VAT: What are the regulatory challenges for businesses in UAE, Saudi?

Value added tax (VAT) implementation has been a considerable challenge for most businesses in the UAE and KSA, where compliance with taxes is not common. VAT represents the most comprehensive and transformative regulatory requirement that business has had to take on.

VAT has a profound and pervasive impact across all aspects and functions within any business, including family businesses, governments and free zone entities – such as information technology, human resources, procurement, finance, and marketing. Due to its broad base, it applies at 0 per cent or 5 per cent across a diverse range of sectors such as construction, retail, real estate, healthcare, education, manufacturing, transportation, media, hospitality, professional services, utilities, telecommunications and, at least to some extent, financial services.

Preparing for VAT requires a significant commitment of resources and some organisations do not have the systems, processes and people in place right now that will enable them to apply VAT accurately and efficiently.

Most local businesses do not have VAT capabilities already built into their IT systems, while international businesses have had to introduce unique local VAT rules and codes into their ERP systems.

Dealing with VAT determination and reporting manually takes time, especially when there are disparate databases and multiple business systems that are not well connected. Those businesses who did not have sufficient time for a comprehensive IT system overhaul are now faced with manual or interim work arounds.

Our experience with the initial weeks, and months, of VAT in the UAE and Saudi Arabia has been that many businesses are failing to issue tax invoices in accordance with the regulatory rules, and working capital is being negatively impacted by delays and/or disputes about VAT pricing and invoicing.

When VAT was introduced, it came with four main compliance elements for businesses to adhere to:

1. Registration – due before VAT commenced on January 1, 2018, or whenever a business expects to exceed the Dhs375,000 per annum mandatory registration threshold.

2. Issuing valid tax invoices – generally necessary within 14 days of making the taxable supply and subject to specific requirements.

3. Lodging a periodic VAT return – either monthly or quarterly returns are required within 28 days of the end of the period, and if the net VAT position is payable then this payment must also accompany the return lodgment by the due date.

4. Maintain records – books of account, all invoices (sales and purchases), import and export documentation, and all other information necessary to support the business’s VAT positions, calculations and documentary requirements must be kept for at least five years.

There are some common issues related to the introduction of VAT that are affecting most businesses operating in the GCC. For instance, the working capital issue related to the fact that most GCC businesses often operate on long payment terms (exceeding six months, even when contracted for only 60 days) means that in case of any delayed receipt of payments by suppliers, businesses will be financing the VAT to the government even when not actually received from the customers.

In addition, the necessity to obtain, and maintain, valid tax invoices for all local purchases that a business is seeking to deduct the VAT on is a fundamental new requirement.

Furthermore, regardless of the particular industry segment, the following points still need to be addressed by most businesses:

• Cross-border acquisitions or sale of goods and/or provision of services, including via intermediaries / agents

• Issues related to the acquisition and disposal of residential and commercial properties and, in particular, complex issues of mixed use properties, as well as cases where the legal and beneficial ownership of real estate are split

• Particular issues related to the specific rules of each GCC member state: for instance, the application of the VAT rules to the supplies and acquisitions and intra-group transactions in the UAE freezones, including “designated zones”, and mainland UAE.

Based on the evidence to date, it is well worth performing a VAT implementation review to check whether a business has indeed completed all the necessary changes to ensure compliance, and then one can start considering how they can optimise their business structures, operations, systems and processes to overcome this most challenging regulatory requirement.

David Stevens is the GCC VAT Implementation partner at EY