VAT will be introduced in the UAE and Saudi Arabia on January 1.
Shiraz Khan, senior tax advisor at Al Tamimi & Company in Dubai, is a busy man. Like many of his peers involved in tax law in the UAE and Saudi Arabia, the introduction of VAT in the two countries on January 1, 2018 has led to a big influx of work, and a corresponding dearth of sleep. With under two weeks to go to the start date, Khan and his colleagues have been busy advising all kinds of companies about their VAT obligations and how to comply with the law. Bloomberg Businessweek Middle East caught up with Khan to find out about the state of readiness of companies in the UAE, and the steps firms should be taking immediately.
Bloomberg Businessweek Middle East: Are companies ready for VAT in the UAE?
Khan: Most people have now heard of VAT in some shape or form. They have thought about it but they have not done enough. I think probably most small companies fall into this category where they know about it and they have thought about it but they have not done anything. The big companies generally started their preparations early and have been working towards a VAT implementation for more than a year, while others have been working on it for about nine months, so they’re quite advanced in terms of preparation. Of the big companies, banks are the most ready and they did their VAT impact assessments early, although they still face practical challenges in determining the VAT that is recoverable.
How ready can companies be? Do many companies still have doubts about the implementation of the law?
In any country, whenever a new law is introduced there is naturally some uncertainty and there may be matters that are subject to interpretation. In the UAE, it will be no different. We’re talking about a law that’s not even in force yet. It will apply on January 1 and only then will we see what treatment the tax authorities are adopting and how they are dealing with certain cases. The practice and precedent will take time to develop. It is also challenging for a tax authority to implement a new tax law in a mature tax jurisdiction. The Federal Tax Authority, which is a new tax authority, has done a fantastic job in raising awareness on VAT.
Shiraz Khan, senior tax advisor at Al Tamimi & Company.
What should companies be doing immediately, especially companies that are perhaps a bit behind the curve with preparing for the law?
VAT requires a radical change in the nature of doing business here. Companies need to communicate with their suppliers and customers in relation to VAT, and review the clauses in their contracts. They need to have processes in place, keep documentation, and issue tax invoices. They need all these processes in place so that they are able to calculate and account for VAT from January 1 onwards.
Large companies will need to assess the capability of their existing ERP systems to undertake VAT reporting and upgrade these systems or replace them. Smaller businesses will need to see if there is an accounting software solution to assist with VAT reporting. All businesses still need to sit down and assess their transactions, because they need to correctly identify the VAT treatment for each transaction for both sales and purchases– and report the output VAT on their sales and input VAT on their purchases in the VAT return.
Businesses that fail to make the necessary changes to their IT systems will have to somehow prepare their first return without automation.
There’s also the issue of dealing with your customers. If you’ve got old contracts that have no VAT clause, there are transition provisions in the law that allow you to pass on the VAT cost. But you will not automatically avail the benefit if these provisions; you have work to do. You have to communicate with your customers, and even if you want to amend the contracts you need to include clauses.
When is the first filing due?
For UAE, the VAT return and payment are due within 28 days of the end of the tax period. The standard tax period will be three months although the Federal Tax Authority may allow some businesses to have a different tax period, for example, monthly. For taxpayers that are required to file on a monthly basis, the first VAT return will be due by 28 February 2018. For taxpayers that are required to file on a quarterly basis, the first VAT return will be required to be filed by 28 April 2018.
For Saudi Arabia, the VAT return and payment are required to be submitted within a month of the tax period. Companies with an annual taxable turnover of more than SAR 40 million will be required to file VAT returns on a monthly basis – the first return for such companies will be due by 28 February 2018. All other companies will be required to file VAT returns on a quarterly basis so the first return will be due for such companies by 30 April 2018.
In addition to the requirement to file returns, companies are also under the obligation to keep records and issue tax invoices in a prescribed format. There are penalties for non-compliance including late filing, late payment and failure to keep the required records and to issue a valid tax invoice.
There are practical challenges in getting ready for VAT. In terms of the invoicing, sometimes it’s not easy to change the format in the system, it can be quite complicated. Then if you’re reporting through your IT system you’ll need to do all the VAT coding and mapping of transactions. Even before you get to the transaction stage you need to have input from different stakeholders within the organisation because it effects different business units. This could mean obtaining feedback from the finance department, the legal department, procurement, operations, strategy and IT. Everyone needs to join heads to understand all the different transactions undertaken by the business and to determine the impact of VAT across the entire organisation.
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