On January 1, value-added tax (VAT) will come into effect for the first time in the United Arab Emirates and Kingdom of Saudi Arabia.
The legislative implications present many challenges for business owners in the region. Additionally, the incorrect implementation of VAT by business owners will come at a significant cost and exposure to penalties as recently detailed by the UAE.
While this may seem like a daunting task for many in both the UAE and KSA, firms can take a three-prong approach to understand the basics of VAT ahead of January. This would include a focus on timely registration, VAT compliance procedures and transitional provisions for contracts.
Registration: Deadlines to register your business for VAT are perhaps the most crucial aspect of preparing your business. The failure to register on time may lead to heavy penalties. In the UAE, companies that did not register within deadline, which passed on 4 December, will be liable to an administrative penalty of AED 20,000.
In Saudi Arabia, however, businesses have had a longer lead in time. Businesses with an annual turnover that exceeds the mandatory registration threshold of SAR 375,000, but fall below the threshold of SAR 1,000,000 may defer registration until 20 December, 2018.
Separately, the Saudi Arabian Tax Authority has also automatically registered many large businesses with an annual turnover surpassing SAR 40 million based on existing information. Having said this, other companies that have failed to register in time will be liable to a SAR 10,000 penalty.
Transitional Provisions in Contracts: Many businesses never anticipated the day that taxation would be introduced to the GCC. So, what happens to those contracts that roll into 2018 and are silent on VAT? It is important for businesses to review the transitional provisions when assessing their existing contracts and while drafting new agreements before 1 January 2018.
Both the UAE and Saudi Arabia have special rules to protect businesses that did not consider the implantation of VAT in their existing contracts.
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In the UAE, where the contract is silent on VAT, the price will automatically be deemed to be inclusive of VAT. The question remains on who will bear the burden of the tax in these cases. If the contract was concluded prior to the implementation date and a part of the supply is made after the implementation date for example, suppliers will be able to pass on the VAT to the customer, however this is only if the customer is registered for and can recover VAT.
In Saudi Arabia, for contracts that were entered into before 31 May, 2017 and are silent on VAT, the supply can be treated as zero rated until the completion of the contract or 31 December, 2018. This only applies where the customer is registered for VAT and is entitled to deduct the VAT incurred on their purchases.
VAT Compliance: Once VAT has been implemented, businesses will be required to file VAT returns to the government on a regular basis. This presents a first for many regional business owners and the legal requirements again differ from country to country.
In the UAE, VAT returns will generally have to be submitted on a quarterly basis, with the returns and payments due within 28 days after the end of the period.
However, In Saudi Arabia, companies with an annual income in excess of SAR 40 million must file returns on a monthly basis. Companies under this threshold will subsequently be required to file their returns on a quarterly basis. VAT returns and payments will be required to be made within a month of the end of the relevant period.
So what steps can you take to prepare your business? There are 10 key actions that a firm should consider taking in order to effectively prepare for VAT ahead of January 2018. These include:
Project Planning: Prepare a budget for implementation and assign responsibilities within your team
Raising Awareness: Educate and train employees on the impact of VAT on accounting and reporting processes
Begin Mapping Transactions: Classify VAT treatment of all business transactions
Understand Cash Flow and Working Capital Requirements: Assess cash flow impact as VAT is paid on accruals basis
Preparing Systems and IT: Analyse existing account systems, their capability and upgrade or replace IT systems in order to produce tax reporting
Analyse Pricing Framework: Consider the impact on pricing and customers
Review Contracts: Review existing contracts with customers and suppliers that span the implementation date, review payment terms and include VAT clauses where applicable
Processes: Determine changes required to existing accounting processes and documentation
Customer & Supplier Management: Establish effective communications with both customers and suppliers
Compliance: Consider whether your company is required to register and if so register, file the VAT returns and pay VAT from 2018.
Generally VAT is not imposed as a cost to businesses; however, the responsibility of accounting for VAT resides with the individual companies.
If implemented correctly, VAT should have a neutral impact on most businesses. However, many firms must anticipate a long lead-in time to effectively manage risks. There are a number of financial and legal repercussions to incorrectly applying VAT therefore it is imperative for businesses to be prepared now by proactively assessing the impact of VAT on their operations.
Shiraz Khan is a senior tax advisor at Al Tamimi & Company
