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Abu Dhabi, UAETuesday 18 December 2018

VAT compliance a challenge for UAE firms, experts say

Understanding the intricacies and amending systems to comply with the legislative requirements prove difficult for some businesses

Businesses that are likely to face VAT issues are conferences and events which pay VAT on hotel bills, restaurants and other services. Antonie Robertson/The National
Businesses that are likely to face VAT issues are conferences and events which pay VAT on hotel bills, restaurants and other services. Antonie Robertson/The National

Businesses are struggling to comply with VAT, with a significant number not yet registered, even as the Federal Tax Authority (FTA) waives penalties for late registration and extends deadlines for filing tax returns for some companies, experts say.

The UAE introduced the 5 per cent levy on January 1, and about 260,000 companies out of an estimated 350,000 have registered, although the authority’s director general Khalid Al Bustani said last month the FTA is showing leniency in terms of imposing fines for late registration. To help companies comply correctly with VAT regulations, the authority extended the deadlines for filing tax returns, a move experts say will help struggling businesses but will not resolve all of the challenges they face.

The FTA did not specify which companies will benefit from the extension and it did not immediately reply to request for comment from The National.

“All companies will complain that they do not have enough time – however long they are given,” said Adrian Low, a partner with law firm Clyde & Co based in Dubai.

“It [the extension] will certainly give companies more opportunity to get things right, but there are still a number of areas where businesses are struggling to make sure that they are applying the correct treatment. I think ultimately the FTA are going to have to issue either further public guidance or to be able to quickly answer queries to make sure everybody is consistently interpreting the rules the same way.”

The UAE is introducing taxes to help offset the effects of the low oil price environment, which has reduced government income from hydrocarbons, widened the fiscal deficit and weighed on the economy. The UAE and Saudi Arabia are the only Arabian Gulf countries so far to introduce VAT and excise taxes, although all six GCC states signed up to implement the levies by next year.

“Although VAT should in principle be straightforward, understanding the intricacies of the rules and amending your systems to comply with the legislative requirements can be quite a challenge, particularly in context of the environment here, where many businesses have had no previous experience with reporting and paying taxes,” said Reggie Mezu, a senior special tax counsel at the law firm Baker McKenzie.

“These issues would be ongoing at least in the short to medium term, so an extension will not necessarily be sufficient to deal with them.”

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In the UAE, businesses failed to register on time because many waited for executive regulations that were released in November to begin the process, although the FTA opened registration in September.

Businesses that did register are finding it hard to comply because there are still grey areas that are open to interpretation in the VAT laws.

“There is no doubt when a major new tax is being introduced there is a period of time before you get absolute clarity on the treatment of transactions,” said Mr Low.

“Ultimately, those matters will be clarified by court decisions. I don’t think you will see any amendments to the law or the regulations this calendar year.”

To complicate matters further, the GCC-wide agreement struck between the member states to implement VAT may have to be amended as well at some point, if not immediately.

“You will also start to see the other GCC states come on line and as they come on you will have interpretation issues among the GCC countries,” said Mr Low. “After a couple of years, you could revisit the treaty and look at whether there are things that should be amended, which will then flow through the domestic laws as well.”

Another complication is the fact that GCC countries, as implementing states, are not considered an export market but, rather, outside the scope of VAT. Exports of goods and services are usually designated as zero-rated. When businesses have zero-rated services and goods, they can reclaim VAT they have paid on costs from the government.

When goods and services are exempt from VAT, that means businesses will not be able to recover the tax incurred on the cost of an item or a service.

“Selling into Saudi was supposed to be outside the scope of VAT as an implementing state. That’s a bit complicated,” said David Stevens, the VAT implementation leader at advisory EY.

“There is meant to be a big electronic database for entering information related to trading with Saudi [and other GCC states] and that hasn’t been set up yet.”

In the UAE, there are further interpretation problems that makes compliance a thorny issue.

One is the treatment of free trade zones as designated zones subject to VAT. The FTA provided a list of these zones last month after the introduction of the levy. But already the treatment of goods and services in designated zones is raising questions.

“If your customer in a designated zone is actually consuming the good, then it is VAT-able,” said Mr Stevens. “It is easy if it is a restaurant or a supermarket. The problem comes when you are selling things like wood or concrete. If it is being used in the manufacture of something else, then it has a different tax treatment.

How do you know what the customer is doing with the thing you are selling them and the impact on the VAT treatment? It is a grey area, where further guidance from the FTA will be required.”

Another potential issue faced by busi­nesses is cash flow. Companies also may grapple with getting their refunds from the Tax Authority with the extension of the filing of returns.

“Probably the biggest thing we found is the cash-flow implications,” said Mr Low.

“Certainly businesses who have not planned or changed the way they manage cash flows may find the VAT, even at 5 per cent, becomes an increase in working capital cost for them.

“If the [tax] authority takes a long time to pay you your cash refunds then you are out of pocket.”