Ready or not, a 5% value-added-tax (VAT) will make its January 2018 maiden entry into the UAE business landscape, and from the looks of it, most companies are either oblivious to it, or in denial. Perhaps they’re awaiting the new tax law to be issued, or a last-minute change of heart by federal authorities. Truth be said, unless businesses get their VAT act together, this simple levy on services and products could turn into a complicated burden on private enterprise, especially for those in the design and build industries.
“People have worked in a tax-free environment for years and the introduction of VAT in the UAE is a little disconcerting for businesses,” said Rakesh Pardasani, Partner at RSM Dahman, a leading audit and tax advisory firm in the UAE.
“A large number of people that we do business with, speak to, or are coming to us for advice on these services are totally unprepared. They need to start looking at this very carefully, and soon,” stressed Pardasani.
Rakesh Pardasani is a veteran chartered accountant, tax advisor and partner with a globally renowned audit and tax firm. You certainly don’t want to miss his September 26 talk at the Big 5 Outdoor Design and Build Show, Dubai World Trade Center, where he plans to discuss ‘VAT Considerations for the Design & Build Industry’, among other tax insights.
VAT is a tax that is essentially and eventually paid by the final consumer, and where the impact on business is not the actual tax – a low 5% compared to other countries – but rather the compliance cost for meeting those tax requirements, which could be significant.
“VAT is a self-assessed tax with businesses acting as levy collectors, and handed the responsibility of gathering the right amount and later paying it to the government within a specified deadline,” explained Pardasani.
“Compliance and mistake free-filings are very important to avoid costly penalties later on.”
Payers of the VAT also need to claim their refund in a timely manner whenever applicable.
“The problem is that most people don’t even have proper books of accounts to calculate the impact of VAT and assess their liabilities come January 2018.”
Every industry has its own trade practice which will impact tax applicability on respective businesses in that sector. The design and build industries rely heavily on subcontracting, where VAT figures prominently and requires closer inspection than say pure sales/trade transactions.
All subcontracting costs usually carry a VAT and clients of these services can essentially reclaim that charge upon invoicing to the final client, but, according to Pardasani, what needs to be assessed is whether either sides of the transaction are liable to VAT or not, to begin with.
To figure this out, he lays out a few scenarios.
“Subcontracted work by a UAE business for a UAE/GCC client is subject to a 5% VAT which can be claimed as an input credit. On the other hand, subcontracted work for a non-UAE/GCC customer, such as exporting designs to other parts of the world, do not fall under the scope of VAT and as such businesses who locally subcontract work may not be able to reclaim the VAT paid on these services, simply because the final exported “products” are very likely not under the scope of VAT.”
Similarly, a French company cannot impose its country’s VAT rates on its exports. But it gets trickier. Under the export of services, where a local company is subcontracted to do work for a foreign entity, there are special rules for Place of Supply that will be looked at. The standard rule is of course, the location of the Supplier. But in special cases, for instance real estate, the special rule will apply which is the Location of the real estate. Similarly there are differences in the applicability also when the service is provided to a Business, such as a UAE design firm designing a mall in London or to an end consumer, such as a UAE design firm designing a home in France.
When it comes to the design and build sector, you can count on many other types of transactions needing to be looked at in more detail.
“If design services are requested from providers residing outside the UAE/GCC, there is no input VAT on these, but there might be a reverse VAT charge applicable. A reverse charge VAT is germane on all imports and cost ledgers will be calculated virtually as if there were a VAT.”
Some businesses may be providing turnkey solutions which include design, materials, and build elements, all in one lump sum price, and in such cases, the VAT will apply to the total.
“However, some parts of the agreement may be subcontracted locally, while others may be imported, or exported, so again, for that business, it will have to implement proper systems to calculate the VAT input on each transaction,” said Pardasani.
Additionally, there are certain sectors where the government has decided not to collect VAT from the end consumer, such as for the sale of residential units (subject to fulfilling certain conditions). Developers cannot add VAT on the sale of finished units/homes because these developments enjoy special exemption, likely aimed at preventing inflating the cost of properties on buyers and thus incentivizing the sector.
Companies will need to hire additional resources, engage the services of tax experts, and amend internal IT systems, to account for new laws and provisions, towards VAT compliance and timely tax filings.
It appears that the federal tax authorities in the UAE will have their own tax auditors and inspectors. And just like the American IRS system, if the tax authority feels it needs to look more closely into certain company accounts, it will select a few clients for a more thorough audit.
March 31st 2018 will signal the end of the first quarter and VAT returns will be due 30 days later. Failure to file on time could incur government penalties amounting up to 5 times what was originally payable or due, especially in cases where intentional fraud was suspected, not to mention the additional interest accrued during the elapsed payment deadline and any civil penalties for tax evasion that the courts may levy.
“The good thing is that the UAE rules to be introduced, and the flat 5% rate on all products and services, make VAT implementation and compliance relatively easier than in other countries,” said Pardasani.
“Most small to mid-size companies will be able to be able to get familiar with and ready for VAT requirements within a few months, if they start now.”