#Dubai tops the Middle East & ranks 5th globally ahead of Madrid, Amsterdam, Sydney & Tokyo in CEOWORLD magazine’s survey of the Best Cities to Live in the World for Expats 2020.
What are the major impacts of VAT
In this article, KT has assessed the impact of VAT on businesses, individuals, government and overall economy
Since VAT is a consumption and multistage tax, so it has an impact on each player of the supply chain and individuals, who are buying the goods and services for consumption purposes. It has an effect on the economy and it is a major source of revenue for the government. In this article, we have assessed the impact of VAT on businesses, individuals, government and overall economy.
(a) Impact of VAT on businesses
There are some common impacts of VAT on each business and some specific impacts, based on the categories of supplies.
(i) Common Impacts of VAT on Businesses
Whenever VAT is being introduced in any country, every business is required to have an impact assessment to assess the impact of VAT. Based on the impact assessment, they will be able to know, on which areas of business VAT will have an impact and what are they required to do to implement it properly. Like based on the impact assessment, they will be able to adopt the proper tax position of their supplies. Businesses will be able to know eligibility of VAT registration, impact on their working capital and system, required changes in the processes, compliance requirement etc.
Based on the impact assessment, businesses are required to implement the VAT properly which requires changes in the system, tweaking existing processes, training to the employees, communication with the suppliers and customers etc.
Once the VAT is up and running, businesses are required to submit the VAT Return, and while submitting the VAT returns, businesses cannot claim input tax on some purchases/expenses like expenses for throwing parties, expenses related to Car which can carry less than 10 people and is available for personal use, expenses related to the dependents of the employees where companies have no legal obligations, non-business expenses etc. All such blocked input tax will become cost of the businesses.
Businesses requires work force to comply VAT so it will lead to increase in administration and hiring cost. Sometime, companies are required to hire consultants which will lead to increase the consultancy charges.
(ii) Specific impact of VAT on businesses
So far as specific impact of VAT is concerned on businesses based on the categories of supplies, the industries that are dealing with standard rated supplies, VAT will impact the purchasing power of their customers and it will have a negative effect on the demand of their supplies. VAT registered companies which have longer payment terms with the customers and shorter payment terms with the suppliers, VAT will have adverse impact on their working capital, and vice versa.
Businesses which are dealing with the exempt supplies, like local passenger’s transport, banks and financial institutions offering margin-based services, suppliers of bare land etc will not be able to claim related input tax and such input tax will become their cost which will lead to increase in the operating cost of the business. Most probably, such businesses will pass on this cost to their customers by increasing the prices of their supplies to achieve their targeted margins so it will have a negative impact on the purchasing power of their customers which will affect demand of their supplies.
Businesses that are dealing with zero rated and out of scope supplies, VAT will not have any major impacts on them except the common impacts as mentioned above.
(b) Impact of VAT on individuals
Individuals who are buying standard rated goods and services for consumption purposes, they would be liable to pay five per cent VAT, and Individuals who are buying VAT exempt goods and services, most probably, they would be liable to pay higher prices. Such purchases will have a negative impact on their purchasing power. However, if they are buying zero rated or out of scope supplies, they wouldn’t be liable to pay any VAT and/or increased price which will not have impact on them.
(c) Impact of VAT on the government
Globally, taxes are the major source of revenue for the Governments and Governments across the globe spend these taxes for the welfare of the public. In the same way, VAT has become a source of income for the Government of United Arab Emirates (UAE) and UAE Government spends this income for the welfare of the public by developing world-class infrastructure, hospital, roads, medical facilities etc.
Moreover, VAT has reduced reliance on the oil-generated money and led to diversified sources of income for the Government which is a sign of healthy and matured economy.
(d) Impact of VAT on the economy
I am always saying, this is not only introduction of VAT, but the documentation of the whole economy. Government will be able to know the sales and purchases of each registered supplier in the supply chain, which would be helpful for the Government to take decisions.
Moreover, standard rated and exempt supplies of goods and services will make supplies more expensive and it will push the inflation rate up based on average supply of standard rated goods and services in the market.
Dubai ranked as best city for expats in Middle East
Dubai has also ranked fifth globally higher on the list than cities such as Sydney, Amsterdam and Tokyo.
Dubai has been ranked first in the Middle East and fifth globally among the best cities for expats to live and work in 2020.
According to a CEOWORLD Magazine, Dubai has ranked higher on the list than cities such as Sydney, Amsterdam and Tokyo.
The cities were ranked based on local friendliness, cost of living, quality of healthcare, safety, ability to raise a family, and career opportunities.
The magazine asked 127,000 expats from 186 cities to rank the best cities in the world to live and work in 2020.
The survey, conducted by CEOWORLD magazine on Oct 10, 2019, to Jan 2, 2020, was open to all expats over 18 who are currently living away from their home countries.
Dubai introduces instant bank account for new entrepreneurs
Dubai Economy has established a blockchain consortium in partnership with six UAE banks, whereby freelancers and entrepreneurs in Dubai will soon be able open bank account instantly.
“KYC (Know Your Customer) Blockchain Consortium” consists of Emirates NBD, Emirates Islamic, HSBC, Rakbank, Abu Dhabi Commercial Bank and Commercial Bank of Dubai.
Through the first KYC blockchain platform to be introduced in the UAE, authenticated and validated KYC data of companies will simultaneously be shared with financial institutions of their preference. This will expedite the opening of a bank account for newly registered companies and reduce the burdensome and costly requirements of managing KYC data for already registered companies. This is in stark contrast to the status quo, whereby multiple paper-based KYC files are redundantly originated and managed in silos.
Opening a bank account has been a major hassle for new entrepreneurs, freelancers and small businesses due to tough requirements from the banks and this platform will make life much more easier for them.
“The platform will offer a digital ‘Instant Bank Account’ functionality, allowing for faster and less cumbersome onboarding journey with banks and significantly improving the experience of new investors looking to establish themselves in the UAE. This in turn will boost customer satisfaction as well as ease of doing business in the UAE as a whole,” said Ali Ibrahim, deputy director-general of Dubai Economy.
He said this initiative will eventually become a nationwide ecosystem and invited other financial institutions and licensing authorities to join this initiative. The KYC platform will be launched in the first quarter of 2020 at which point it will open for additional qualified financial institutions and licensing authorities to join. Smart Dubai in collaboration with the UAE Central Bank will play a pivotal role in overseeing and regulating the Consortium operations.
Wesam Lootah, CEO of the Smart Dubai Government Establishment, said blockchain has tremendous potential to streamline services and operations, saving time, money, and resources for everyone involved – individuals, companies, or governments.
The consortium has partnered with global blockchain KYC firm norbloc as the technology provider to enable the ecosystem through its Fides KYC Platform while Dubai Pulse is the government-certified blockchain platform enabler.
Saoud Al Jassem, head of government banking at Abu Dhabi Commercial Bank, said, the Blockchain KYC Production Platform will allow corporate clients to experience seamless registration and account opening and enhanced KYC capabilities. “Additionally, it will ensure the UAE, in line with the Vision 2021, is a world leader in terms of the ease of doing business in the country. ADCB looks forward to working with the DED, norbloc and the consortium members to expand the Blockchain KYC Production Platform across the UAE.”
Geoff Stecyk, COO of RakBank, said they are thrilled to be a part of the nationwide initiative created by Dubai Economy called ‘Instant Bank Account’ that aims to digitize the onboarding process, making it more seamless, secure and frictionless.
“The concept of a Blockchain-based KYC platform will optimize costs by enabling financial and banking institutions to deviate from the outdated process of identification verification and take full advantage of today’s blockchain technology that has the potential to be faster, easier, safer and more efficient than the traditional verification processes,” he said.
VAT: Mind your boundaries
It is a fundamental principle of value-added tax (VAT) that it can be charged only on goods or services sold within the defined boundaries of a country – which in technical terms is referred to as ‘VAT jurisdiction’ or ‘territorial scope’. If goods or services are sold outside such boundaries, it would not attract VAT.
Every country which has introduced VAT, specifically defines its boundaries, either in the VAT Law or any other ancillary Law. The UAE’s VAT Law does not define ‘the UAE’. However, the Constitution of the UAE provides that the union shall exercise sovereignty over all territory and territorial waters lying within the international boundaries of the member Emirates. Further, it is understood that the sovereignty of the UAE extends beyond its land territory and internal waters, to its territorial sea, the airspace over the territorial sea as well as its bed and subsoil.
Thus, if goods or services are sold outside the defined boundaries of the UAE, be it soil, airspace or sea, it would be treated as outside the scope of UAE VAT and then tax would not apply. In the following cases, the VAT Law provides that the services shall be provided where they are performed or physically carried out.
. Services related to goods, such as the installation of goods supplied by others;
. Restaurant, hotel, and food and drink catering services;
. Any cultural, artistic, sporting, educational or similar services.
Additionally, for the supply of services related to real estate, the supply shall be made where the real estate is located.
Thus, any supply of service which is performed outside the boundaries or territorial limits of UAE or where the real estate is located outside the UAE, such services may be considered as outside the scope of UAE VAT Law and would not attract VAT. The following examples would be relevant.
. Catering services provided on rigs located beyond the territorial sea limits of UAE would not attract VAT since the services are performed outside the boundaries of the UAE.
. Instructor lead trainings provided outside the UAE to employees of a UAE-based company should be outside the scope of UAE VAT Law.
. For goods sold by one person to another in the UAE where the goods never physically come within the boundaries of the UAE; such transactions would not attract VAT.
. Oil exploration services provided beyond the continental shelf or boundaries of the UAE would be outside the scope of the UAE VAT Law since they are performed outside the boundaries of the UAE. This would be irrespective of where the supplier and customer are located.
. Repairs and maintenance services provided for ships or oil rigs located outside boundaries of the UAE may not attract VAT.
. Insurance of a property located outside the UAE, which is owned by a UAE resident may be outside the scope of UAE VAT Law. Again, this is irrespective of whether the insurance company or property owner are in the UAE.
Under the UAE VAT Law, a person who supplies goods or services which attract five per cent VAT, is eligible to claim back the VAT paid on goods and services purchased by such person. Further, the law provides that a person who supplies goods or services which are exempted from VAT is not allowed to claim back the VAT incurred on his expenses.
The law also provides that a person can claim back VAT paid on goods and services used for making supplies made outside the boundaries of the UAE which otherwise would have attracted five per cent VAT had they been made within the defined boundaries of the UAE.
In all the above cases, the supplier of the service would be eligible to claim back VAT paid on expenses incurred for rendering the out of scope supplies. This is in light of the fact that such services would have been taxable had they been performed within the boundaries of the UAE.
It may be noted that the above are few illustrations and there could be other supplies made outside the boundaries of UAE VAT Law. It is observed that some taxpayers have not considered the territorial scope of the UAE and have incorrectly charged five per cent VAT even though the supply is outside the scope of UAE VAT Law. Thus, the territorial scope and the place of supply needs to be carefully determined, i.e. whether the supplies are made within the boundaries of the UAE and hence would attract VAT. In the event of ambiguity, it would be ideal to approach the Federal Tax Authority to seek clarity on the territorial scope of UAE VAT Law.