PORTFOLIO | Road To VAT
same accounting period, including AED 20 VAT, it is only required to pay AED 30 (AED 50 less AED 20) to the authorities. The government also receives the AED 20 and now gets AED 30 making AED 50 — which is the correct amount of VAT due on the sale of the steel sheet.
How Business Processes will be Impacted? So what exactly will be changed by the introduction of VAT, and how could companies prepare for this tax transformation? There are various important questions business in the UAE should need to find answers to, such as what costs incurred will be utilized as input VAT. In the case of firms in the financial services, how will taxation apply to insurance- related activities, given the fact that most insurance companies have investment income generated from their financial assets? Similarly, in case of real estate and construction sectors the question is how VAT regime will apply to transactions related to sale of property by developers and sale by the retail buyers? M.R. Raghu, Managing Director,
Marmore Mena Intelligence, a research firm with focus on providing information on MENA businesses, says, “VAT is a relatively simple tax and is easy to comply with, and has no need for accrual accounting. It is free from economic distortions (i.e.) it is inflation neutral and neutral to changes in trading and distribution patterns. Companies will have to understand the various perspectives from which VAT is applied, and understand where they fall in the product supply chain.” One of the concurrent examples is China, the world’s second-largest economy, which is also expected to complete the final stage of its comprehensive VAT reform within the next 6 to 12 months. Chinese tax officials are embarking on major structural changes to lead the nation into a new era, with the goal of aligning the country’s indirect tax policies with international practices,
according to a report by EY.
Ready for the Run? VAT can impact businesses in many ways, both financial and operational. Businesses affected by the VAT reforms need to be prepared for the transition. To begin with, businesses in the UAE may consider various factors in accounting for VAT, including systems and invoicing processes, communications with customers and suppliers. Although a definite date of implementation of VAT has not yet been declared, an 18-month to 2-year timeframe to let business prepare for the implementation is likely. Within that period, or even before that, companies may start identifying and streamlining their processes that will equip them for the future, say experts. This may involve an overhaul of business processes. As a report by Deloitte observes,
“The design of VAT puts businesses in charge of charging and collecting VAT, then remitting it to government at agreed times. For businesses unfamiliar with VAT, implementation can require a significant change to business operations.” Although issues related to VAT will be addressed by the authorities in due course of time, much of the success of VAT will hinge on how businesses can establish an effective work plan processing system to migrate to VAT platform. “All of the governments of the GCC are fully aware of the fact that the success of a VAT implementation will depend on the ability of businesses (being those ultimately responsible for collecting it from their customers) to administer it,” the Deloitte report says. This becomes all the more
important given the dominance of SME’s in Dubai economy — SMEs which account for 95% of total firms in Dubai and 40% of total value added to Dubai’s economy and which have to ensure that the relevant books and records are maintained in the appropriate manner.
February 2016 |
www.wealth-monitor.com
Main Characteristics of Tax Systems in the UAE
Companies and Businesses
No taxes levied by Federal Government
Except for oil companies, individual Emirates impose income tax up to 55% on taxable income of bodies corporate (not enforced thus far).
55% to 85% tax rates on oil companies.
20% tax rate on foreign banks' taxable income in Abu Dhabi, Dubai, Sharjah and Fujairah.
Labor Tax/ Fees
Biannual work permit fees ranging from US$80 to 1350, based on certain criteria.
Social Security Tax
15% employer's contribution. 5% employee's contribution.
Others
Up to10% tax rate on hotel services and entertainment.
5% municipal tax on the annual rental of residential property.
Property registration fee 2% for Abu Dhabi and 4% for Dubai.
19 Source: IMF Staff Report 19
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