AURIFER
Financial sector hard hit by VAT

Financial sector hard hit by VAT

29 October 2017 by AURIFER
The UAE is a regional finance hub with global aspirations. Many international banks are licensed in the UAE and the local and regional banks are very dynamic. Dubai's DIFC and Abu Dhabi's ADGM are important financial centres. Many sovereign wealth funds are also active in the region, as well as internationally. In KSA there are also important players on the financial and insurance market. All actors in the financial and insurance sector will be hit hard by VAT.

Financial sector hard hit by VAT

Financial sector hard hit by VAT
29 October 2017 by AURIFER
The UAE and KSA will both introduce VAT on 1 January 2018. The other GCC countries are expected to follow over the course of 2018. In KSA the laws are in place whereas in the UAE the publication of the implementing regulations is imminent.  

On the basis of the VAT laws in both countries, VAT applies on supplies of goods and services at a rate of 5%. The introduction of VAT has a profound impact on the business community in the GCC, triggering a higher cost of the products and services they offer, and a higher administrative burden to administer VAT.  

The financial and insurance sector occupy a special place in VAT legislation benefiting from deviating rules and therefore introducing even greater complexity. Applying VAT on complex products is not an easy task. The legislation often ends up zero rating or exempting financial and insurance transactions, instead of just subjecting them to VAT. The VAT exemption is not on any social or economic reason but on account of the conceptual and administrative difficulties associated with measuring the value of financial services.

The distinction between both is important, as on the face they both do not carry VAT, but the consequences in terms of the possibility to deduct input VAT are very different. Zero rating still allows input VAT deduction whereas the application of an exemption does not. This blockage of input taxes gives rise to cascading of tax and competitive distortions.

Additionally, certain income in the financial and insurance sector is out of scope of VAT, such as dividends or certain capital gains, which in turn again may impact the VAT recovery of such a business.   

KSA will tax fee based products (e.g. obtaining a credit card) and exempt margin-based products (e.g. a credit card loan). This principle will be applied throughout the financial sector. In terms of the insurance sector, life insurance will be exempt whereas other insurances subject to VAT. The UAE will only exempt certain financial services. The Director General of the FTA has recently declared that the sale and purchase of shares will be out of scope of VAT and profit margins will not be taxed. But the VAT treatment of financial services is much more extensive and complicated. The other GCC countries will likely apply a similar treatment.  

The fact that the financial and insurance sector is often largely exempt from VAT entails that they have a ‘mixed status’ for VAT purposes. It means that businesses need to get registered for VAT purposes but cannot deduct all of their input VAT, like regular businesses can. Instead, they need to apply a method to apportion the deductible input VAT. This method needs to be revised regularly.  

Contrary to regular businesses, VAT does not just flow through the financial and insurance sector. Instead it constitutes a cost. This has a number of negative consequences for purchases, outsourcing and intercompany charges, which may come at a higher cost.  

Even if the financial institution is fully VAT exempt, it will still have to pay VAT to its vendors and required to register for VAT purposes if they purchase services from outside the UAE. And even if the financial and insurance sector is largely exempt, the compliance burden is high. It has to keep the same records as a general business, i.e. a sales and purchase journal, and will have to file a VAT return like any other business.  

For example, it has to pay VAT itself on all services which businesses it receives from abroad. It requires that it keeps a purchase journal and makes a clear distinction between its foreign service supplier and its domestic suppliers.  

Opportunities lie in grouping related companies in the same country for VAT purposes, or by analysing which kinds of transactions could potentially benefit from a zero rate for VAT purposes.  

Islamic finance products further challenge the qualification of financial and insurance products for VAT purposes. Because of the riba prohibition, or prohibition to earn interest on loans, the underlying assets are often sold or given as security. This triggers a number of unsought consequences from a VAT perspective.  

The commercial opportunity for banks lies in a higher need for businesses of working capital and higher lending pending the introduction of VAT. The myriad of providers in the financial sector each have their specific position and VAT impact. Funds are impacted in a very different way than insurers or payment providers.   

Likewise credit card services, asset management services, insurance, investment in marketable securities all will be treated differently for VAT purposes. The common aspect for all financial services businesses is that all of them will be confronted with VAT and most of them simply have to get registered for VAT purposes.
    
Taking into account the date set for the implementation the UAE, (1 January 2018), it is about time that the FTA determines their comprehensive regulations for the implementation of VAT in financial sector. The uncertainty may deter investors in the UAE and lead it to shift to other jurisdictions where VAT is not implemented yet or is implemented in a more favorable way. Businesses in the financial sector need to make an impact assessment and determine their strategy for the implementation.   






UAE's Gold, Diamond Industries Plead for Lenience on VAT

UAE's Gold, Diamond Industries Plead for Lenience on VAT

20171022 by Courtesy of Matthew Kalman (Bloomberg BNA)
Dubai's status as a world trading hub for gold and diamonds could be threatened by the introduction of VAT in January 2018, industry leaders warned in the first high-profile protest against the new tax. They urged government officials to apply a zero tax on loose diamonds and gold when they publish the executive regulations for the tax.

UAE's Gold, Diamond Industries Plead for Lenience on VAT

A last-minute public protest against the UAE's implementation of VAT by leaders of the gold and diamond industry is heartfelt, but also reflects widespread uncertainty over the new tax, practitioners said.

UAE's Gold, Diamond Industries Plead for Lenience on VAT
20171022 by Courtesy of Matthew Kalman (Bloomberg BNA)
The value of the UAE's diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

Industry Concerned

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

“I'm already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe's largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn't clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India's Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn't practically be moved in reaction to a change, the same doesn't hold in the gold and diamond market,” Daly said by email on Oct. 18.

Even though there is some justification for their concern and the executive regulations aren't yet finalized, the jewelry executives had left their protest very late, he said.

 “VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.” 
Future of VAT in the EU

Future of VAT in the EU

20171006 by Thomas Vanhee
On 4 October 2017, the European Commission has set out how it proposes to reform VAT in the EU (https://ec.europa.eu/taxation_customs/business/vat/action-plan-vat/single-vat-area_en). These proposed changes should enter into force in 2022 and are amongst others aimed at tackling cross-border VAT fraud.

Future of VAT in the EU

Far ahead of the GCC?

Future of VAT in the EU
20171006 by Thomas Vanhee
The most recent VAT gap study showed that the Member States of the EU in 2015 missed out on around 150 billion EUR. According to estimates, around 50 billion EUR of that is due to cross-border VAT fraud.

The proposal of the European Commission to tackle this cross-border VAT fraud is to tax any cross border supplies in the EU. Currently, for goods these are broken down into a (potentially) exempt intra-community supply in the country of departure and a taxed intra-community acquisition in the country of arrival. For services, in a B2B environment these are simply taxed in the country of establishment of the recipient.

In the Common VAT Agreement of the States of the Gulf Cooperation Council, which is the Treaty signed by the GCC States to introduce VAT, cross-border supplies of services are treated in the same way as currently in the EU. For goods however, these supplies are in a B2B sale taxed in the country of recipient and the customer is liable for the payment of VAT on this supply.

In both the EU and the GCC the issue of cross-border VAT fraud was examined. The circumstances are obviously different. The EU has a VAT system in place since decades, whereas the GCC is only just about to start, with the United Arab Emirates and the Kingdom of Saudi Arabia introducing VAT on 1 January 2018.

The EU is choosing a different way forward than how it currently operates. Going forward, as from 2022, it intends to tax cross border supplies and hold the seller accountable for VAT. In other words no reverse charge applies. An exception would be made for buyers who are trustworthy, so-called certified taxable persons. These buyers would be allowed to reverse charge on the purchase. In order to mitigate the additional administrative burden, a one stop shop will be foreseen to report cross border transactions.

The GCC had the intention to implement an electronic services system ("ESS"). The system was designed to match sales and purchases of goods and services within the GCC. It is comparable to the EU's European Sales Listing but it would work in a safer and quicker way matching transactions and giving both seller and buyer reassurance. The GCC is kicking off though with not all States implementing VAT simultaneously and with the ESS not in place. Once in place it will provide a good test case to determine whether it is an effective measure to reduce cross border fraud.

Although the EU has a much longer tradition in the application of VAT, it chooses an option which is not necessarily more effective in tackling cross border VAT fraud. An electronic system matching sales and purchases in a fast and effective way, constituting a type of block chain solution, may be much more effective than taxing all cross border supplies. Time will tell whether either the EU's option or the GCC option will be the more effective in tackling cross border VAT fraud.
UAE FTA opens VAT registration portal

UAE FTA opens VAT registration portal

20171002 by Aurifer
On September 29, 2017 the Federal Tax Authority (“FTA”) of the United Arab Emirates (“UAE”) opened its VAT registration portal to allow businesses to register for VAT. The portal is accessible via www.tax.gov.ae.

UAE FTA opens VAT registration portal

Three months before the actual implementation the FTA opens the VAT registration portal

UAE FTA opens VAT registration portal
20171002 by Aurifer
With January 1, 2018 rapidly approaching, companies now have a mere three months to get registered for VAT. We advise businesses operating in the UAE to already start applying for a Tax Registration Number (TRN) well ahead of the implementation date. Doing so will allow them to fully prepare for the launch of VAT and avoid any technical difficulties which may occur as the year-end (and thus the implementation date) approaches.

Aurifer's tax advisors have already familiarised themselves with the registration process and are ready to assist your company in obtaining its VAT number. Hereafter we will discuss certain aspects of the UAE VAT registration process.

Which businesses can / must apply for a VAT registration?

It is important to know whether or not you are required or eligible to register for VAT. As a basic principle, every person operating a business is obligated to register for VAT. A person can be an individual (i.e. when an individual is operating as a sole trader) or a legal person. The term person also covers other entities (e.g. an unincorporated body such as a charity or club, a partnership or trust).

Businesses established in the GCC (‘Resident Businesses') whose turnover exceeds the mandatory VAT registration threshold must register for VAT. Where the turnover of a business is below the mandatory VAT registration (AED 375.000 / USD 100.000) threshold, that business may still opt to register, provided that its turnover exceeds the  optional VAT registration threshold (AED 187.500 / USD 50.000).

Both the mandatory and the optional threshold must be assessed in two different ways. The thresholds must be evaluated, both in terms of effective turnover in the last 12 months as in terms of the expected turnover in the next 30 days.

It should be noted that there is no threshold in place for businesses which are established outside the GCC (‘Non-resident Businesses'). These businesses are required to register as from the first supply of goods or services in the UAE where they are liable to account for the VAT.

A side effect of the optional threshold is that recently incorporated businesses and micro-businesses will not be capable of registering for VAT. In most cases these businesses do not meet the minimum turnover requirement during the 12-month period, let alone the 30-day period. As a result, the optional threshold works as a de facto minimal threshold.

UAE VAT law provides for the possibility to form a Tax group between related parties,. Forming a Tax group can be an interesting opportunity for corporate groups as it allows them to organise their business activities as a whole. Provided that all members of the Tax group are UAE residents and carry out an economic activity, a Tax group can be established through a single VAT registration. This entails a significant administrative simplification for large groups of companies.

Businesses that only make zero-rated supplies (e.g. exports, international transport of passengers and goods), can apply to be exempted from registering for VAT. These businesses will still have to go through the VAT registration process, but will at a certain point have to indicate that they would like to apply for the exemption.

Why should you register?

Businesses not registered for VAT cannot charge VAT on their sales and cannot claim any VAT incurred on their inputs. Furthermore, the FTA may impose an administrative fine of AED 20.000 on every business that fails to comply with the obligation to register within the timeframe specified in the VAT law.

How to get registered?

Businesses can register through the online VAT registration portal (link). Throughout the registration process, you are required to upload copies of various documents. Accepted file types are PDF, JPG, PNG and JPEG. The individual file size limit is 2 MB.

Note that a number of information needs to be communicated in Arabic, such as trade name and authorised signatory. These must be manually entered.

What can Aurifer do for your business?

Aurifer can advise you on whether or not your business is obligated to register for VAT purposes. In addition, Aurifer provides VAT registration services where our tax advisors manage your VAT registration from A to Z. This includes assistance with collecting the necessary documents and information, completing the registration procedure and communicating with the FTA on your behalf.

Providing the wrong documents or information during the registration process may delay your VAT registration and can in some cases lead to your application being rejected by the FTA. Having tax professionals assist you during this process can significantly reduce the headache for your business.