Author: Thomas Vanhee

Saudi Arabia Proposes Transfer Pricing Documentation Rules

Post author By Thomas Vanhee
Post date December 17, 2018
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Bahrain third GCC country kicking of VAT

Saudi Arabia Proposes Transfer Pricing Documentation Rules

Would require multinationals to document intercompany transactions
Kingdom trying to stop profit shifting to low-tax countries

Saudi multinational companies would have to prepare transfer pricing documentation beginning Jan. 1, 2019, under draft rules aimed at the disclosure of all intercompany transactions.

The draft regulations, issued Dec. 10 by the General Authority for Zakat and Tax (GAZT), would incorporate some of the Organization for Economic Cooperation and Development’s base erosion and profit shifting final reports into domestic law, Shiraz Khan, a senior tax adviser at Al Tamimi and Co. law firm in Dubai, told Bloomberg Tax. They would “expand the tax base in Saudi Arabia by targeting companies that are using related party transactions to shift profits to other countries with lower tax rates.”

Because many countries require multinationals with operations in their jurisdictions to prepare transfer pricing documentation, many Saudi multinationals already have transfer pricing policies in place in those countries.

“Under the current Saudi income tax law, companies that are subject to tax are already required to conduct related party transactions on an arm’s-length basis,” Khan said by email Dec. 17. “However, there is no specific requirement to have transfer pricing documentation in place. Companies will now have to comply with the additional requirements.”

The draft regulations are open for public comment until Jan. 9.

Disclosure Forms

Under the draft regulations, companies would have to complete controlled transaction disclosure forms, and maintain files detailing the group’s transfer pricing policy, and those of its entities, including an explanation of the transfer pricing methods, said Laurent Bertin, an adviser at Aurifer Tax Consultants in Dubai. The regulations apply to controlled transactions with an annual aggregate value exceeding 6 million riyals ($1.6 million).

Bertin said the regulations would also require companies with a turnover of more than 3.2 billion riyals ($850 million) to file country-by-country reports. The reports provide a snapshot of a company’s financial data—including taxes paid and number of employees—for each country in which the company operates.

Companies would have to submit the appropriate notification that transfer pricing documentation has been prepared to GAZT within 120 days after the end of its fiscal year.

Country-by-country reports would have to be filed within 12 months of the last day of the fiscal year.

“Saudi headquartered multinationals will have to incur professional services fees, as well as allocate staff and time toward maintaining this documentation,” Bertin said by email Dec. 17. “Companies must keep evidence of the invoiced work, especially when it is intangible,” such as management fees for “rendered services” including internal seminars, memoranda and presentations, he said.

Profit Shifting

Saudi tax authorities may say that more of the companies’ profit should be attributed to the kingdom, Khan said. “It is possible that GAZT may argue that additional profit should be recognised in Saudi Arabia where the prices for related party transactions were manipulated to pay less tax in the kingdom or otherwise where there is no transfer pricing documentation in place to support the price,” he said.

With a 20 percent corporate income tax, Saudi Arabia has an incentive to attribute more profit to the foreign company, Bertin said. Saudi companies “with affiliates in low tax jurisdictions will be the subject of greater scrutiny. Thanks to the new TP rules, GAZT can easily track all controlled transactions and adjust the tax base when the transactions are not considered priced at arm’s length.”

GAZT’s implementation of a value-added tax since January 2018 suggests it will “take a close look at TP documentation and learn quickly how to implement these new rules and to perform comprehensive tax audits,” he said. “An increase in tax audits due to these regulations is definitely to be expected.”

Companies must ensure they are compliant by revising their group structures and intragroup transactions, maintaining appropriate documentation in a timely manner and preparing for increased audits “since GAZT now has a new base for tax reassessments,” Bertin said.

VAT

Bahrain releases further information on VAT

Post author By Thomas Vanhee
Post date December 4, 2018
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Bahrain releases further information on VAT

Important VAT update from Bahrain

With less than one month to go before the VAT will be implemented in Bahrain, the MoF of Bahrain and the National Bureau for Gulf Taxation organised an informative session yesterday.

During the session more information on the Bahraini VAT rules was provided. See below an overview of the main points:

I. Registration deadlines

Three deadlines are applicable:

20 December 2018: businesses with turnover > BD 5 million, effective date is 1 January 2019.
20 June 2019: businesses with turnover > BD 500,000, effective date is 1 July 2019.
20 December 2019: businesses with turnover > BD 37,500, effective date is 1 January 2020.

No threshold is applicable for non-resident companies. Businesses which are not already contacted by the tax authorities have to register through a portal that will be available soon.

II. Filing VAT returns

Four options are applicable:

Quarterly in 2019: businesses with turnover > BD 5 million.
Semi-annual in 2019: businesses with turnover < BD 5 million.
Monthly in 2020: businesses with turnover > BD 3 million.
Quarterly in 2020: businesses with turnover < BD 3 million.

III. Invoice requirements

No requirement for invoices to be in Arabic.
Simplified invoices can be issued for supplies to non-registered customers and for supplies with an amount < BD 500.
Bank statements will be valid as tax invoices for banks.
The required mentions on the invoices will be similar to KSA’s rules and the potential number of the required mentions will be around 14.

IV. Real estate

Zero rate: construction of all buildings (residential and commercial).
Exempt: sale and lease of all buildings (residential and commercial) and bare land.

V. Financial services

Dividends are out of scope of VAT.
Life insurances are exempt from VAT, all other insurances are subject to VAT.

Further information is expected soon, so keep checking our daily updates for news. Please treat this update with the necessary caution as currently the Executive Regulations have not been published yet.

Uncategorized

Bahrain to Roll Out VAT System in Stages Before Official Launch

Post author By Thomas Vanhee
Post date November 30, 2018
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Special Tax Payers in the GCC: Exempt taxable persons

Bahrain to Roll Out VAT System in Stages Before Official Launch

Businesses with turnover exceeding $13 million must register by Jan. 1
Companies await implementation regulations and timetable for smaller firms

Bahrain wants large companies to register for the 5 percent value added tax ahead of its official rollout in January.

Companies with an annual turnover exceeding 5 million dinars, ($13.26 million) are being asked to register for the VAT on all goods and services before the system is officially launched at the beginning of the year, according to Bahrain’s finance ministry. Bahrain will be the third Gulf Cooperation Council country after the United Arab Emirates and Saudi Arabia to introduce the tax. Oman, Kuwait and Qatar are expected to follow shortly.

Under a 2017 agreement, all GCC states will collect VAT from businesses with revenues of 375,000 Saudi riyals ($100,000) or more by Jan. 1, 2019. Registration thresholds for smaller companies haven’t yet been announced.

“Taxpayers who have commenced their preparations should see them through,” Michael Camburn, head of VAT for Deloitte in Bahrain, said in an emailed comment Nov. 29. “The interim threshold for VAT registration could be altered at any time which would leave little time for the necessary changes to be made to accounting, financial, and other systems.”

VAT implementation details and the treatment of different sectors is left to the individual jurisdictions. In launching the tax system, the Gulf states are seeking to stabilize their budgets and replace lost revenues from oil, the price of which has fluctuated dramatically since 2014.

To charge, collect and remit VAT on time in compliance with the tax law, companies in GCC countries must update their information technology, accounting and billing systems, train employees and, in many cases, engage external tax advisers, according to practitioners. They must also maintain new tax records, together with original documentation in case of queries, for inspection on demand by the authorities.

Early indications are that VAT revenues are set to exceed an earlier EY estimate that 5 percent VAT will produce more than $25 billion per year for the six GCC countries. In the first three quarters of 2018 alone, Saudi Arabia collected more than 80 billion riyals ($21.3 billion) in taxes on goods and services, according to Jadwa Investment Research.

Staggered Implementation

Bahrain’s decision to require large companies to register early suggests that the introduction of VAT in the country will be staggered, Deloitte said in a note to clients Nov. 29.

The country has yet to announce when other companies above the minimum 37,500 dinars-threshold must register or whether they can do so voluntarily.

Bahrain’s National Bureau for Taxation will hold a series of briengs to help companies prepare to implement the executive regulations, which haven’t yet been published but “include a detailed explanation of the operational and procedural aspects of the law,” approved Oct. 9, Rana Faqihi, the bureau’s assistant undersecretary for development and revenue policies said in a statement Nov. 28.

“It does take pressure off SMEs and allows the National Bureau of Taxation to manage a smaller group of businesses in the first instance,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. “In adopting this policy, Bahrain’s finance ministry is copying the Saudi tax authority, which had the exact same smart policy.”

Businesses Want Details

“With one month to go, the executive regulations are still not published,” whereas Saudi Arabia published its regulations nearly five months before its tax began on Jan. 1, Vanhee said by email Nov. 29. Bahrain’s finance ministry “will need to communicate extensively between now and Jan. 1, 2019, in order to inform businesses as much as possible.”

For multinationals, Bahrain’s VAT should pose few problems because they operate in other tax jurisdictions, including the Gulf for the past year, but the lack of information is causing some concern.

“The situation is very blurry,” said Katrijn De Naeyer, indirect tax manager EMEA for projects and planning at Johnson Controls, a multinational conglomerate that produces and ships batteries and electronics. “We don’t have the 5 million dinars revenue that they’re asking for so we’re more at ease but at the same time there’s so much uncertainty for a company, which is making it difficult to plan ahead.”

The firm is using its experience in the UAE last year, along with external advisers, to prepare. VAT won’t have much impact on revenue, so the main issue is compliance, De Naeyer said by phone from Brussels.

“In the UAE it was also very last-minute. In the end we were fine,” she said. “But here in Bahrain they are even later issuing the implementation guidelines. It’s a bit more stressful now because we know nothing. At least in the UAE we knew half a year before it actually went live. We are getting our VAT systems ready to go ahead. From the moment we know something more we’ll be able to press a button and go live.”

Under the GCC’s VAT treaty, other member states were due to start implementing the tax within 12 months from its start in the UAE and Saudi Arabia. That timetable has slipped.

“Although Bahrain will technically have introduced VAT just within the requisite time period, the registration threshold is by far the highest in the world, is in breach of the GCC Unied VAT Agreement, which provided for a threshold of the equivalent of 375,000 Saudi riyals,” said Jeremy Cape, tax and public policy partner at Squire Patton Boggs law rm in London.

“There is some sense in trying to avoid the issues that arose with the ‘Big Bang’ approach in the UAE, and the struggles that the tax authorities and smaller taxpayers faced,” but the high threshold provides “straightforward avoidance opportunities for large businesses, distorts the market and is unsustainable in all but the very short term. It will be interesting to see the reaction of the UAE and Saudi Arabia,” Cape said by email Nov. 29.

Int'l Tax & Transfer Pricing

The impact of the US tax reform on the GCC

Post author By Thomas Vanhee
Post date November 28, 2018
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The impact of the US tax reform on the GCC

In order to boost job opportunities in the US, to increase US tax revenue, and capital and profits, support the growth of the US economy, and to prevent companies from shifting their revenue to foreign countries, the US Tax Cuts and Jobs Act entered in force on 1 January 2018.

It represents a major change to the US tax system, holding high significance particularly to multinational companies and the US economy as a whole.

In the long term, the reform is predicted to raise the US GDP and wages, assuming that the tax cuts will provide increased stimulus for investment and activities, thereby increasing labor demand. These new incentives and deterrents have consequences on the foreign investments of US companies, including in the GCC region.

WHAT’S HAPPENED?

The US Tax Cuts and Jobs Act entered into force on 1 January 2018 is meant to significantly positively impact businesses.

Through this reform, along with an important reduction of the corporate income tax rate, another major change in the US taxation system appeared: the worldwide US taxation system has been switched to one that is very close in nature to a territorial system. This shift is accompanied by a “transition tax” and implies that corporations doing business abroad will no longer be taxed by the US on the profits they generate overseas.

While the reform brings restrictions on interest and loss deductions, related party payments and movements of intangible property (IP), it also introduces favorable dividend exemptions, capital investmentand exportincentives. This will ideally provide the necessary push to repatriate reserves of cash held overseas.

The reform also introduces new anti-avoidance and incentive tax measures, namely the Base Erosion and Anti-Abuse Tax (BEAT), the Global Intangible Low Taxed Income (GILTI) and the Foreign Direct Intangible Income (FDII).

IMPACT ON US BUSINESSES

1. Corporate Income Tax Rate Reduction

The main feature of the US tax reform is definitely the reduction of the Federal Corporate Income Tax (CIT) from 35% to 21%, starting from tax years beginning after 1 January 2018, with an average drop from 39% to 26%, including state income taxes.

This 26% CIT rate will be in line with the average among Organization for Economic Co-operation and Development (OECD) member nations.

2. Interest Expense Deduction Limitation

This new provision provides for a limitation of the interest deduction for all business interest expenses paid by the taxpayer, namely interest paid or accrued on debt which can be traced back to a trade or business.

This new restriction applies to all businesses, regardless of entity type, at the legal entity level. This includes “C corporations” which are taxed separately from their owners and subject to corporate income taxation, and “S corporations” which’ shareholders are directly subject to tax on their pro-rata shares of income based on their shareholdings (e.g. sole proprietorship).

However, this restriction does not affect small businesses since it applies only if the taxpayer’s average annual gross receipts for the three tax year period ending with the prior tax period do not exceed $25 million. Certain regulated public utilities, real estate and farming businesses that use the alternative (generally straight line) depreciation system for particular properties are allowed to elect for an exemption of this limitation.

This new measure, subject to some exceptions, limits the deductibility of interest to 30% of the “adjusted taxable income”. This “adjusted taxable income” can be largely compared to earnings before interest, depreciation, depletion, interest income, interest expense and amortization (EBITDA) for the first four years till 2022. From 2022 onwards, the limitation will be applied on an amount closer to the EBIT of the company. Any disallowed business interest deduction can be carried forward indefinitely.

This restriction on interest expense deduction was designed to deter companies from shifting debt financing to foreign subsidiaries, thereby discouraging cross company loans and borrowing for tax avoidance.

3. Loss restriction

The treatment of the Net Operating Losses (NOLs), the carry back and carry forward provisions were notably modified by the reform. The NOLs deduction is now limited to 80% of the taxable income of the year.

Previously, the NOLs offset was not limited and could be carried forward up to 20 years and carried back up to two years for corporate income tax purposes. With the reform, the carry back is eliminated while the carry forward is allowed indefinitely.

The reform only applies to NOLs generated in taxable years ending after 31 December 2017. Subject to limitations, NOLs generated earlier will be subject to the former rules. Therefore, taxpayers have to track NOLs depending on the year of their generation.

This reform aims at dissuading companies from bringing losses to the US to artificially reduce their profit and shift costs including interest to foreign affiliates to make better use of loss deductions.

4. Foreign Participation Exemption:

US parent companies who own at least 10% of a foreign group or affiliates are exempt from tax on dividends received from these companies. The ownership criterion can alternatively be the number of voting shares or their value.

The objective is to encourage US multinationals to shift their foreign profits onshore, since they can now bring cash back without heavy tax liabilities.

This exemption will not apply to any “hybrid dividend”, defined as any dividend for which the foreign affiliate received a deduction for local income tax purposes. This might notably happen when the capital provided to the foreign affiliate is deemed as a loan and grants the right to interest deduction to the foreign company, while the return on the same capital would classify as dividends in the US and be exempt. This would result in a double tax deduction on these amounts.

5. Transition Tax:

The inclusion of a transition tax is a strong signal that the US tax reform will confer many benefits from the territorial tax system but comes with compensation.

Current overseas untaxed earnings still accumulated and held abroad since 1986 will be subject to a one-time transitional tax payable over 8 years. This applies to controlled foreign corporations (CFC) or any other foreign companies with a 10% US corporate shareholder. The law refers to them as “Specified Foreign Corporations” (SFC).

The untaxed earnings would be charged at a lower rate of 15.5% for earnings held in cash or specified asset. Such items include:

– net accounts receivable,

– actively traded personal property, and

– obligations with a term of less than a year.

Any remainder will be taxable at 8%.

US shareholders are allowed to opt to pay the transition tax over eight years:

– 8% each year during the first five years,

– 15% the 6th year,

– 20% the 7th year,

– 25% the 8th year.

In case the US corporation does not pay this tax within 10 years of the Act’s enactment, a safety net ensures that the full amount of untaxed earnings is subject to the transitional tax to a 35% tax rate.

This is directed at increasing the amount of corporate cash available for M&A transactions and overall increasing the liquidity levels in the US.

This computation may present extreme complexity as there is a need to determine post-1986 earning pools and historic tax payments to substantiate any foreign tax credit attributable to post-1986 earnings. This would potentially require companies to arrange significant cashflow needed to pay tax.

6. Capital investment:

The previous bonus depreciation percentage which qualified property could benefit from has been increased, following the reform, from 50% to 100%, from September 2017 up to the end of 2022.

Accordingly, a company that acquires assets may be able to immediately deduct a significant portion of the purchase price as compared to the acquisition of the equity interests.

Beginning 2023, this bonus depreciation will be phased-out till 2026 (i.e. 80% for qualified property placed in service before 1 January 2024, 60% before 1 January 2025; 40% before 1 January 2026; and 20% before 1 January 2027).

The bonus depreciation is also applicable to non-original first use property as long as it is the tax payer’s first use.

This provision encourages structuring investments in new ways to take advantage of the deductions in the US along with the reduced effective tax rate as compared to other regions like Europe, Asia and Latin America.

7. Base erosion and anti-avoidance tax (BEAT):

The BEAT is introduced amid a global crackdown against companies which have used the world’s tax regimes and deprived governments of a large chunk of corporate revenue, estimated at USD 100-240 billion.

According to the BEAT, if a large multinational, operating in the US makes related-party payments that are potentially part of aggressive profit shifting, they will be subject to a new minimum tax.

BEAT only applies to companies:

– with average annual gross receipts of at least $500 million for the most-recent three year period, and

– with related-party deductible payments of 3% (2% for banks) or more of their total deductions for the year (the “base erosion percentage”).

These related party disallowed payments include royalties, interest, rent, high-margin service payments to a foreign related party for the purposes of avoiding tax but exclude most cost of goods sold, payment for services at cost and certain qualified derivative payments.

Computation is done by using a minimum rate of tax a company should be paying on income without disallowed payments (Modified Taxable income or MTI), comparing this to the regular tax liability of the taxpayer arising at the federal corporate tax rate. If the regular tax liability is lower than the minimum computation, the excess is the BEAT amount to be paid as an additional tax.

The minimum rate of tax to be used for this calculation is 5% of the MTI for year one, 10% thereafter and increasing to 12.5% from 2025 (additional 1% for banks and broker-dealers).

The BEAT is of major concern to foreign subsidiaries and could lead to a significant increase in US tax liability. Companies may find it beneficial to establish contracts in such manner that cost-sharing contracts between parents and subsidiaries are used instead of transactional payments in order to avoid the profit shifting arrangement.

8. Global intangible low tax income (GILTI):

This regime taxes the intangible low taxed income received from CFCs in the hands of the US shareholders.

This tax is charged on an accrual system where the US parent includes in their income the GILTI value to be fully taxed regardless of whether it is remitted back to the US or not. This decreases the benefit for US companies to shift their IP in foreign low tax jurisdictions.

The GILTI amount is calculated on a net deemed tangible return based on the CFC’s tangible assets, which equal 10% of the shareholder’s aggregate pro rata share of the CFC’s qualified business asset investment (QBAI). The QBAI can be defined as the CFC’s quarterly average tax basis in depreciable tangible property used in the CFC’s trade or business to produce tested income or loss.

The GILTI requires also to determine the US shareholder’s aggregate pro rata shares of its CFCs’ “net tested income”, which corresponds to the difference between the “tested income” (Gross income of a CFC excluding several listed incomes) and the specific “tested losses”.

The portion of the CFC’s net tested income that exceeds the deemed tangible return on tangible assets is then included in the U.S. shareholder’s GILTI amount.

For C corporations only, a deemed deduction of 50% will be applied to the GILTI amount but subject to a taxable income limitation. 80% of certain foreign income taxes paid by the CFCs will be deductible from the GILTI tax amount.

If the foreign effective tax rate on GILTI is at least 13.125% the US residual tax on the GILTI can be eliminated. If no foreign tax applies on the GILTI, US will tax this amount at a default rate of 10.5%.

9. Deduction for foreign derived intangible income (FDII):

While the tax reform uses GILTI to penalize taxpayers that have migrated IP offshore, it simultaneously incentives companies that leave their valuable IP in the U.S. using the FDII.

This provision grants a preferential effective tax rate of 13.125% to eligible income of C companies. This is relevant to US headquartered companies and non-US companies doing business in the US.

FDII can be defined as the net domestic income earned thanks to operations in the US but only related to export (sales, services, lease…).

Similarly to GILTI, the FDII is the part of the income of the US company that exceeds the deemed tangible return amount calculated with reference to the QBAI.

IMPACT ON BUSINESSES IN THE GCC

In the aftermath of the US reform, companies around the world will look to alter their policies to maintain their corporate revenue and tax advantages.

Some GCC countries have almost no corporate tax (i.e. UAE, Bahrain) and are, similar to other jurisdictions, being affected by the aforementioned measures. It would prove beneficial for US subsidiaries in the GCC to assess the extent to which costs have been shifted to them from the US. It is also expected that lower budgets will now be allocated to these subsidiaries, to hold cash within the US, impacting the available cash in the GCC.

Adversely, GCC headquarters with US affiliates will be impacted by the BEAT, as a transfer pricing inter-company loan component. Any major cash remittances back to the GCC parent will be under scrutiny for anti-tax avoidance purposes.

Uncategorized

UAE’S VAT Refund Scheme Set to Reverse Slump in Jewelry Sales

Post author By Thomas Vanhee
Post date November 13, 2018
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UAE’S VAT Refund Scheme Set to Reverse Slump in Jewelry Sales

Refunds available from Nov. 18, maximum daily amount 10,000 dirhams ($2,700)
Scheme does not include motor vehicles, boats and aircraft

The UAE on Nov. 12 announced the details of a value-added tax refund scheme for visitors designed to boost tourism and sales of luxury goods.

From Nov. 18, foreign residents aged 18 and over with proof of purchase and a refund form issued by the retailer can reclaim VAT on goods they are exporting from the UAE, with the exception of motor vehicles, boats and aircraft, according to the Federal Tax Authority’s Decision No. (02) of 2018, by Sheikh Hamdan bin Rashid Al Maktoum, UAE minister of nance and FTA chairman.

Merchants and leisure operators hope it will revive the sale of luxury goods and increase tourism, reversing a decline in retail sales of jewelry and gold since the 5 percent tax was introduced on Jan. 1.

The items must have been bought within the past 90 days and have a total value of at least 250 dirhams (about $68). The maximum tax refund to any tourist within a 24-hour period will be 10,000 dirhams. Refunds can be claimed in cash or credited to cards.

An administrative fee of 15 percent of the VAT refund plus a fixed fee of 4.8 dirhams will be deducted from each claim by Planet, which is operating the digitized system on behalf of the tax authority. The item must be exported whole and must be accompanied out of the country by the tourist claiming the refund.

The scheme will start at Abu Dhabi, Dubai, and Sharjah International Airports on Nov. 18 and be extended to the UAE’s other land, sea and airports on Dec. 16.

“Due to the now practical implementation of the VAT refund scheme, retailers who focus on tourists can expect an increase in sales, especially for high value goods, such as the sale of jewelry and luxury items,” Thomas Vanhee, founding partner at Aurifer Tax Advisers, in Dubai, said by email Nov. 13.

UAE VAT Uncategorized

UAE Taxman Confirms VAT Due from Transportation Companies

Post author By Thomas Vanhee
Post date November 9, 2018
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UAE Taxman Confirms VAT Due from Transportation Companies

A last-minute public protest against the UAE’s implementation of VAT by leaders of the gold and diamond industry is heartfelt, but also reflects widespread uncertainty over the new tax, practitioners said.

Dubai’s status as a world trading hub for gold and diamonds could be threatened by the introduction of VAT in January 2018, industry leaders warned in the first high-profile protest against the new tax. They urged government officials to apply a zero tax on loose diamonds and gold when they publish the executive regulations for the tax.

The value of the UAE’s diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

Industry Concerned

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

“I’m already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe’s largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn’t clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India’s Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn’t practically be moved in reaction to a change, the same doesn’t hold in the gold and diamond market,” Daly said by email on Oct. 18.

Even though there is some justification for their concern and the executive regulations aren’t yet finalized, the jewelry executives had left their protest very late, he said.

“VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.”

GCC Tax VAT

More often than not JAFZA offshore companies need to register for VAT

Post author By Thomas Vanhee
Post date October 21, 2018
No Comments on More often than not JAFZA offshore companies need to register for VAT

More often than not JAFZA offshore companies need to register for VAT

Offshore companies in the Jebel Ali Free Zone Authority (JAFZA) are a special breed in the UAE. An offshore company incorporated under the recently amended 2018 JAFZA Offshore Companies Regulations (“Regulations”) is not subject to the federal commercial laws in the UAE and is not able to conduct any commercial business activities in the country. They are considered as non-resident for commercial purposes but are in fact treated as resident for VAT purposes.

The benefit of incorporating a JAFZA offshore company, amongst others, is to allow foreign investors to hold shares in other companies within the UAE as well as to own property in freehold areas in Dubai.

Assessing the VAT Impact

Like many other companies in the UAE, JAFZA offshores have been impacted by the introduction of VAT on 1 January 2018. Although for all intents and purposes JAFZA considers such companies as “offshore”, for VAT purposes they are not.

JAFZA offshore companies still need to determine whether they need to register for VAT with the UAE’s Federal Tax Authority (FTA). Any business making taxable supplies with a total value exceeding the mandatory threshold of AED 375,000 (+/- USD 100,000) must get registered. Whether or not the JAFZA offshore companies need to get registered will depend on their activity. Although they are not allowed to conduct business in the UAE as per the Regulations, from a VAT perspective they may still receive a business income.

JAFZA Offshore and Rental Income through Property Ownership

In accordance with the Regulations, JAFZA offshore companies are allowed to own property in Dubai, and therefore many offshore companies choose to exercise this right. The purpose of such property ownership would most likely be to obtain some form of rental income.

Any rental income obtained from a residential property is exempt from VAT (in most cases) and does not trigger an obligation to register for VAT.

The situation differs however for offshore companies leasing commercial units and obtaining their rental income as such, since the leasing of commercial properties is considered a taxable supply for VAT purposes, and is subsequently subject to 5% VAT. When the value of such supplies exceeds the VAT mandatory threshold, VAT registration is required. Therefore, any JAFZA offshore company which owns property in Dubai needs to carefully assess the criteria they fall under in order to determine their VAT liability.

Receiving Dividends and Selling of Shares

Since such JAFZA offshore companies act as holding companies, they will often be receiving dividends or income from selling participations.

The receiving of dividends from UAE companies and the sale of shares to UAE companies are transactions which are VAT exempt. They impact negatively the right to recover input VAT of the holding company.

The fact that the receiving of dividends is exempt in the UAE is unusual from a VAT perspective. Generally, the payment of dividends is out of scope of VAT, like for example in the Kingdom of Saudi Arabia or like in all EU countries.

As such, if the JAFZA offshore company only receives dividends from UAE companies or only sells shares to UAE companies, it will not have to get registered for VAT purposes.

However, when these same transactions are done with non-resident recipients, they are no longer VAT exempt, but they are zero rated. Accordingly, dividends paid to a JAFZA offshore company by a foreign company and shares sold to foreign investors are, for VAT purposes, treated as taxable supplies. Therefore, if the total amount of these transactions exceeds AED 375,000, the JAFZA offshore company needs to register for VAT. Since one of the purposes of setting up a JAFZA offshore company is holding participations, this will often occur.

The rationale behind this rule copied from the EU is not to disadvantage the financial sector when it has to compete with businesses in countries which do not have VAT. However, the unusual position taken by the UAE on dividends has the strange consequence that these JAFZA offshore companies may be required to register for VAT purposes.

Applicable Exceptions

Due to the nature of its revenue, more often than not, a JAFZA offshore company will indeed have to register for VAT.

The FTA does provide certain exceptions from registration in the event a taxable person’s supplies are exclusively zero rated. Therefore, if the offshore company solely exports financial services – by virtue of receiving dividends from participations abroad or selling shares to non-residents – an alternative is to apply for this exception from registration for VAT with the FTA, in order to mitigate the impact of the offshore company’s VAT obligations.

The exception from registration cannot be granted when the offshore company is leasing commercial property and it cannot be granted retroactively.

Penalties and Consequences

All JAFZA offshore companies need to assess whether they need to register for VAT with the FTA. In practice, most JAFZA offshore companies have been under the impression that they do not need to register.

The FTA imposes very strict fines for companies which have not yet registered for VAT. The penalty for late registration is AED 20,000. In addition, a penalty of up to AED 2,000 per return will apply for not filing the VAT return.

Furthermore, in case VAT is due (e.g. leasing of commercial property) and is not paid to the FTA, a daily penalty of 1% may be charged on any amount that is still unpaid one calendar month following the deadline for payment (with a maximum of 300%). In addition to that, a penalty of 50% on the amount unpaid to the FTA will be imposed as well.

VAT

Bahrain publishes VAT law

Post author By Thomas Vanhee
Post date October 10, 2018
No Comments on Bahrain publishes VAT law

Bahrain publishes VAT law

The Kingdom of Bahrain will be the third GCC member state to implement VAT after all members had agreed to adopt VAT when they signed the GCC VAT Framework Agreement in 2016. The UAE and KSA have been the first States to introduce VAT on 1 January 2018. The other States will follow most likely in the following order: Oman, Qatar and Kuwait.

On 10 October 2018, Bahrain published its VAT Decree law (No. 48) in its Official Gazette. The Bahraini VAT law was written mainly by the Ministry of Finance and borrows largely from the GCC VAT Framework and the KSA VAT legislation. In addition to the VAT Decree law, Decree No. 47 approves the GCC VAT Treaty and Decree No. 45 establishes the Bahraini Tax Authorities. As a next step, Executive Regulations will be adopted in Bahrain to provide further detail on all provisions.

As is expected the VAT rate is 5% and businesses making taxable supplies in excess of BD 37,500 are required to register for VAT purposes. Bahrain has adopted a similar stance to financial services as the UAE and KSA. With respect to Real Estate, Education, Health Care and Local transport it has borrowed more from the UAE. Contrary to both the UAE and KSA, it has zero rated a number of foodstuffs. Regretfully it has taken over the too strict conditions to apply the zero rate on “exports of services” (in fact services’ which place of supply takes place abroad) like the UAE and KSA have. These conditions are not in line with modern international EU VAT practice or the guidelines of the OECD in this matter.

Unfortunately it has also implemented the obligation to appoint a fiscal representative in some cases, whereas experience has taught that in KSA this structure is practically difficult to implement and leads to less compliance. No automatic reverse charge on imports of goods has been foreseen, contrary to the UAE. Remarkably, the sale of pearls in Bahrain has been zero rated, relatively similar to the wholesale of diamonds in the UAE where a reverse charge applied.

In line with KSA and UAE, steep penalties have been adopted to deter any non-compliance. A specific prison sentence has been determined as well for tax evasion. Extremely long transitional provisions have been foreseen for supplies to governments.

Businesses in Bahrain have to prepare for the introduction of VAT now and UAE and KSA businesses with subsidiaries in Bahrain have to compare their current implementation with the Bahraini framework. In addition, businesses in the other GCC States will have to analyse the impact of the implementation on their dealings with Bahrain, such as the exchange of VAT numbers but also the different Customs framework which will apply.

VAT

Gulf Businesses Rethink Structures Under New VAT Regime

Post author By Thomas Vanhee
Post date October 3, 2018
No Comments on Gulf Businesses Rethink Structures Under New VAT Regime

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

Gulf Businesses Rethink Structures Under New VAT Regime

Survey reveals one-quarter of businesses fined for wrong or late returns
Executives grapple with increased costs, impact on supply chain and cashflow

Businesses in Saudi Arabia and the United Arab Emirates are having to look again at their operation designs, as they continue to struggle under a edgling value-added tax regime.

The VAT regime began in the Gulf countries nine months ago. Since then, the UAE’s Federal Tax Authority has published six clarications to plug the gaps in the bare-bones legislation and regulations, a sign of the continued uncertainty that has surrounded the regime.

Companies are now having to revamp invoicing, allocate staff to VAT compliance, and respond to increased cost and cashow issues, practitioners told Bloomberg Tax. Both countries introduced the regime on Jan. 1, 2018.

“When it comes to the business model, it’s a hassle to have to deal with VAT because it cascades through the whole supply chain and it requires you to ask questions,” Jeremy Cape, Tax and publicpolicy partner at London-based law rm Squire Patton Boggs.

A September survey from Aurifer Tax in Dubai found respondents “have had to reassess their existing arrangements” within the supply chain and with product pricing, because of the regime. About 33 percent of its 55 company respondents feel VAT has had “a signicant impact on their business model” and 38.5 flagged increasing revenue eects. The respondents are based in the UAE and Saudi Arabia.

Thomas Vanhee, founding partner at Aurifer, said finding a business model that is suitable for VAT will be crucial for companies to plan their budgets and operations.

“At this point, many businesses are still subject to penalties and many businesses are experiencing teething problems. Tackling these as soon as possible will prevent important corrections a few years down the line,” he said in an email.

‘Fundamental Change’

The tax regime required “a fundamental change in some of our processes, in particular our Purchase-to-Pay process,” said Paul Lidke, regional CFO for the Middle East and Africa for the German-based pharmaceutical and health care company Merck Serono Middle East FZ-LLC.

That’s because the regime ensnared contractual agreements with vendors, invoicing, and accounting. VAT also affects the company’s cashow “and for certain services increases our cost,” he said.

The Saudi and UAE VAT regulations also require different approaches based on where the supplier is located, where the service takes place, and what the service is, he said.

“It therefore took us some time to fully understand the requirements and we are still learning,” he said.

Grappling With Rules

To comply, companies face a range of challenges, including the implementation of new IT accounting systems, training staff, remodeling the supply chain to incorporate VAT invoicing and its effect on cashflow, and managing the impact on clients.

About a quarter of the survey respondents had been penalized by the tax authorities, mainly for late payment and incorrect filing of returns, and about 8 percent have already been audited by the FTA, the survey said.

About 26 percent of the respondents said preparing and ling VAT returns took more than 10 hours to complete, requiring more time and money to deal with the demand.

“The survey showed that IT configurations, supply chain management and interpreting the legal framework were considered as the most challenging VAT aspects. These may compound the challenges to businesses as they are required to reassess their processes and business models,” Vanhee said.

UAE VAT

VAT public clarification on Tax Invoice

Post author By Thomas Vanhee
Post date October 1, 2018
No Comments on VAT public clarification on Tax Invoice

VAT public clarification on Tax Invoice

The United Arab Emirates’ (“UAE”) Federal Tax Authority (“FTA”) has published a new Value Added Tax (“VAT”) public clarification on tax invoice requirements. The new public clarification is relevant to all businesses making taxable supplies and provides further clarity on the issuance of tax invoices.

VAT Public Clarification VATP006 addresses the application of article 59 of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax, which sets out the requirements for when a tax invoice must be issued and the particulars that must be included.

A tax invoice can be defined as a written or electronic document in which the occurrence of a taxable supply is recorded with details pertaining to it and is generally issued by the supplier of goods or services.

The tax invoice plays a crucial role for the supplier as it may dictate the date if supply, thereby determining the tax period in which the output VAT is to be paid. On the other hand, a recipient will need the VAT invoice for the recoverability of the input VAT.

The Federal Tax Authority (FTA) prescribe certain criteria for who is obligated to issue a tax invoice.

- VAT registered person making a taxable supply (excluding zero rated supply)
- VAT registered person making a deemed supply

The FTA requires suppliers to issue the tax invoice within 14 calendar days of the date of supply, providing flexibility to compound multiple monthly transactions for the same customer under a single invoice.

As per the FTA guidelines, there exist certain situations when the obligation of producing the tax invoice is shifted from the supplier. It may be the responsibility of the recipient to issue a “Buyer-created tax invoice”. In cases of consignment of goods to an agent, the agent may issue a tax invoice in relation to that supply with the particulars of the agent as if that agent had made the supply of goods or services itself with a reference to the principal supplier (e.g including the supplier’s name and tax registration number “TRN”).

Where the recipient is not registered for VAT, or where the recipient is registered for VAT and the consideration for the supply is under AED 10,000, optionally a simplified tax invoice can be prepared with requirements as follows:

the words “Tax Invoice” clearly displayed on the invoice;
the name, address, and TRN of the registered supplier;
the date of issuing the tax invoice;
a description of the goods or services supplied; and
the total consideration and the VAT amount charged.

In addition to the above, supplies over AED 10,000 necessitate additional requirements for a full tax invoice as follows:

where the customer is registered for VAT, the name, address, and TRN of the customer;
a sequential tax invoice number or a unique invoice number;
the date of supply (where different from date of issue of the tax invoice);
for each good or service, the unit price, the quantity or volume supplied,
the rate of VAT and the amount payable expressed in AED;
the amount of any discount offered;
the gross amount payable expressed in AED;
the tax amount payable expressed in AED together with the applied exchange rate;
where an invoice relates to a supply under which the recipient is required to account for VAT, a statement that the recipient is required to account for VAT, and a reference to the relevant provision of the Law.

The public clarification clarifies that there is no requirement for line items to be shown on the simplified tax invoice at a net value. This means that the total gross amount and the VAT amount should be stated in separate lines at the bottom of the simplified tax invoice.

However, for full tax invoices, the line items must show the tax value and net value, but there is no need to present the gross amounts for each line item as this is reflected in the total gross amount payable.

Whenever a taxable supply is made, a tax invoice must be issued and delivered to the recipient. If the conditions for a simplified tax invoice are met, then a simplified tax invoice can be issued and delivered instead. It is not acceptable to offer only an option of providing an invoice upon request and thus not provide one if the customer does not request one. A tax invoice must be provided in all circumstances where a taxable supply is made.

However, the Cabinet Decision No. (3) of 2018 on Tax Invoices provides issuers of tax invoices the flexibility of using the mailing address of the recipient as an alternative to their physical address.

Furthermore, the clarification requires that all tax invoices must have the tax amount converted and stated in UAE Dirham even if the transaction is made in some other currency. The invoice may still contain information regarding prices in the original currency. The exchange rate used must be a rate determined by the UAE Central Bank.

Another important thing to note for a tax invoice is the rounding of amounts to the nearest Fils (that is up to two decimal places) where the invoice amount is a fraction of a Fils (1 Dirham = 100 Fils). The clarification guide instructs to follow the mathematical principles for rounding off. The general rules for rounding off are as following,

If the number you are rounding is followed by 5, 6, 7, 8, or 9, round the number up.

Example: 4.5387 rounded upto 2 decimals as 4.54

If the number you are rounding is followed by 0, 1, 2, 3, or 4, round the number down.

Example: 6.7234 rounded to 6.72

This publication is important as the tax invoice process is relevant to all businesses making taxable supplies, and tax invoices received must be compliant with the UAE’s VAT legislation to enable input tax recovery on the VAT return. In this regard, it is important to note that these requirements are mandatory rather than optional.

Failure to comply with the stated requirements can have a number of implications for the business, ranging from commercial (such as the customers may not be entitled to a Tax Credit for VAT incurred), to the imposition of penalties for the failure to issue and deliver compliant tax invoices. The FTA has prescribed a penalty of AED 5,000 for each tax invoice in case of failure by the taxable person to issue a tax invoice when making any supply.

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More often than not JAFZA offshore companies need to register for VAT

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Gulf Businesses Rethink Structures Under New VAT Regime

VAT public clarification on Tax Invoice

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