Author: Thomas Vanhee

VAT

Future of VAT in the EU

Future of VAT in the EU

The most recent VAT gap study showed that the Member States of the EU in 2015 missed out on around 150 billion EUR. According to estimates, around 50 billion EUR of that is due to cross-border VAT fraud.

The proposal of the European Commission to tackle this cross-border VAT fraud is to tax any cross border supplies in the EU. Currently, for goods these are broken down into a (potentially) exempt intra-community supply in the country of departure and a taxed intra-community acquisition in the country of arrival. For services, in a B2B environment these are simply taxed in the country of establishment of the recipient.

In the Common VAT Agreement of the States of the Gulf Cooperation Council, which is the Treaty signed by the GCC States to introduce VAT, cross-border supplies of services are treated in the same way as currently in the EU. For goods however, these supplies are in a B2B sale taxed in the country of recipient and the customer is liable for the payment of VAT on this supply.

In both the EU and the GCC the issue of cross-border VAT fraud was examined. The circumstances are obviously different. The EU has a VAT system in place since decades, whereas the GCC is only just about to start, with the United Arab Emirates and the Kingdom of Saudi Arabia introducing VAT on 1 January 2018.

The EU is choosing a different way forward than how it currently operates. Going forward, as from 2022, it intends to tax cross border supplies and hold the seller accountable for VAT. In other words no reverse charge applies. An exception would be made for buyers who are trustworthy, so-called certified taxable persons. These buyers would be allowed to reverse charge on the purchase. In order to mitigate the additional administrative burden, a one stop shop will be foreseen to report cross border transactions.

The GCC had the intention to implement an electronic services system (“ESS”). The system was designed to match sales and purchases of goods and services within the GCC. It is comparable to the EU’s European Sales Listing but it would work in a safer and quicker way matching transactions and giving both seller and buyer reassurance. The GCC is kicking off though with not all States implementing VAT simultaneously and with the ESS not in place. Once in place it will provide a good test case to determine whether it is an effective measure to reduce cross border fraud.

Although the EU has a much longer tradition in the application of VAT, it chooses an option which is not necessarily more effective in tackling cross border VAT fraud. An electronic system matching sales and purchases in a fast and effective way, constituting a type of block chain solution, may be much more effective than taxing all cross border supplies. Time will tell whether either the EU’s option or the GCC option will be the more effective in tackling cross border VAT fraud.

UAE VAT

UAE FTA opens VAT registration portal

Post author By Thomas Vanhee
Post date October 2, 2017
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UAE FTA opens VAT registration portal

With January 1, 2018 rapidly approaching, companies now have a mere three months to get registered for VAT. We advise businesses operating in the UAE to already start applying for a Tax Registration Number (TRN) well ahead of the implementation date. Doing so will allow them to fully prepare for the launch of VAT and avoid any technical difficulties which may occur as the year-end (and thus the implementation date) approaches.

Aurifer’s tax advisors have already familiarised themselves with the registration process and are ready to assist your company in obtaining its VAT number. Hereafter we will discuss certain aspects of the UAE VAT registration process.

Which businesses can / must apply for a VAT registration?

It is important to know whether or not you are required or eligible to register for VAT. As a basic principle, every person operating a business is obligated to register for VAT. A person can be an individual (i.e. when an individual is operating as a sole trader) or a legal person. The term person also covers other entities (e.g. an unincorporated body such as a charity or club, a partnership or trust).

Businesses established in the GCC (‘Resident Businesses’) whose turnover exceeds the mandatory VAT registration threshold must register for VAT. Where the turnover of a business is below the mandatory VAT registration (AED 375.000 / USD 100.000) threshold, that business may still opt to register, provided that its turnover exceeds the optional VAT registration threshold (AED 187.500 / USD 50.000).

Both the mandatory and the optional threshold must be assessed in two different ways. The thresholds must be evaluated, both in terms of effective turnover in the last 12 months as in terms of the expected turnover in the next 30 days.

It should be noted that there is no threshold in place for businesses which are established outside the GCC (‘Non-resident Businesses’). These businesses are required to register as from the first supply of goods or services in the UAE where they are liable to account for the VAT.

A side effect of the optional threshold is that recently incorporated businesses and micro-businesses will not be capable of registering for VAT. In most cases these businesses do not meet the minimum turnover requirement during the 12-month period, let alone the 30-day period. As a result, the optional threshold works as a de facto minimal threshold.

UAE VAT law provides for the possibility to form a Tax group between related parties,. Forming a Tax group can be an interesting opportunity for corporate groups as it allows them to organise their business activities as a whole. Provided that all members of the Tax group are UAE residents and carry out an economic activity, a Tax group can be established through a single VAT registration. This entails a significant administrative simplification for large groups of companies.

Businesses that only make zero-rated supplies (e.g. exports, international transport of passengers and goods), can apply to be exempted from registering for VAT. These businesses will still have to go through the VAT registration process, but will at a certain point have to indicate that they would like to apply for the exemption.

Why should you register?

Businesses not registered for VAT cannot charge VAT on their sales and cannot claim any VAT incurred on their inputs. Furthermore, the FTA may impose an administrative fine of AED 20.000 on every business that fails to comply with the obligation to register within the timeframe specified in the VAT law.

How to get registered?

Businesses can register through the online VAT registration portal (link). Throughout the registration process, you are required to upload copies of various documents. Accepted file types are PDF, JPG, PNG and JPEG. The individual file size limit is 2 MB.

Note that a number of information needs to be communicated in Arabic, such as trade name and authorised signatory. These must be manually entered.

What can Aurifer do for your business?

Aurifer can advise you on whether or not your business is obligated to register for VAT purposes. In addition, Aurifer provides VAT registration services where our tax advisors manage your VAT registration from A to Z. This includes assistance with collecting the necessary documents and information, completing the registration procedure and communicating with the FTA on your behalf.

Providing the wrong documents or information during the registration process may delay your VAT registration and can in some cases lead to your application being rejected by the FTA. Having tax professionals assist you during this process can significantly reduce the headache for your business.

GCC Tax VAT

VAT impacts important defense market in GCC

Post author By Thomas Vanhee
Post date September 17, 2017
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VAT impacts important defense market in GCC

With defense spending in KSA and UAE reportedly currently around 100 billion USD a year combined, the introduction of VAT on 1 January 2018 in those countries will have an important impact on businesses active in that segment.

Governments are generally outside of the scope of VAT. That is especially true in the defense sector, where governments take up one of their most important roles, that is guaranteeing the safety of their citizens.

This entails that when suppliers sell to governments, the VAT which they will charge will not be deductible for the governments. In other words, VAT constitutes a cost for the government.

Both in the UAE and KSA, there will be a list of governmental organisations that can request the refund of VAT charged to them by businesses. When put on this list, these governmental organisations can then ask from respectively the UAE’s Federal Tax Authority and KSA’s General Authority for Zakat and Tax the refund of this VAT.

Even if the Ministry of Defense would be put on such a list, it would have to pay its suppliers first and later recover this VAT. This entails that VAT could potentially weigh heavily on the budget of these Ministries. They will be looking to mitigate these effects and potentially push them to their suppliers.

Long term contracts with governments generally do not cater for the introduction of VAT. In other jurisdictions, international organisations often benefit from a zero rate (sometimes also known as an exemption allowing the recovery of input tax) of any supplies made to them. Supplies made to NATO or SHAPE for example are zero rated. Supplies made to the local military usually do not.

As always with VAT though, the contracts and the supply chain need to be analysed. A US supplier of weapons for the KSA MoD agreeing to deliver 50 millions USD worth of weapons but with the KSA MoD acting as the importer of record would not have to charge and collect any VAT. If however, it has a physical presence in KSA to render installation engineering and training services, it will have to charge KSA VAT at a rate of 5%.

The supply chain usually stretches longer and will involve multiple parties and potentially even foreign governments. It is paramount to analyse the capacity in which all of these parties intervene, as well as their delivery terms, in order to draw any conclusions around the impact of the introduction of VAT. It is most likely currently being relatively overlooked by governments and suppliers, but will no doubt heavily impact them.

UAE VAT

UAE releases VAT law

The UAE Ministry of Finance published its VAT law on 27 August 2017. It constitutes the second piece of tax legislation that will be enforced in the UAE, after the publication of the legislation concerning excise taxes, which will enter into force on 1 October 2017. The VAT law constitutes the basis for the introduction of VAT as of 1 January 2018. This is a landmark law that will massively impact businesses and consumers in the UAE. The VAT law comes a little earlier than expected, the authorities having announced it would be published in September only. It will be followed by the implementing regulations, which will provide more detail on its application.

The UAE VAT law implements the GCC VAT Agreement, a treaty signed by all 6 Member States of the GCC. Drafting on the treaty has begun as far back as 2009. In its design, it is loosely based on the VAT directive. The VAT directive is the basis of VAT legislation throughout the countries of the European Union, where VAT originates from. The Member States have committed to introduce VAT throughout the GCC by at the latest 1 January 2019. The Kingdom of Saudi Arabia has already published its VAT law and is currently pending the publication of its implementing regulations.

Businesses have to register when they expect to meet the mandatory registration threshold of 375,000 AED. The possibility to register should open as of September through tax.gov.ae. The UAE expects around 350.000 businesses to register for VAT purposes. To calculate whether a business needs to register, there is a retrospective test and a so-called prospective test. For the retrospective test the past twelve months need to be analysed, but remarkably for the prospective test only the next 30 days.

This prospective test is foreseen to be applied differently in the Kingdom of Saudi Arabia, where the next twelve months need to be taken into account, which is also the way it seems to apply under the treaty. If a business makes supplies or incurs expenses of half that mandatory registration threshold, it can also voluntarily register for VAT purposes.

Importantly the VAT law confirms the policy adopted by the UAE in terms of the exceptions it will make that all supplies in the UAE are subject to the standard 5% VAT rate.

According to its law, it subjects certain supplies to a zero rate. This means that VAT is not calculated on the supply, but the supplier can still recover all input VAT. This applies for example for international passenger travel. Flights from Dubai to Riyadh or to a third country will not be subject to VAT. This is good news for the tourist sector, which already sees prices for hotels and restaurants increase with 5% VAT.

It also confirms that the first supply of residential buildings within 3 years of their completion is subject to a zero rate. This rule has been imported from the UK, but is not widely applied in other European jurisdictions. It is obviously beneficial for prospective buyers of a new home and good news for the UAE real estate sector. Crude oil and gas will also be subject to a zero rate, whereas the Kingdom of Saudi Arabia is not expected to do the same.

Very important to the wider public is the subjecting of the education and health care sector to a zero rate. Tuition fees will therefore not increase in price. The same holds for preventive and basic health care. This does not prevent that some of the supplies by educational institutions or health care institutions will still be subject to the standard rate of 5%.

Certain supplies are subject to the application of an exemption for VAT purposes. This means that the supplier cannot recover any input VAT. This is the case for certain financial services, the supply of bare land, the supply of real estate not subject to a zero rate and local passenger transport. This is on the face of it goods news for the RTA metro fees. However, importantly, this also means that the RTA will not be able to recover any input VAT charged to it for the extension of the metro in view of Dubai 2020 and therefore its costs will increase.

The VAT law sheds some tiny light on the VAT treatment of free zones, hinting at the application of a regime similar to that of the designated zones in the Excise Tax law. Detail on the application of this regime is however deferred to the Implementing Regulations, which are still yet to be published.

Governments will remain out of scope for VAT purposes, unless they are not acting as a government or enter into competition with the private sector. A list will be established on the basis of which this distinction will be made and a cabinet decision will be made which governmental entities need to register for VAT. This additional information will be very important as government entities may enter into competition with private actors and the fact that they are not subject to VAT can provide them with a substantial advantage over the private sector. Any subsidies provided by governments can also be deducted from the taxable base on which to calculate VAT. This is the exact opposite of what is applicable in the European Union. Additionally, government entities put on a specific list will be able to reclaim VAT from the Federal Tax Authorities which they paid to their suppliers.

In its technical wording, the UAE VAT law deviates substantially from the Agreement and from the legislation published in the Kingdom of Saudi Arabia. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will therefore have to read both legislations closely as different terms may mean the same in both legislations. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will incur substantial administrative costs due to the different laws, VAT returns and procedures. Whereas in the European Union the European Commission pushes towards harmonisation of the laws and obligations, the GCC Member States have not harmonised their laws and obligations.

Time is now really crucial for businesses, as 4 months until 1 January 2018 is a very short implementation period for businesses wanting to being compliant for VAT purposes.

VAT

KSA releases VAT law

The Implementing Regulations provide much more detail on how VAT will actually apply in the KSA. The draft VAT law was unique in its design as it referred back to the VAT Agreement concluded between the six Member States of the Gulf Cooperation Council. It did not provide the basis for domestic taxation, deviating in its design from international standards around the design of tax laws and potentially even deviating from its own Constitution, the Saudi Basic Law.

The detail in the Implementing Regulations is important for businesses preparing for the implementation of VAT. They now at least have a sense of the direction the KSA is choosing in implementing VAT. For example, more details are given with respect to how tax payers can register, what kind of documentation is required for GCC supplies, but also how tax payers who have exempt supplies can deduct input VAT and to what extent expenses with respect to vehicles can be deducted. The Implementing Regulations are still subject to final amendments after the public consultation process.

The publication of the Implementing Regulations is another step in the process towards the implementation of VAT in the KSA on 1 January 2018. Insofar as Saudi businesses have not started preparing for the introduction of VAT, it has now become high time to do so, as preparations are time consuming.

VAT

How real estate businesses will be hit by the introduction of VAT

Post author By Thomas Vanhee
Post date July 24, 2017
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How real estate businesses will be hit by the introduction of VAT

Real estate usually occupies a special place in VAT legislation benefiting from deviating rules, introducing complexity in the operations. Instead of following the general rules, often VAT is applicable in a different country, or the transaction may be exempt from VAT or subject to a zero percent rate, instead of just subject to VAT.

For instance, regardless where vendors or customers are located, for VAT purposes sales or purchases with respect to a building will mostly be subject to VAT in the country where the building is located.

Whether the transactions will actually be taxed will depend on the domestic tax legislation of the country where the building is located. The Member States of the GCC are allowed to implement VAT with respect to real estate in a different way and are expected to do so. The UAE is expected to zero rate the first sale of a new building whereas KSA is not expected to do so. Both would exempt residential rent and tax commercial rent.

Property developers or rental companies face costs which generally bear 5% VAT. Their output however will not necessarily bear VAT, as shown in the examples above.

Specific agreed payment terms need to be taken into account when assessing the application of VAT, since working capital will be particularly hit. Indeed, VAT may be due before the customer has actually paid.

As mentioned above, the lease or letting of property could be exempt from VAT in certain circumstances. The developer or constructor may also wish to change the destination of the developed goods. Mall managers also have their specific issues because of the specific terms in the agreements they conclude with their tenants.

Taking into account the date set for the implementation in KSA and the UAE, (1 January 2018), it is high time for real estate businesses to determine their strategies for the implementation.

UAE VAT

VAT adds complexity to customs

Post author By Thomas Vanhee
Post date June 10, 2017
No Comments on VAT adds complexity to customs

VAT adds complexity to customs

The Gulf Cooperation Council applies a unified Customs Law since 2002. The same GCC Member States have signed an Agreement to implement VAT. The VAT legislation will apply on imports and supplies of goods, amongst others also on supplies of goods between the Member States of the GCC.

Contrary to customs duties though, VAT on imports is recoverable. Customs duties are paid to the Customs authority and import VAT usually follows the same procedure.

Holding compliant customs documentation will now however become even more important since the tax authorities will require importers and exporters to hold compliant documentation. Any customs suspension and associated procedures (e.g. warehousing) will also be followed by the tax authorities for VAT purposes. In other words, getting it wrong will not only impact customs duties but also VAT, increasing potential risks.

Since the GCC Customs Union works in a more complicated way than for example the Customs Union in the European Union, this complexity trickles through in VAT. This is compounded by the fact that not all GCC Member States will implement VAT at the same time.

Pending the implementation of VAT in the UAE and KSA on 1 January 2018, a mapping of the supply chain is required in order to qualify each and every single transaction for VAT purposes and determine what the invoicing, reporting and compliance requirements are. The implementation of these transactions in the IT systems will be the most time consuming process. Although a lot of the legislation is yet to be published, businesses should and can already start preparing.

GCC Tax Int'l Tax & Transfer Pricing

Identifying indirect tax hurdles for your supply chain

Post author By Thomas Vanhee
Post date June 10, 2017
No Comments on Identifying indirect tax hurdles for your supply chain

Identifying indirect tax hurdles for your supply chain

When setting up or reviewing their supply chain, businesses seek the most (cost) efficient and lean way for the cross-border movement of their goods. However, when performing this exercise, the indirect tax and regulatory requirements should be duly taken into account in order not to create any unforeseen or hidden (financial) risks.

For example, companies and supply chain experts continuously needs to ask themselves the following questions. Are all the required documents and certificates in place to import goods into a certain country? Are my products classified correctly for customs purposes? How is the taxable base for customs and import VAT calculated? Are there any related-company transactions and have these been taken into account for customs valuation? Are the incoterms in line with the contractual agreements and supply chain reality? How is the preferential and non-preferential origin of my product managed? Are there international sanctions and restrictions related to my products, my business partners or the country of destination? Etc. Non-compliance with the applicable regulations and formalities could lead to severe financial penalties imposed by the Customs and VAT Authorities. But next to the direct cost, companies should also be aware for the indirect financial implications as the cost of supply chain disruptions due to blocked or seized goods cannot be underestimated. In the world of international and cross-border trade, one catch phrase sums it up quite nicely: “if you think compliance is expensive, try non-compliance!”

Luckily, local legislations and international agreements have foreseen in various possibilities and legal tools not only to mitigate the risks, but also to establish an efficient customs and supply chain setup. With sufficient in-depth knowledge of the business combined with legal expertise, asking the right questions allows you to seize short term opportunities.

Are there optimizations possible through product classification or valuation of the import transaction? Am I using the full potential of international free trade agreements? Can I shift costs and responsibilities to my business partner through the use of Incoterms? Are there special customs procedures and arrangements foreseen enabling me to optimize customs duties (e.g. customs warehouse, free zones, temporally import, etc.)? Are there any simplification procedures foreseen enabling me to streamline and optimize my supply chain? Etc.

As the complex and ever-changing legislation brings both risks and opportunities, we would recommend to take a close look at the impact indirect tax requirements and other regulatory formalities have on your supply chain, and how these are currently managed. A good understanding of your business setup combined with a thorough knowledge of the various legal requirements will enable you to mitigate risks and spot opportunities and optimizations. This holds true especially now that VAT will be introduced in the GCC. A mapping of the current supply chain is therefore very important to further determine the appropriate strategies.

UAE Tax

UAE publishes FTP law

The United Arab Emirates today released its first piece of federal tax legislation today which is not related to customs duties. It marks the first legislative step in an important process for the UAE of diversification of its revenues away from natural resources. The Law will apply for the administration of both Excise taxes and VAT. The former is expected to apply as from Q4 2017, whereas the latter as from 1 January 2018. It will also apply for any future taxes which the UAE may introduce. The UAE’s Federal Tax Authority will be responsible for administering federal taxes.

The Law will be followed by Implementing Regulations, but it already contains a number of important provisions.

In terms of the tax related records and information, as well as returns to be filed, these need to be in Arabic. Another language can be used, provided that a translated copy is provided at the expense of the tax payer and under his responsibility.

The FTA has the right to not give a refund of a certain tax if the tax payer still owes other taxes. For example, if the tax payer requests a VAT refund, but still owes Excise Tax, the FTA can compensate the two amounts.

Voluntary disclosures also need to be made using the original tax return which was filed. The FTA will however not automatically drop any penalties against the person making the voluntary disclosure.

Tax payers can appoint tax agents. These tax agents will be responsible for filing returns on behalf of tax payers. They are not jointly liable with the tax payer though, but do have the obligation to keep a copy of all records.

Tax payers will be notified of an audit 5 business days before it takes place, except in specific circumstances. Importantly, the FTA can amend any assessment it has previously made when new information surfaces after a tax audit.

The FTA can make an audit until 5 years after the relevant tax period, and even up to 15 years in cases of tax evasion. The FTA’s claims are never subject to any time limitations.

As an intermediate step before going to court, a Tax Disputes Resolution Committee is being set up. It will rule on differences between the tax payers and the FTA. If the tax payer is unhappy with the ruling of the Committee, he can still bring his case before court.

Pending the Implementing Regulations, the FTP Law already constitutes the basis of the interaction of tax payers with the FTA. More detail to follow in due time.

Future of VAT in the EU

UAE FTA opens VAT registration portal

VAT impacts important defense market in GCC

UAE releases VAT law

KSA releases VAT law

How real estate businesses will be hit by the introduction of VAT

VAT adds complexity to customs

Identifying indirect tax hurdles for your supply chain

UAE publishes FTP law

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