AURIFER
UAE releases VAT law

UAE releases VAT law

27 August 2017 by AURIFER
The UAE has now published its VAT law

UAE releases VAT law

UAE releases VAT law
27 August 2017 by AURIFER
The UAE Ministry of Finance published its VAT law on 27 August 2017. It constitutes the second piece of tax legislation that will be enforced in the UAE, after the publication of the legislation concerning excise taxes, which will enter into force on 1 October 2017. The VAT law constitutes the basis for the introduction of VAT as of 1 January 2018. This is a landmark law that will massively impact businesses and consumers in the UAE. The VAT law comes a little earlier than expected, the authorities having announced it would be published in September only. It will be followed by the implementing regulations, which will provide more detail on its application.

The UAE VAT law implements the GCC VAT Agreement, a treaty signed by all 6 Member States of the GCC. Drafting on the treaty has begun as far back as 2009. In its design, it is loosely based on the VAT directive. The VAT directive is the basis of VAT legislation throughout the countries of the European Union, where VAT originates from. The Member States have committed to introduce VAT throughout the GCC by at the latest 1 January 2019. The Kingdom of Saudi Arabia has already published its VAT law and is currently pending the publication of its implementing regulations.

Businesses have to register when they expect to meet the mandatory registration threshold of 375,000 AED. The possibility to register should open as of September through tax.gov.ae. The UAE expects around 350.000 businesses to register for VAT purposes. To calculate whether a business needs to register, there is a retrospective test and a so-called prospective test. For the retrospective test the past twelve months need to be analysed, but remarkably for the prospective test only the next 30 days. 

This prospective test is foreseen to be applied differently in the Kingdom of Saudi Arabia, where the next twelve months need to be taken into account, which is also the way it seems to apply under the treaty. If a business makes supplies or incurs expenses of half that mandatory registration threshold, it can also voluntarily register for VAT purposes.

Importantly the VAT law confirms the policy adopted by the UAE in terms of the exceptions it will make that all supplies in the UAE are subject to the standard 5% VAT rate. 

According to its law, it subjects certain supplies to a zero rate. This means that VAT is not calculated on the supply, but the supplier can still recover all input VAT. This applies for example for international passenger travel. Flights from Dubai to Riyadh or to a third country will not be subject to VAT. This is good news for the tourist sector, which already sees prices for hotels and restaurants increase with 5% VAT.

It also confirms that the first supply of residential buildings within 3 years of their completion is subject to a zero rate. This rule has been imported from the UK, but is not widely applied in other European jurisdictions. It is obviously beneficial for prospective buyers of a new home and good news for the UAE real estate sector. Crude oil and gas will also be subject to a zero rate, whereas the Kingdom of Saudi Arabia is not expected to do the same.

Very important to the wider public is the subjecting of the education and health care sector to a zero rate. Tuition fees will therefore not increase in price. The same holds for preventive and basic health care. This does not prevent that some of the supplies by educational institutions or health care institutions will still be subject to the standard rate of 5%.

Certain supplies are subject to the application of an exemption for VAT purposes. This means that the supplier cannot recover any input VAT. This is the case for certain financial services, the supply of bare land, the supply of real estate not subject to a zero rate and local passenger transport. This is on the face of it goods news for the RTA metro fees. However, importantly, this also means that the RTA will not be able to recover any input VAT charged to it for the extension of the metro in view of Dubai 2020 and therefore its costs will increase.

The VAT law sheds some tiny light on the VAT treatment of free zones, hinting at the application of a regime similar to that of the designated zones in the Excise Tax law. Detail on the application of this regime is however deferred to the Implementing Regulations, which are still yet to be published.

Governments will remain out of scope for VAT purposes, unless they are not acting as a government or enter into competition with the private sector. A list will be established on the basis of which this distinction will be made and a cabinet decision will be made which governmental entities need to register for VAT. This additional information will be very important as government entities may enter into competition with private actors and the fact that they are not subject to VAT can provide them with a substantial advantage over the private sector. Any subsidies provided by governments can also be deducted from the taxable base on which to calculate VAT. This is the exact opposite of what is applicable in the European Union. Additionally, government entities put on a specific list will be able to reclaim VAT from the Federal Tax Authorities which they paid to their suppliers.

In its technical wording, the UAE VAT law deviates substantially from the Agreement and from the legislation published in the Kingdom of Saudi Arabia. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will therefore have to read both legislations closely as different terms may mean the same in both legislations. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will incur substantial administrative costs due to the different laws, VAT returns and procedures. Whereas in the European Union the European Commission pushes towards harmonisation of the laws and obligations, the GCC Member States have not harmonised their laws and obligations.

Time is now really crucial for businesses, as 4 months until 1 January 2018 is a very short implementation period for businesses wanting to being compliant for VAT purposes.   
KSA releases VAT law

KSA releases VAT law

9 August 2017 by AURIFER
The Kingdom of Saudi Arabia has now published its VAT law in its Official Gazette

KSA releases VAT law

KSA releases VAT law
9 August 2017 by AURIFER
On Friday 29 July 2017 the Kingdom of Saudi Arabia released its VAT law. It is the first piece of VAT legislation published in the GCC and therefore sets the tone for the other Member States.

The law follows the unique structure of the previous draft law. Although likely not compliant with the Saudi Basic Law, the VAT law refers to a great extent to the VAT Agreement concluded between the GCC Member States.

The level of detail in the VAT law is therefore quite limited. It does contain a number of the penalty provisions since these had to be included in the law, and not in the implementing regulations. The same thing holds for the appeal provisions. 
       
According to the law, VAT will apply on all imports and supplies of goods and services as of 1 January 2018. The extent of the exemptions and zero rates will be determined in the implementing regulations. Tax payers who register late will incur a penalty of 10,000 SAR.

The issuance of invoices or payments before 1 January 2018 will be disregarded if the supply is made after 1 January 2018.
KSA draft VAT implementing regs

KSA draft VAT implementing regs

9 August 2017 by AURIFER
As with its VAT law, the Kingdom of Saudi Arabia has published the bilingual draft VAT Implementing Regulations for consultation (see https://www.gazt.gov.sa/dzit_logon/MenuItems.jsp?menu_id=regvatform&portalapp=x&ume.logon.locale=en). The public consultation is ongoing until 19 August 2017.

KSA draft VAT implementing regs

KSA draft VAT implementing regs
9 August 2017 by AURIFER
The Implementing Regulations provide much more detail on how VAT will actually apply in the KSA. The draft VAT law was unique in its design as it referred back to the VAT Agreement concluded between the six Member States of the Gulf Cooperation Council. It did not provide the basis for domestic taxation, deviating in its design from international standards around the design of tax laws and potentially even deviating from its own Constitution, the Saudi Basic Law. 
 
The detail in the Implementing Regulations is important for businesses preparing for the implementation of VAT. They now at least have a sense of the direction the KSA is choosing in implementing VAT. For example, more details are given with respect to how tax payers can register, what kind of documentation is required for GCC supplies, but also how tax payers who have exempt supplies can deduct input VAT and to what extent expenses with respect to vehicles can be deducted. The Implementing Regulations are still subject to final amendments after the public consultation process. 
 
The publication of the Implementing Regulations is another step in the process towards the implementation of VAT in the KSA on 1 January 2018. Insofar as Saudi businesses have not started preparing for the introduction of VAT, it has now become high time to do so, as preparations are time consuming. 
How real estate businesses will be hit by the introduction of VAT

How real estate businesses will be hit by the introduction of VAT

9 August 2017 by AURIFER
Real estate is an important part of the Gulf economy. Construction fever in the United Arab Emirates is high, especially in Dubai as it prepares for the Expo 2020. The complexities of VAT hit especially the real estate sector.

How real estate businesses will be hit by the introduction of VAT

How real estate businesses will be hit by the introduction of VAT
9 August 2017 by AURIFER
Real estate usually occupies a special place in VAT legislation benefiting from deviating rules, introducing complexity in the operations. Instead of following the general rules, often VAT is applicable in a different country, or the transaction may be exempt from VAT or subject to a zero percent rate, instead of just subject to VAT.

For instance, regardless where vendors or customers are located, for VAT purposes sales or purchases with respect to a building will mostly be subject to VAT in the country where the building is located.

Whether the transactions will actually be taxed will depend on the domestic tax legislation of the country where the building is located. The Member States of the GCC are allowed to implement VAT with respect to real estate in a different way and are expected to do so. The UAE is expected to zero rate the first sale of a new building whereas KSA is not expected to do so. Both would exempt residential rent and tax commercial rent.

Property developers or rental companies face costs which generally bear 5% VAT. Their output however will not necessarily bear VAT, as shown in the examples above. 

Specific agreed payment terms need to be taken into account when assessing the application of VAT, since working capital will be particularly hit. Indeed, VAT may be due before the customer has actually paid.

As mentioned above, the lease or letting of property could be exempt from VAT in certain circumstances. The developer or constructor may also wish to change the destination of the developed goods. Mall managers also have their specific issues because of the specific terms in the agreements they conclude with their tenants.

Taking into account the date set for the implementation in KSA and the UAE, (1 January 2018), it is high time for real estate businesses to determine their strategies for the implementation.