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.
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.
“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.”
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.”
Far ahead of the GCC?
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.
Three months before the actual implementation the FTA opens the VAT registration portal
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.
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.