How is the “new nationwide VAT roll out” impacting the UAE?

With the announcement of the new VAT rollout of 5% taxation, businesses can expect to start registering as early as 1st October this year. With 2018 just a few months away from now, the Ministry of Finance is in the process of defining the fees and penalties for non-compliance.

This new tax is expected to add Dh12 billion to the UAE government’s coffers in 2018, rising to as much as Dh20 billion in 2019, as mentioned in December by Obaid Humaid al-Tayer, UAE Minister of State for Financial Affairs.

Although a hundred food items, health, education and social services are under exemption from VAT, Younis Al Khoury, undersecretary at Ministry of Finance, claims that it will be mandatory for companies with annual revenues over AED3.75 million to register under the VAT system.

Despite penalties at stake for non-compliance as well as workshops to inform the public on proper compliance, there seems to be an evident lack of awareness which is of high concern. Below are some pointers to take note of with the VAT roll out as it potentially affects the financial industry within the UAE.

Impact of the VAT roll out within the Financial Sector

In “Banking sector Perspectives 2017”, KPMG’s partners argued that both VAT and Common Reporting Standard (CRS) are likely to have a significant impact on every bank operating within the UAE.
A partner at KPMG, Umair Hameed, claims that “VAT is likely to be an irrecoverable cost, negatively affecting margins for the banking sector. It is therefore imperative that the impact of VAT on UAE banks is clearly understood.”

VAT is a tax on transactions which impacts all areas of businesses from IT systems to legal, human resource to marketing, and procurement to finance. The standard rate of VAT is expected to be at five per cent. An additional taxable rate of zero per cent may be extended to some member states of the GCC which includes the UAE.

Elliot Severs, Senior Manager of Indirect Tax at Deloitte said that banks are amongst the most complex businesses for VAT. It usually results in multiple VAT liabilities on their supplies whilst the VAT law is rarely specific enough to prescribe the correct VAT treatment.

As banks are increasingly concerned over the VAT that they would incur, many are looking for options which can curb fiscal issues to protecting their profit margin. This would potentially result in an increase of fees. 
Despite this, the latest data by the UAE central bank indicates that local banks are still experiencing growth in terms of assets at an increase of 7% and credit at 8.1% as of last year. The assets of national banks on the other hand rose to Dh2.23 trillion in December 2016 while gross credit climbed to Dh1.37 trillion.

It is also likely that many financial services may experience VAT exempt.

“VAT exempt is not a rate of tax and so cannot be added to the price of goods or services. Supplies that are VAT exempt do not typically allow for VAT incurred on costs to be recovered, thereby creating a blocked VAT cost,” said Hameed.

Transactions involving moving money are likely to fall into the category of VAT exempt. As such, international transactions may either be zero rated or lie outside the scope of VAT.
A bank that provides both taxable and VAT exempt services will be required to calculate how much VAT it is entitled to recover. However, this exact amount will depend on the legislation — international practice varies from fixed percentage ages to reasonable or special methods that may require negotiation with the tax authority.

With less than ten months until implementation, the time left to prepare is short. Many banking organisations have in fact, started their VAT journey. Securing resources, planning and analysing the project, raising awareness and assessing VAT’s impact should be the first steps these organisations take. This will clearly involve identifying and mapping the categories of supplies based on the expected VAT outcome: five per cent, zero per cent and VAT exempt. This will in turn provide an indication on the costing and profits for the upcoming year.

There are also trends which suggest a potential spike in demand for VAT professionals to ensure all necessary arrangements are made for VAT to kick-start. These individuals will continue to rise in demand with the implementation of VAT for at least the initial phases.

Rising need for VAT Professionals

A recent survey by Deloitte found 69% of GCC businesses feeling concerned and unprepared for the VAT roll out by January. One of their main concerns – sourcing for the right talent to ensure VAT’s compliance within the company to prevent incurring any penalties.

Hiring new staff that will enable businesses to prepare and implement new tax policies should have been done at this point in time, if not earlier. Companies should have also started to think about the additional resources they would need to ensure VAT compliance. Depending on how tedious this process may be, companies would then need to allocate resources based on the complexity of their operations. 

The level of preparedness businesses are at for the VAT rollout depends heavily on their ability to conduct efficient training, while scouting for VAT professionals and IT specialists who will be able to ensure their systems are VAT-enabled. Only with this will businesses see a complete implementation of all legal regulations that comply with tax requirements in 2018 for its daily operations.

If you are interested in finding out more with regards to the talent pool of VAT professionals, please email our Dubai office at [email protected] or follow our LinkedIn page for more industry updates.

Sources: Arabian Business, Gulf News & Khaleej Times

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