On January 1, 2018, value-added tax (VAT) will come into effect for the first time in the UAE. Naturally, small businesses are concerned about the financial and operational impacts of VAT compliance, especially since they’re used to operating in a low-tax business environment.
While there will be implications for systems, infrastructure, skills and training, there are a number of benefits of the new tax system on businesses and the economy.
But first, let’s take a step back to understand why VAT is being implemented in the first place.
For decades, the economies of the GCC countries have benefitted from high oil prices. However, a drop in demand, increased global competition and a substantial decrease in the price of crude oil per barrel – from a peak of $147 in 2008 to about $50 today – has forced GCC countries to look for other sources of revenue to diversify their economies and remain globally competitive. VAT is one such revenue source, and because tax is an unfamiliar topic in the GCC, you might have some questions about how it will impact your small and medium business.
What is VAT?
VAT is a tax on the consumption of goods and services and has been set at 5 per cent across the GCC countries. This rate is among the lowest in the world, with some countries charging VAT of more than 20 per cent.
VAT is levied at each stage of the supply chain, from the manufacturer, to the wholesaler, to the retailer, taxing the ‘value added’ by businesses at each point in the chain. For example, raw cotton becomes more valuable as it moves along the supply chain to eventually be manufactured into a T-shirt, or the end-product.
Certain sectors will be exempt from paying VAT, such as healthcare, education, certain foods, some type of real estate transactions and local transport, but these may differ between member countries. Export of goods outside the GCC will be zero-rated, which means exporters can claim a tax refund.
What are the advantages?
VAT is an efficient and transparent way for governments to increase revenue – the IMF predicts that GCC states can boost GDP by 1.5 per cent with the implementation of VAT. This will help GCC states to diversify their economies away from oil and to continue delivering on their public service mandates.
How will VAT affect businesses?
If a business has an annual turnover of Dh 375,000 (or the equivalent in other GCC states), the business will be obliged to register as a VAT vendor.
If the business generates 50% of this threshold, you can voluntarily register for VAT, which has its own advantages and disadvantages.
Keep in mind, VAT is not an expense to the business, but a cost that is ultimately passed on to the end-consumer when they buy a product. Businesses act as the ‘collection agents’, collecting the tax on behalf of the government. They pass down the burden of tax from themselves to their customers.
However, there will likely be indirect costs associated with becoming compliant, which will affect many areas of businesses, including pricing, cashflow, financial reporting, tax accounting, supply chain and compliance processes.
The cost of non-compliance could be even greater. Penalties are set at a minimum of Dh500 up to five times the amount of VAT that would have been payable for the period in question. At 5% VAT, this puts the maximum risk at 25% of turnover.
How to register
If you haven’t already registered, now is a good time to invest in an accounting solution that streamlines the VAT collection, record-keeping and reporting processes, and that automates the production of VAT invoices in Arabic.
While you have until January 1 to be fully compliant, full transition can take between nine and 12 months so, if you haven’t yet, you should activate your VAT implementation plans as soon as possible.
Businesses that need to be VAT-compliant should work through a detailed impact assessment with a trusted business partner to guide them through the implementation and operation phases.
An effective VAT system relies on shared responsibility between governments, businesses and consumers. The additional revenue will go a long way to maintaining effective public services and positioning GCC countries as globally competitive nations with truly diversified economies.