT Agreement and informal
discussions with the UAE MOF as at 28 June 2017.

For a VAT impact assessment for your existing business

model, you should be working with a qualified VAT tax
consultant.

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Do not lose sleep GTS TAX CONSULTANTS
are here to help!

THANK YOU

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