Gearing up for VAT - Do you have the answers? Discounts - - PowerPoint PPT Presentation

Gearing up for VAT - Do you have the answers?

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Gearing up for VAT Presentation to the Association of Corporate Council - Middle East

Presented by John Peacock Senior Associate – VAT Compliance, Corporate & Real Estate Services 9 April 2017

• 1. Background
• 2. What we know – GCC
• 3. What we know - UAE
• 4. Common Principles & Provisions
• 5. Existing Legislation
• 6. VAT Compliance Litigation
• 7. Tips
• 8. Questions and Answers

Topics of Discussion

• GCC VAT Framework Agreement – signed by all GCC member states - still

await official release

• What we know –
• All GCC members must implement VAT between 1 January 2018 and 1

January 2019

• Allows for a general framework within which member states can

formulate their VAT legislation but also prescribes certain agreed terms, such as the standard VAT rate at 5%, prescribes mandatory exemptions and determines zero rated industry sectors

• Grants each GCC member state the right to formulate their own

legislation and concessions applicable within that state

Background

• Legislative Framework in the GCC
• Civil Law systems - codified, classified and structured codes but often

lack detail as these often only deal with general principles as influenced by Sharia’ Law

• National or Federal Laws – applicable within each GCC state as a whole
• Emirate Laws (in the UAE) – applicable only to the respective Emirate in

which promulgated

• Free Zone Laws, Rules and Regulations – applicable only within the

particular free zone

• Hierarchy of Laws in the UAE - Federal Laws, Emirate Laws, Free Zone

Rules and Regulations

• VAT legislation will be implemented at national / federal level

Background

• VAT is a self assessment system requiring little effort from the respective

states and tax authorities

• Responsibility for compliance is the sole responsibility of the “taxable

person” for each aspect from registration obligations to the submission of returns to the payment to the tax authority in accordance with the legislation provided

• What do states and tax authorities need to do to facilitate implementation?
• Provide the legislation
• Provide a registration platform
• Provide a platform on which to submit returns
• Provide a platform for payment
• The legislation is not yet available for any of the GCC states however VAT is

not an unknown concept and the essential elements and legislative provisions are mostly constant throughout the world

Background

VAT legislation for will consist of a composite of :

• Empowering legislation – creation of a tax authority (see UAE Federal

Decree No. 13 of 2016 – Regarding the Establishment of the Federal Tax Authority)

• Procedural legislation – creation of the rules and regulations regulating the

procedural aspects relating to taxes, tax reporting and the collection thereof (a Tax Procedures Law expected in the UAE in under 2 weeks)

• VAT laws, Rules and Regulations – promulgation of the laws containing the

definitions, provisions, and supplemented by the rules and regulations (“expected in “a few months”)

• Directives – mainly used to set out matters not specifically dealt with in the

VAT law and to supplement procedural matters

• Rulings – to regulate and categorize particular circumstances or

transactions not contemplated in the legislation and to obtain clarity in advance of transactions

• Supplemented by existing legislation (Commercial Companies Law, the

Penal Code and the Commercial Transactions Law)

Background

• The UAE will be ready to implement their VAT system on 1 January 2018

and other GCC countries should implement by the end of the 2nd quarter of 2018

• Various Government Ministers have announced various fact at press

conferences, the UAE Ministry of Finance has delivered briefings (and has a number more planned in the next months) and also various VAT forums have been held at which various accounting firms involved in the planning stages have intimated certain specifics

• It appears evident that the European VAT model will substantially be

followed in the GCC and thus the provisions and regulations applied in the European Union countries will be used as the VAT “blueprint” in the GCC

What we know - GCC

• Different rules will apply in each of the GCC states – different jurisdictions

with different rules will be especially relevant for imports and exports – also see GCC Common Customs Law

• Common reporting system will operate between GCC states – imports and

exports will be reported between GCC states

• New VAT legislation for the UAE is likely to have similar provisions as

contained in the commercial companies law and the penal code will apply as it does not appear that special provisions will be passed to “decriminalize” VAT related offences

What we know - GCC

• There will not be any “grandfathering” provisions and liability for VAT will be

either the time of supply of services or delivery of the goods - except for certain property lease agreements entered into before the implementation date in the “normal course of business”

• Determination of jurisdiction for VAT responsibility – place of supply
• Determination of time of supply – upon delivery of goods or completion of

delivery of services (with invoice to be issued within 14 days)

• Penalties for evasion – up to 500% and up to 72 hour business closure
• Definition of a “Taxable Person” – includes offshore companies (implication

to licensors and franchisors)

• No special provisions for free zones in the UAE – “fenced and unfenced”

free zones may have different/special rules but only regarding goods imported and exported therefrom

What we know - UAE

• Error corrections on VAT Returns will be allowed to be done online if done

within 30 days of submission date (may still incur penalties)

• Objections/Appeal process – firstly to Federal Tax Authority (within 20 days)

then to review Committee of the Federal Tax Authority then to Courts

• The seat of jurisdiction for VAT disputes will be the local courts and thus all

submissions and proceedings will be conducted in Arabic

• The “taxable person” (company) is the responsible collection agent for the

Tax Authority – VAT not collected does not excuse payment to Tax Authority

What we know - UAE

REGISTRATION –

• Take law as presented – analyze both thresholds and classifications of

goods/supplies into standard rated goods and supplies, zero rated supplies/ goods and exemptions

• Registration of “VAT Groups” will be allowed – understood that wide

discretion will be allowed to group different businesses even in different industry sectors however that this will only be allowed if:

• the entities keep separate accounting records
• are separately identifiable entities
• under same ownership (unsure of subsidiaries)
• domiciled in the same country
• Group registrations can be frustrated by multiple sponsors
• Group registrations will require and limit extent of consolidated group

financials and frustrate inter group entries

Common Principles & Provisions

INVOICES AND INVOICING -

• The “invoice is everything” – correct invoicing is essential to claim legitimate

input VAT credits, avoid penalties and audits

• Provisions will allow for simplified invoices (“till slips”) but generally invoices

must contain the following:

• reflect the VAT Registration Numbers of both supplier and customer
• contain a stipulation of services/goods delivered
• contain the address of supplier
• contain the delivery address
• The quotation of relevant Article in cases of an exemption
• foreign currency invoices must reflect local currency equivalent
• Coding will allow for easy change in legislation provisions
• Apportionment of Input VAT on certain expenses
• Unclaimable Input VAT (caution on posting of entries and disallowance)

Common Principles & Provisions

RETURNS -

• Will be due quarterly (i.e. first return due – 1 April 2018)
• Will be filed online
• Information required to be included in VAT Returns will differ from jurisdiction

to jurisdiction

• VAT Return (UAE) must contain declaration of revenue per Emirate
• VAT Returns usually require –
• the amount of revenue income at the standard rate and the Output

VAT amount

• the amount of zero rated revenue income
• the amount of exempt revenue income / deemed supplies
• the Input VAT amount
• a declaration of accuracy of information submitted
• Deemed supplies – Output VAT is payable (e.g. gifts, enterprise assets

taken for own use, proceeds of execution sales, insurance claims, rights to use goods, intra-group transaction (unless under same registration))

Common Principles & Provisions

OTHER ITEMS TO CONSIDER -

• Implementation Law – check definitions
• Appointment of responsible officer/representative taxpayer/public officer
• VAT Rulings – approval of anticipated transactions
• Bad Debts and VAT Recovery
• Disallowance of output VAT - procedures
• Penalties and Late Payment
• Evasion and Avoidance - restructure
• Record retention (Insurance?)
• Retention of an “audit trail” for entries, amendments and corrections
• 5 year audit period by Tax Authority

Common Principles & Provisions

There are numerous provisions contained in existing legislation that will be used to supplement and facilitate the efficiency of the imminent VAT legislation, The most prominent is Federal Law No 2 of 2015 – On Commercial Companies which inter alia provides for:

• Restriction against exemption from personal liability of office bearers

(Article 24)

• Maintenance and retention of accounting records (Article 26)
• Preparation of Annual Financial Statements by auditor(s) (Article 27)
• Every shareholder in a limited liability company and any Director in a joint

stock company shall be responsible for any fraudulent acts committed and shall be liable for any damages, losses and expenses incurred by the company, its co-shareholders, co-directors or third parties due to the contravention of any law or any gross errors committed by them (Articles 84 & 162)

Existing Legislation

Some punitive provisions contained in the Commercial Companies Law applicable to managers, directors and auditors include:

• AED 10,000 – AED 100,000 for failure to provide access to documentation

to inspectors from the Ministry of Economy or the Securities & Commodities Authority (Article 347)

• AED 50,000 – AED 500,000 for failure to keep accounting records (Article

348)

• AED 20,000 – AED 100,000 for failure to keep accounting records for the

period determined by the law (Article 367)

• AED 100,000 – AED 500,000 and/or a sentence of 3 months to 2 years for

concealing the true financial position of a company (Article 364) and

• Article 371 states – “The penalties as provided in this Law shall be without

prejudice to any severer penalties imposed in any other Law”.

Existing Legislation

Federal Law No. 3 of 1987 – The Penal Code states:

• Article (26) – “Crimes are of three types: felonies, misdemeanors and
• contraventions. The category of the crime shall be determined in accordance

with the penalty thereto provided by law…”

• Articles (28), (29) & (30) – sets out the classification more fully by stating the

punishments

• Article (31) – “The practical element of a crime consists of a criminal activity

resulting from commission or omission of an act where such commission or

• mission is classified as a criminal offense”
• Article (32) – “A person shall not be answerable for a crime if it is not a result
• f his own criminal activity; however, he may be answerable for a crime

even if his criminal activity and another proceeding, contemporary or subsequent cause have contributed to its occurrence, where such a cause is expected to happen or likely to happen in the ordinary course of things”

Existing Legislation

• Article (38) – “The moral element consists of the intent or error…. An error

arises if a criminal result occurs by reason of the offender’s error whether such an error is negligence, inadvertence, carelessness, recklessness, imprudence or non-compliance with laws, regulations, rules or orders”

• Article (43) – “An offender shall be answerable for a crime whether he has

committed it with or without intention, unless the law explicitly provides for intention”

• Article (65) – provides that juridical persons are responsible for any criminal

act committed for their account or in their name by their representatives, director or agent. This Article also explicitly states that a financial penalty imposed on a corporate offender does not prohibit punishment of the individual offender

• Article (399) – fraud is defined as taking or gaining from another, property or

money or anything or value by deception, lying or trickery which is supported by verbal means or written documents

Existing Legislation

• Exempt Goods - Jaffa Cakes case – is it cake or a biscuit? (England vs

Ireland results)

• Zero Rated vs Deemed Supply – Online supply of services from offshore

was zero rated – tax authority audited and found that the supply was zero rated by company

• Disallowed Input VAT/Credit – Definition of a “motor vehicle” and does a 4x4

qualify for a deduction?

VAT Compliance Litigation

• Get up to speed with general VAT principles as soon as possible - if not

already done

• Consider the “business” of the company with regard to –
• registration
• compliance
• perations
• When the legislation is available –
• carefully consider the “definitions”
• carefully consider the provisions
• prepare and adopt an action plan for compliance
• Keep up to date with continuing developments

Tips – What should the legal department be doing?

Questions and Answers

john.peacock@bsabh.com

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