7 Ways to Avoid VAT Penalties in UAE
The United Arab Emirates and the Kingdom of Saudi Arabia began the implementation of Value Added Tax (VAT) on January 1, 2018 at the rate of five per cent, while other GCC countries are expected to follow in the near future.
As VAT is new to the region, it is imperative for business owners to be aware and comply with the new regulations in order to avoid stiff penalties which could be as high as AED 50,000.
Seven tips for UAE businesses to avoid financial penalties that may be imposed due to violations, errors or incorrect record-keeping include:
- Register for VAT
Every company offering taxable goods or services with an annual revenue of AED 367,000 and above is required to register for VAT. However, those with an annual revenue between AED 200,000 and AED 367,000 will have the option to register. The Federal Tax Authority (FTA) has stated businesses must register within the prescribed period, and failure to do so could result in non-compliance penalties as severe as AED 20,000. In addition, unregistered companies will be required to stop sales until they receive their tax registration certificate (TRC).
- Record all transactions
The law requires businesses that meet the minimum annual turnover (as evidenced through financial records) to register and keep a record of all their business income, costs and other associated VAT charges, whilst ensuring all records are up to date. These records will be submitted to the FTA in Arabic.
However, it is advisable for businesses that do not meet the minimum annual turnover to maintain records of all transactions. Supposing the FTA arrange an inspection to determine whether or not your company should be registered for VAT, these records are the only means of evidence to make decision. Otherwise, this may be seen as noncompliance, which would lead to penalties.
- Collect VAT
Every business essentially plays the role of a tax agent, collecting on behalf of the government VAT on goods and services purchased by their consumers. Failure to collect this VAT may result in up to five times the amount of VAT being imposed on your company that would have been payable for the period in question. While there are still some uncertainties regarding the items subject to the tax, it’s recommended to follow best practices to maintain tax compliance.
- File VAT return
VAT returns must be filed monthly if your company has an annual turnover above AED 150 million. Businesses with revenue below that level must file quarterly. This can be done electronically through the FTA website. Failure to file a tax return within the specified timeframe will make the business liable for fines.
- Understand zero rates and exempt suppliers
The FTA has exempted some businesses in priority sectors from tax. Being a zero-rated supplier means that the goods being supplied are still VAT taxable, but at the rate of zero per cent. Therefore, your company is still required to record and report on all supplies. Such industries include real estate developers, jewellery, airlines, schools, clinics and hospitals.
- Reverse charges
Reverse charges are the amount of VAT one would have paid on goods or services if they were purchased in the UAE. These charges apply when goods and services are imported from outside the GCC. As the business is not required to pay VAT at the point of import. the responsibility for reporting the VAT transaction shifts from seller to buyer (under the Reverse Charge Mechanism). In this case, the buyer reports their Input VAT (on the goods purchased) as well as their normal output VAT (on sales) in their return for that quarter.
- Get the basics right
A tax invoice must be issued within 14 days of the date of supply. It is mandatory for a tax invoice to include the name, address and tax registration (TRN) of the registrant making the supply. An invoice must have a unique number and date of issue which enables identification of the tax invoice and the order of the invoice in any sequence. Also, it is mandatory for it to clearly state the unit price, the quantity or volume supplied, the rate of tax and the amount payable expressed in UAE dirham should be specified.
We know from experience in other mature VAT jurisdictions that businesses often struggle to address questions raised during audit by tax authorities. This is mostly due to the inability to produce complete documentation that substantiates liabilities and entitlements reported within the VAT return. Due to the transactional nature of VAT, it would be prudent for businesses implementing the tax to put in place a combination of automated processes and tools that can efficiently produce an audit file, upon the request of tax authorities.
More relief as three UAE free zones are out of VAT scope
The UAE’s Federal Tax Authority (FTA) has added three new free zones to the list of designated zones that will be out of the five per cent VAT scope imposed earlier this year.
The new addition sees the total designated zones increasing to 23 across the UAE.
Federal Decree Law No. (8) of 2017 on VAT specifies that any area meeting certain conditions and mentioned in the Cabinet decision is termed as designated zone for VAT purposes and should be treated as being outside the state for VAT purposes.
According to the FTA, the newly-added free zones are Al Ain International Airport Free Zone, Al Bateen Executive Airport Free Zone in Abu Dhabi, and International Humanitarian City – Jebel Ali in Dubai. The treatment of these areas as designated zones was effective from June 18, 2018.
Thomas Vanhee, partner at Aurifer Middle East Tax, said businesses that have transactions in the new designated zones will be relieved that no VAT applies on the supplies of goods inside the designated zones with some exceptions.
“Some businesses in these designated zones may potentially now deregister for VAT purposes. It will be important for them to assess again their transactions in the zone and determine which ones are actually subject to VAT and which ones are not. Although this constitutes an important relief, the transactions with designated zones can be complex,” said Vanhee.
Currently, eight designated zones are located in Dubai, five in Abu Dhabi, three in Ras Al Khaimah, two each in Fujairah, Sharjah and Umm Al Quwain, and one in Ajman.
International Humanitarian City, which is to be the largest humanitarian hub in the world with the most diverse members, has 70 members including nine UN agencies, 48 non-profit organisations and 13 commercial members. Currently, over 45 free zones are across the country.
Exports from the UAE’s free zones totalled Dh225.5 billion in 2017, a growth of 6.6 per cent from the previous year, according to the Central Bank of the UAE data. That amounts to 19.5 per cent of the UAE’s total exports recorded last year.
The UAE houses one of the highest number of free zones globally at 45 with another 10 under construction. Dubai now houses around 30 free zones.
Nirav Shah, director at Fame Advisory, said all companies in the free zones will be able to avail VAT benefits for all goods that were not to be used within the UAE since all transactions within designated zones for goods movement is outside the scope of five per cent VAT.
Technically, Shah said, the Cabinet can add more free zones, because tge VAT law says that free zones with customs-restricted access will qualify for this, so if any other free zone infrastructures are developed and meet this criteria, those can also be included in the designated zones.
According to Mayank Sawhney, director at MaxGrowth Consulting, the Cabinet decision had said earlier that designated zones can be added or removed from the list.
“In the future, more free zones can be added if they fulfill the criteria of designated zones such as custom control, fenced boundaries and controlled movement of goods going in and out of it,” Sawhney said.
He pointed out companies from specific sectors are increasingly looking at moving into one free zone as it benefits them from cash-flow perspective because they are heavily involved in bilateral trade and dealings.
“In Dafza [Dubai Airport Free Zone], there a number of mobile phone companies that are engaged in buying and selling to each other. So, having a presence in one designated zones will not block their cash flow,” he added.
FTA issues more clarification on labour accommodation
Meanwhile, the FTA also issued clarification about the issue of the applicability of five per cent VAT on labour accommodations.
“In the initial period, there was confusion whether labour accommodation is chargeable or not. Subsequently it was clarified by the FTA that labour accommodation is treated as residential property and hence exempt from VAT. In essence, where additional services such as cleaning, Internet etc. are provided as part of the composite labour accommodation service, there is a single pricing and it is provided by the same supplier, it will be treated as residential property and will be exempt from VAT,” said Girish Chand, director at MCA Management Consultants.
He also pointed out that where the labour accommodation is a mixed supply consisting of various elements and it is charged separately, the tax treatment of each component will have to be determined separately.
Now hiring: Banking and finance professionals back in demand, says recruiter
The improving fortunes of banks in the United Arab Emirates and Saudi Arabia, coupled with the introduction of value-added tax (VAT) in both markets, has led to an increase in demand from for finance professionals, according to a new survey.
Recruiter Robert Walters said that its Middle East Jobs Index recorded a 32 percent increase in demand for banking and financial services professionals in the UAE, and a 26 percent increase in demand for accounting and finance staff.
Saudi Arabia also witnessed a 26 percent increase in demand for accountancy and finance staff, plus a 55 percent increase in the number of legal posts advertised.
Overall, the number of advertised jobs climbed by 81 percent year-on-year in Saudi Arabia during the first quarter, the company said.
“The job index reflects the sentiment across the banking sector in both UAE & KSA,” James Grundy, country head at Robert Walters was quoted as saying in a press release announcing the results. Although many banks in the UAE were making headcount cuts as late as last year, Grundy said that that several banks in both markets had recently reported “double-digit growth” in quarterly results, and that several regional and international banks are looking to establish a presence in the Saudi market.
Demand in the accountancy and finance market had been driven by the introduction of VAT, the firm said, adding that it has created new roles both within major public practices firms and within companies.
“The most in-demand roles so far this year are tax managers, financial planning and analysis and controllers. Candidates who are qualified with good enterprise resource planning (ERP) experience and mergers and acquisitions exposure, will be in high demand in 2018,” Grundy added.
In Saudi Arabia, he added, jobs growth was being driven by Vision 2030 initiatives and the requirement for firms to hire more Saudi workers from both sexes.
“The main challenge for employers, both local and international companies, is to hire good quality Saudi talent,” Grundy said.
The company said that despite the forthcoming Ramadan and Eid holidays, improving market sentiment meant that growth was likely to continue in local jobs markets in the second quarter of the year.
Key points on VAT registration in UAE
The Federal Tax Authority (FTA) has stressed that all businesses subject to the implementation of value added tax (VAT) should be fully aware of key on registering for VAT.
Khalid Ali Al Bustani, Director-General of FTA, urged business sectors to learn and understand key information, which has been identified based on the first period of VAT implementation, with the new taxation system coming into effect from January 1, 2018.
He said that it was incumbent on all businesses to ensure that they are compliant and properly registered.
“This continuous follow-up is a commitment by the FTA to adopt the highest standards of transparency and accuracy in its efforts to achieve optimum implementation of tax systems locally and to avoid misconceptions that can lead to the arising of issues that can have a negative impact,” he said.
“This information is being added to the existing guidelines, laws and regulations available through the FTA’s website: www.tax.gov.ae, as well being made available in the form of infographics, short film presentations and induction workshops in the UAE. The messaging has been designed to guide community members and business sectors to the mechanisms of calculating VAT, to explain the steps and procedures related to it, and to outline the obligations of each party,” he added.
The FTA clarified that included in the information were seven essential pointers to ensure optimum VAT implementation, including:
Businesses whose supplies are less than Dh375,000 are not required to register for tax
Businesses must register for VAT if their taxable supplies exceed Dh375,000 over the previous 12 months, or expected to exceed the threshold in the next 30 days. Businesses with supplies less than voluntary registration of Dh187,500 cannot register with the Authority to obtain a tax number and are not required to have a tax registration number (TRN).
Natural persons are subject to VAT if their supplies exceed the mandatory threshold
A natural or legal person in business is required to register for VAT if their taxable supplies exceed the mandatory registration threshold of Dh375,000 000 over the previous 12 months, or expected to exceed the threshold in the next 30 days. They should register as soon as possible to avoid late penalties and the accumulation of payable tax duties.
The tax registration number (TRN) is sufficient to carry out all commercial activities.
Providing a TRN is sufficient to carry out any business or other economic activity, which can be verified using the service of the TRN verification through the FTA website at www.tax.gov.ae. Businesses do not need to wait for the completion of a VAT registration certificate in order to trade – a TRN is sufficient. This policy is in line with FTA’s continuous efforts to ensure there’s no negative economic impact on businesses that could result from not being permitted to trade.
Registration is continuous
Registration for VAT is continuous for either new business or businesses reaching the mandatory registration threshold or late registration cases for which the legal process will be applied upon registration.
Computation of the mandatory limit according to revenues.
The mandatory registration threshold shall be calculated on the basis of total business turnover relating to taxable supplies provided no explicit provision for exemption has been issued. The registration threshold is calculated on the value of imported goods and services and not based on profits.
Exemption from the late registration penalties only until the end of April.
The FTA’s decision to exempt late business sectors from VAT registration procedures applies only up until the end of April 2018. All taxable businesses are still required to settle all due taxes due from January 1, 2018.
Unregistered businesses are not entitled to impose tax
Unregistered businesses are not entitled to impose a tax on their customers and therefore cannot issue tax invoices. Such businesses will still have to pay tax on imported goods before they clear customs outlets. Violating parties will be required to pay an administrative penalty of Dh20,000.