Horwath Mak

Member Crowe Horwath International

`
Level 21, The Prism, Business Bay, Sheikh
Zayed Road
P.O Box 6747, Dubai, UAE
T: +971 4 4473951
F: +971 4 4473961
www.crowehorwath.ae

VAT IN THE UAE

WHAT YOU SHOULD KNOW

1. What is Value Added Tax (VAT)?

Value Added Tax (VAT) is a levy added on to most goods and services. It is collected
from customers by vendors and paid over to the Government. Accordingly, a business
enterprise will pay VAT on the goods and services it buys (on the purchase price) and
collect the VAT from its customer on the goods and services it sells (on the sales
price, which might also include the value for any value addition undertaken and profit
on the goods before selling). The difference between the amount which the business
enterprise has paid and collected is to be paid over to the government.
This may be further explained by the following example involving a manufacturer:

Price without VAT VAT

Purchase of material 1,000 50

Further costs and profit margin 300 -

Sale price without VAT 1,300 -

Add: VAT 65 (65)

Price charged to customer 1,365 -

Excess of VAT recovered over amount paid - (15)

The incremental VAT recovered from the customer is to be deposited with the
designated Authority. Accordingly, there is no burden of VAT on the business
enterprise. VAT is suffered by the ultimate consumer as it is included in the sales
price.
2. VAT related developments in the GCC
The available reports indicate that:
Other countries in the GCC are also going to impose VAT in their respective
countries and a consensus exists for almost simultaneous imposition of VAT
according to the similar (if not the same) laws for all the countries. This is to avoid
any cross border VAT imposition conflicts (as the GCC countries are already bound
by a Customs Union for free movement of goods across the GCC).
On 16 June 2016, the Finance Ministers of the Gulf Cooperation Council (GCC)
attended an extraordinary meeting in Jeddah, Saudi Arabia on GCC Value Added Tax
(VAT). Economic integration in the GCC was also on the agenda.

Following the meeting, the GCC Chairman, Bahrains Finance Minister, Sheikh
Ahmad bin Mohammed al-Khalifa announced that the Ministers approved the
introduction of GCC VAT, adding that some procedural aspects will be discussed in
further detail in a future meeting. The Chairman also re-affirmed previous statements
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1
 Horwath Mak
Member Crowe Horwath International
`
Level 21, The Prism, Business Bay, Sheikh
Zayed Road
P.O Box 6747, Dubai, UAE
T: +971 4 4473951
F: +971 4 4473961
www.crowehorwath.ae

2. VAT related developments in the GCC (Continuation)

made by other GCC Ministry of Finance officials to the effect that the GCC countries
would be ready for the first phase of VAT implementation by the beginning of 2018.

The VAT Framework Agreement is expected to be finalized at the next meeting of the
GCC Financial and Economic Cooperation Committee in October 2016. Additional
details on the expected announcement on the VAT Framework Agreement will be
provided once available.
Reports coming out of Kuwait, Oman and Qatar also indicate that these countries are
already gearing up to impose VAT from 2018.

3. VAT in the UAE

For over six months now there have been statements by the UAE government officials
and press reports indicating that a VAT will be imposed in the UAE from 1 January
2018.
According to the reports:

VAT at 5% of sales price will be collected for every transaction involving

payment of certain goods and services (staple food items, medicines and
educational items may be exempted from VAT). Fees paid for services,
including such small items as cinema tickets and parking charges, may also be
subject to VAT.
Business enterprises with revenue of AED 3.75 million will be obliged to
register under the VAT system in the Phase I. For the business enterprises with
revenue between AED 1.87 million and 3.75 million, it would be optional to
register during this Phase. It would eventually become obligatory for all
business enterprises to register under the VAT system.
It appears that the requirement to be registered will arise in early 2018 once
the VAT law is announced. The registered companies would be required to
keep accurate records to account for VAT paid and collected and amounts to
be deposited with the Treasury.
There is no clarity as yet for Free Zone Companies or goods imported for re-
export. This might be clarified in the VAT Law when published.
There might be audit of VAT registered entities by the government audits to
ensure that correct amount of VAT was collected and paid to the Treasury.
4. What may be required of you
The VAT Law and Regulations are expected to be announced sometime in the GCC
this summer. Once these are announced it would be possible to understand the
requirements and implement procedures for complying with the VAT regulations.
However, in order to be proactive, based on the available information, it would appear
that the business enterprises should:

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2
 Horwath Mak
Member Crowe Horwath International
`
Level 21, The Prism, Business Bay, Sheikh
Zayed Road
P.O Box 6747, Dubai, UAE
T: +971 4 4473951
F: +971 4 4473961
www.crowehorwath.ae

4. What may be required of you (continuation)

Review their accounting systems and records: Ensure that these are
comprehensive enough to support compliance with the VAT regulations, i.e.,
the accounting records should be able to keep track of payment and recovery
of VAT for each transaction accurately, initiate payment of VAT to the
Treasury at the required periodical interval, submit appropriate returns to the
government authority responsible for the VAT affairs, etc. The accounting
system should also be separately able to calculate and record the value of
items subject to and not subject to VAT (this is important for businesses such
as supermarkets, pharmacies, etc.). In addition the invoices to customers
would be required to clearly indicate the amount of VAT charged.
Your current accounting system may or may not be able to deal with the
requirements mentioned above. It is possible that you might require new
accounting system or additional software to bridge your accounting system to
the requirements for complying with the VAT regulations.

Have an efficient inventory management system, as an additional 5% would

be tied up in the inventory on hand.

Manage cash flow efficiently as the net VAT collected might have to be
deposited with the Treasury at specific dates. Failure to do so may result in
penalties.

5. How may we help you

In view of active public awareness campaign being carried out by the government of
the UAE for imposition of VAT, we consider that our clients should start preparing to
implement the VAT requirements as soon as the VAT Law is announced. Eighteen
months is not a very long period of time to plan and operate a new system of
accounting, billing, and inventory and cash management.
We, at Horwath MAK, are already mobilizing resources to be able to assist our clients
in dealing with the VAT requirements. In that, we have already assigned specialist
resources to:
- Give comprehensive advice to our clients about VAT in general on the basis of
how it is being implemented in other countries.

- Once the Law is announced, our team of legal, accounting and software experts
would be able to give advice, guide and train our clients in setting up appropriate,
accounting, software and inventory management systems.
In this respect, we are already in contact with various software houses to select a
software system, which is efficient, practical and cost efficient for recommending to
our clients.

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3
 Horwath Mak
Member Crowe Horwath International
`
Level 21, The Prism, Business Bay, Sheikh
Zayed Road
P.O Box 6747, Dubai, UAE
T: +971 4 4473951
F: +971 4 4473961
www.crowehorwath.ae

5. How may we help you (Continuation)

- We will also be able assist our clients in:

o Registering and interfacing with the VAT Authority;

o Assist in keeping accurate accounts in compliance with the VAT
Regulations;
o Assist in preparing and filing the required returns with the VAT Authority;
o Advise you of the payment to be made at the prescribed dates and assist
you in making the payment
o Assist you in negotiations and dispute resolution with the VAT Authority.

Needless to say that we will keep you apprised about the VAT developments. In the
meantime, please contact our Senior Tax Partner Mr. Farooq M. Ladha on
farooq.ladha@crowehorwath.ae if you wish to discuss any matter relating to the potential
VAT in the GCC.

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