AURIFER
VAT update seminar 10 September

VAT update seminar 10 September

20180902 by Aurifer
VAT update seminar

VAT update seminar 10 September

VAT update seminar 10 September
20180902 by Aurifer
Come to our VAT update seminar on 10 September 2018 to catch up on the latest VAT developments
Dawn of new tax era - Corporate perspectives

Dawn of new tax era - Corporate perspectives

20180828 by James McCarthy (Clifford Chance) and Thomas Vanhee
Following the implementation of VAT in the UAE from 1 January this year, this briefing outlines the impact of the new regime in respect of M&A transactions and directors' duties. This briefing also highlights the potential impact of the UK's recently implemented corporate criminal offence of tax evasion.

Dawn of new tax era - Corporate perspectives

Dawn of new tax era - Corporate perspectives
20180828 by James McCarthy (Clifford Chance) and Thomas Vanhee
Following the implementation of VAT in the UAE from 1 January this year, this briefing outlines the impact of the new regime in respect of M&A transactions and directors' duties. This briefing also highlights the potential impact of the UK's recently implemented corporate criminal offence of tax evasion.

BACKGROUND

In a move to diversify state revenues away from hydrocarbons, the GCC member states have turned their attention to introducing VAT (and excise tax) as an effective method of raising alternative state revenues. Accordingly, on 27 November 2016, all Member States of the GCC agreed to sign the GCC VAT Framework Agreement (Common VAT Agreement), a multilateral treaty which introduced a legislative framework for the implementation of VAT in the GCC region. The GCC VAT system is a traditional VAT system, which draws inspiration from the European VAT directive. According to the treaty, all GCC countries are expected to implement VAT in their domestic legislation by 1 January 2019. The UAE and the Kingdom of Saudi Arabia emerged as frontrunners by opting to introduce VAT as early as 1 January 2018. Since last April we have seen a host of UAE legislation issued to ensure implementation of the UAE's VAT regime at the start of this year. More recently Cabinet Decisions have been issued confirming, amongst other matters, the status of the UAE Designated Zones, which receive different VAT treatment under the regime.

VAT OBLIGATIONS OF REGISTERED BUSINESSES

It goes without saying that the introduction of VAT will have a significant impact on businesses in the UAE, and Saudi Arabia. Businesses which were previously operating in a virtually non-tax environment will now have to comply with various obligations imposed by the VAT legislation. Not only will businesses have to register and charge VAT to their customers, they will also have to prepare and submit periodic VAT returns and pay VAT to the competent tax authorities. Furthermore, businesses will have to issue compliant invoices and comply with extensive accounting obligations.

VAT'S IMPACT ON M&A TRANSACTIONS

Asset sales

The transfer of a business as a going concern (TOGC) may include the sale of assets that could otherwise be treated as taxable supplies and therefore give rise to a VAT liability. However, under the UAE VAT legislation, a TOGC is not regarded as being a supply of goods or services for the purposes of VAT where the whole or an independent part of a business is sold to a Taxable Person for the purpose of continuing that business. In determining whether a proposed asset sale will fall within the TOGC exemption, there will be a number of factors to consider. In lieu of established practice at this stage, it may be helpful to draw comparisons from other regimes such as the UK. For instance, positive factors suggesting TOGC treatment on a transfer assets would include:
The assets (along with accompanying liabilities) comprise clear independent operations from other parts of the business (shared services are unlikely to be a fatal factor in themselves)
The assets represent a going concern presently and are capable of being operated separately (this would not require the business to be profitable)
The assets have been used to make supplies, not merely used for the overheads of the business
The purchaser will use the assets to run the same type of business without a significant break in trading (although changes to the operation of business, types of products sold etc are typically acceptable in jurisdictions such as the UK). 

In addition, for TOGC treatment, the seller should be a Taxable Person (ie have a VAT registration number) and the purchaser must be a Taxable Person already or become one as the result of the transfer. Transfers within a VAT group are also likely to be outside of the scope without the need to consider TOGC treatment. Cross border transfers will need to be carefully considered – the export rules may apply rather than TOGC and intra-GCC (other than KSA) may remain relatively complicated during the period before full implementation across the region. Where there is uncertainty, a referral to the FTA may be considered, although there is no requirement to do so. In the early years of implementation, until a body of practice has developed, parties may wish to adopt a cautious approach in making such referrals. We understand that the FTA will be developing a ruling practice which can be used to that effect. 

Share sales

Similarly, the sale of shares would fall outside of the VAT rules since such transactions would not be an example of a taxable good or service for business/consumption purposes. Entities that buy and sell securities by way of business should benefit from the financial services exemption relating to the issue, allotment and transfer of equity and debt securities detailed in the VAT Executive Regulations. We are not aware of any present intention to introduce a stamp duty on share transfers.

SPA considerations

VAT covenants and warranties will likely now be expected by purchasers of businesses in the GCC. This will mean, unlike sale processes prior to VAT implementation, a review of tax compliance and future liabilities will now typically be included as part of the diligence phase. A typical tax indemnity on a share transaction seeks to allocate liability for historical tax compliance and warranties would also be sought dealing with issues such as due registration with a tax authority and that no investigations/judgments are pending. Additional provisions may be required if the target is in the seller's VAT group. Such contractual protections would be different on an acquisition of assets where the seller would generally retain such risk. Nevertheless, the VAT impact on business revenues will remain a key area of focus which sellers may be expected to provide warranties against. From a financial side, transactional analysis would also need to include consideration of VAT assets and liabilities on the balance sheet, the accounting provisions regarding receivables and any outstanding claims or amounts due from the tax authority.

HARSH PENALTIES IN CASE OF INFRINGEMENTS OF THE VAT LAW

To ensure that all taxpayers comply with these extensive obligations, the competent tax authorities in each Member State have been granted the power to impose substantial administrative fines. In addition to these administrative fines, the tax authorities may impose more severe penalties (eg prison sentences) in case of infringements that are considered tax evasion. Moreover, the tax authorities may claim any VAT which is due as a result of incorrect reporting or wrongly deducting input VAT.

WHO IS LIABLE FOR PENALTIES?

Businesses will face a high risk of financial exposure in case of non-compliance with their VAT obligations since they will be liable for any VAT debts or penalties vis-à-vis the tax authorities. Unlike in other jurisdictions, tax procedure laws in the GCC do not provide for a joint personal liability in respect of company directors, executives, managers or any other officers who are responsible for the day-to-day management of the company (Company Executives). In Europe on the other hand, Company Executives can be held liable by the tax authorities in case the company does not comply with its VAT obligations (eg non-payment of VAT or penalties by the company) or in situations where the company has incurred a VAT liability or penalties as a result of the shortcomings of a Company Executive. The ability for tax authorities to pursue Company Executives provides them with an additional opportunity to collect VAT in case of company insolvency and puts additional direct pressure on company directors. By way of illustration, we have included an overview of the applicable liability regimes for a selection of European Member States:
  • In the UK, HM Revenue & Customs (HMRC) has the ability to pursue a Company Executive personally for any penalties that it has been unable to collect from the business, provided that it can prove that the error was a deliberate and dishonest attempt by a Company Executive to evade VAT
  • In Belgium, Company Executives can be held jointly liable in case of a civil error which gave rise to the non-payment of VAT
  • Luxembourg only recently introduced a personal liability for Company Executives (as from 1 January 2017). Company Executives can now be held personally and severally liable in the event of a breach of VAT compliance obligations and/or non-payment of the VAT which is payable by the company which they manage.
 However, given the breadth of directors' duties under the UAE's Commercial Companies Law, which are owed to the company, shareholders and third parties, including in relation to errors in management, it is possible that the FTA could seek to impose penalties against directors, particularly where such penalties relate to tax evasion.

NEW EXTRA-TERRITORIAL UK CRIMINAL OFFENCE OF FAILURE TO PREVENT THE FACILITATION OF TAX EVASION

In the context of the UAE's new tax regime, it is noteworthy that the UK has enacted a new corporate criminal offence of failing to prevent the facilitation of tax evasion by employees and other associated persons. Reflecting a trend to extra-territoriality in UK legislation in recent years, the offence is highly extra-territorial, applies to businesses worldwide, and can apply to the evasion of non-UK taxes as well as UK taxes. The only defence available is for businesses to show that reasonable procedures are in place to prevent facilitation of tax evasion. The offence came into effect from 20 September 2017.

With the advent of the UAE's tax laws, the extra-territorial scope of this UK criminal offence creates new risks for UAE businesses and UK group companies with UAE holdings. For instance, an offence would be committed if an employee of a UK company deliberately facilitated tax evasion in the UAE. An offence would also be committed if an employee of a UAE (or any other internationally incorporated) entity facilitated tax evasion in the UK. The penalty for being successfully prosecuted under one of these offences is an unlimited fine. However, there is also the risk of considerable reputational damage and there could be potential regulatory consequences for regulated businesses (eg loss of a regulatory authorisation as no longer deemed to be a fit and proper person).

CONCLUSION

Following the introduction of VAT, businesses will be forced to comply with a large number of obligations imposed by VAT and tax procedure laws. The tax authorities have been granted the power to impose administrative fines and other penalties to ensure compliance with these extensive obligations. VAT and VAT liability should therefore be factored in as part of any share or asset purchase diligence processes and documentation. The VAT regime should also be considered in the day-to-day context of a business' overall liability and the scope of the penalties serve to underline the importance of being fully compliant with VAT legislation in order to avoid the risks of sanctions and/or additional VAT assessments. Taxpayers should carefully consider their VAT position, review their contracts to ensure VAT risk is allocated appropriately, implement efficient processes, and properly monitor their VAT obligations to ensure compliance with the VAT law. Further, given the potential scope of director liability, businesses may want to plan ahead and verify agreements with directors and their liability insurers. In respect of UK tax evasion, businesses may also wish to consider conducting risk assessments in respect of their controls, policies, procedures and provide training to prevent falling foul of the new extra-territorial offence.
U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

20180730 by Matthew Kalman
The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and theUnited Arab Emirates.

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO
20180730 by Matthew Kalman
The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and the United Arab Emirates.

The three Gulf countries began applying a 50 percent 
excise tax to carbonated drinks except water and a 100 percent tax to energy drinks and tobacco products in 2017. The Kuwaiti government said in May that it would accelerate plans to impose similar measures. The measure is supposed to reflect the impact on health but is actually ‘‘discriminatory,’’ with shoppers opting for similar local products that are now cheaper, said Taina Sateri, a trade counselor at the EU delegation to the UAE in Abu Dhabi. ‘‘Consumers have not necessarily reduced consuming these products but have changed their consumption habits to similar types of products which have escaped the tax,’’ Sateri said in a July 19 email.

Fruitless Talks 

The EU has been raising the issue with its Gulf Cooperation Council partners since the GCC framework agreement came to light in 2016, according to Lucie Berger, head of trade and economic affairs in the GCC at the EU delegation in Riyadh. 
After months of fruitless bilateral negotiations, the U.S., EU and Switzerland turned to the World Trade Or- ganization, most recently at the Council for Trade in Goods on July 3. ‘‘Since the introduction of the selective tax, the industry has noted considerable decline in sales of their products,’’ Berger said in a July 20 email. The tax had a ‘‘severe impact’’ on the sales of energy drinks in Saudi Arabia and slowed sales growth in soft drinks, Euromonitor confirmed in February. Consumers are ‘‘shifting to cheaper products that contain often higher level of sugar and other ingredients such as caffeine,’’ Berger said, adding that the 50 percent and 100 percent tax rates are ‘‘unprecedented’’ and far exceed the 20 percent recommended by the World Health Organization. ‘‘Without scientific evidence, it is difficult to understand why some products have been included—such as sugar free products, or flavored carbonated water— while other products are not subjected to the tax, such as juices or caffeinated drinks,’’ she said.

‘‘The EU understands the need to promote a healthy diet through a variety of tools, taxes included. Taxes should ideally be designed in a way to help consumers make healthier choices, while this particular tax might potentially be discriminatory, pushing consumers towards cheaper—and not healthier—alternatives,’’ she added.

Protecting Health? 

While the Gulf states argue that the excise taxes are designed to protect health and the environment, not to shield local industries, they don’t fulfill that aim, Sateri said.
‘‘The tax is based on carbonization, whereas there are many non-carbonated drinks with high sugar content not taxed,’’ said Sateri. However, flavored carbonated drinks continue to be taxed despite having almost no sugar content. ‘‘If health is used as a reason then the range of products would need to be modified. Similarly the energy drinks are taxed at 100 percent but there are many caffeinated drinks on the market with higher caffeinated levels which do not fall under the tax,’’ Sateri said.

Sluggish Resolution 

The dispute could take some time to resolve, leaving other Gulf states unable to advance their own tax plans, said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. 
‘‘The claims could pose a serious challenge to the GCC Excise Tax and may prevent the other GCC states from implementing it in its current form,’’ Vanhee said in a July 19 email. He noted that under the WTO dispute settlement system, the issue is currently in the consultation phase. If no mutually agreed solution in line with the WTO agreement is found, the case will be referred in a first stage to a WTO panel. ‘‘A potential ruling is binding on the WTO members. The majority of WTO disputes get resolved in the consultation phase,’’ Vanhee said. Coca-Cola Co. declined to comment. Austrian-based energy drink manufacturer Red Bull didn’t respond to a request for comment.

Reproduced with permission. Published July 20, 2018. Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
UAE VAT and entertainment - entertaining distinctions leading to less festivities

UAE VAT and entertainment - entertaining distinctions leading to less festivities

20180726 by Aurifer
Practitioners asked for it and here it came, another clarification. The UAE's FTA published its fifth public clarification, this time on entertainment expenses. Article 53 of the UAE's Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.

UAE VAT and entertainment - entertaining distinctions leading to less festivities

UAE VAT and entertainment - entertaining distinctions leading to less festivities
20180726 by Aurifer
Practitioners asked for it and here it came, another clarification. The UAE's FTA published its fifth public clarification, this time on entertainment expenses.

Article 53 of the UAE's Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.

VAT on entertainment expenses provided to non-employees, such as accommodation, food and drinks not provided during a meeting and access to shows or events, or trips provided for the purpose of pleasure or entertainment, is not recoverable. 

This very strict and conservative position disallows pharmaceutical companies inviting their buyers to a conference in a hotel to deduct input VAT. A dealer holding a launch party for a new car model will also be prevented from recovering the input VAT on the food, drinks, band, etc. although it is clearly done with the objective of increasing sales. It is however allowed to provide potential customers with gifts (although these could constitute deemed supplies for which VAT is due).

For employees, VAT on employee expenses is recoverable if there is a legal obligation, a contractual obligation or documented policy (and a proven business practice) or a deemed supply which is accounted for. 

The hotel stay paid to a new joiner before this joiner finds his own home is a recoverable expense. However, the lunch or dinner for employees (e.g. Iftar) is not.

Simple hospitality does not block you from recovering input VAT. Expenses qualify as simple hospitality:
- when the hospitality is provided at the same venue as the meeting
- if the meeting is interrupted only be a short break
- if the cost does not exceed internal policies
- there is no additional entertainment accompanying the food and beverages

A gala dinner where food and refreshments are considered to be so substantial that they constitute an end in themselves, will be considered as an entertainment expense.

Importantly, for conferences and business events, if a fee is charged for attendance input VAT is deductible, if not the catering services will not be deductible.

There are some interesting distinctions as well for sundry and pantry expenses. Tea and coffee is generally deductible, as well as flowers, chocolates and dates.

For staff parties no VAT is recoverable, neither for service awards, retirement gifts, Eid gifts, etc.

The clarification was much needed, as audits in the past few months have shown diverging interpretations of the term entertainment expenses. 

Although seemingly anecdotal in nature, the business versus entertainment nature of expenses has proven controversial in all VAT jurisdictions around the world. It has lead to (Administrative) Supreme Court decisions in various countries.

It can be expected in the UAE that it will also be subject to controversy. Businesses will have to review their expense policies again as a result of the publication of this clarification. Especially documenting certain employee expenses will allow them to still recover the input VAT.