UAE companies filing their first VAT returns will need to account for a number of variables that range from record keeping over the coming five years to making sure they don’t under claim the tariffs they collected, experts said
February 28 is the deadline for the first batch of companies to file their tax returns as the Federal Tax Authority gears up to receive payments of VAT. on Monday, the authority called on businesses whose tax period ends on January 31 to file their returns on time to avoid paying penalties. The authority has extended the tax period for some businesses and those will not have the Wednesday deadline.
“The filing of tax returns is the first really serious test of how compliant and how ready businesses are to fulfil their VAT obligations,” said David Stevens, GCC VAT Implementation Partner at EY. “There are certainly some challenges to companies, particularly those companies who left the implementation very late, so they may not have their systems fully automated to generate the information that is necessary to file the tax returns.”
The UAE, along with Saudi Arabia, are the first two GCC states to implement a five per cent VAT as part of reforms aimed at shoring up government revenue hurt by low oil prices. In the UAE, VAT is expected to yield Dh12 billion in 2018 and Dh20bn in the second year of implementation, according to government officials. The levy, however, is expected to increase consumer prices by about 1.4 per cent, officials have said.
Small and medium size enterprises are more susceptible to making mistakes because many of them were not prepared enough for VAT, experts said.
“In general many companies, especially SMEs have not gone through a thorough process to become VAT ready,” said Basit Hussain, leader of the VAT compliance centre at Deloitte. “Many SMEs did not maintain full-fledged accounting in the past and now with the implementation of VAT will require proper accounting records, timely closing and cut-off procedures and billing to customers in line with VAT requirements. In filing their returns, taxpayers, if not confident in their systems should consider over paying, and possibly erring on the side of caution, rather than reporting a shortfall.”
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The VAT return process is made up of four steps -- all conducted online as the authority seeks to simplify the filing. Registrants also can pay the taxes through The UAE Funds Transfer System, the main money transfer system, which offers direct linkage between the central bank and the authority, allowing immediate transactions of tax payments to entities covered by the system, through bank accounts and from 77 bank branches, exchange offices and finance companies around the UAE, the authority said.
The FTA has also created seven different payment methods to process any payable tax to the authority through the E-Dirham platform in the e-Services portal on its website.
“What is important to note here is that the e-Dirham card has a maximum of Dh100 million for the gold option, however the recharge is each time limited to Dh10m,” said Mr Hussain. “The e-Dirham should be bought in advance because buying a card and topping it up requires a bit of preparation.”
Companies that registered late are struggling the most to file their tax returns and likely to face more difficulties, experts said. The majority of companies that had their tax return deadlines extended are SMEs, but others include government entities and banks.
“Entities with manual accounting or without systematic bookkeeping may not be ready by February 28 for first return filling, leading to mistakes and ambiguities in VAT returns due to the rush to achieve the deadline,” said Anurag Chaturvedi, senior director at Horwath MAK a member of accounting consultancy Crowe Horwath International.
“There could be a disruption in the payment cycle due to the lack of understanding of transition provisions, which would impact smaller firms. One of the common issues surrounding the business environment is what should they do for the contracts entered in 2017 and work done in 2018. There are various complex transactions and there is no guideline available to address such issues.”
Besides automating their accounting systems and making sure they compute VAT correctly, businesses also need to keep their accounting record books for at least five years because they can be audited anytime during that period by the authority, experts said.
Other problems relate to having incorrect invoices, whether to claim or pay taxes, that could lead to penalties.
“If you are a business that wants to make a claim for input tax you need to make sure that your tax invoices from your suppliers are accurate because if there are invalid tax invoices you are not allowed to make a claim for the input tax when you are filing this VAT return,” said Mr Stevens. “Over-claiming input tax leaves you susceptible to penalty. Failure to report all of your output tax will leave you susceptible to penalties because you would have under-reported your VAT position.”
