Q: I gather that VAT will be applicable to all UAE businesses from 2018. We are doing business in the UAE for several years now. I would like to understand how VAT will impact the business and what should we do to be VAT-compliant. F.F., Dubai

A: Value added tax (VAT) is a levy added on to most goods and services. It is collected from customers by vendors and paid 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. VAT is suffered by the ultimate consumer as it is included in the sales price. For several months now, there have been statements by UAE government officials and Press reports indicating that a VAT will be imposed in the UAE from January 1, 2018.

As per the understanding received from the various announcements:

. VAT at five per cent of sales price will be collected for every transaction involving payment of certain goods and services (basic 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 Dh3.75 million will be obliged to register under the VAT system in phase 1. For business enterprises with revenue between Dh1.87 million and Dh3.75 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 for the registration of enterprises will arise in late 2017 or 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.

In order to be prepared, the following will be required:

. Review your 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 liquidity management system, as an additional five per cent 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.

The modus of collection and filing of returns of the VAT has not been announced yet; considering the IT environment in UAE, it is likely that an online submission, filing and claim system may be adopted. We need to wait for official announcements and the VAT Law to further understand the processes and impact though it is advisable that the entities should make preparations for the VAT at the earliest.

The writer is partner at Crowe Horwath, UAE. You can send your business queries to him at .