One month after VAT in the UAE – Have you evaluated these aspects?
VAT in the UAE is in a state of constant evolution. A result of becoming a new tax legislation; this has left ambiguities and varying practices being followed across the Emirates. While the Federal Tax Authority (FTA) has been issuing clarifications on many aspects, it is imperative for businesses to ensure they're not exposed to significant risks.
Some of the key aspects that businesses should consider include:
1. Classification of activities under appropriate categories – Categories for classification include taxable, exempt, zero-rated and outside the purview of VAT. These categories not only determine the eligibility for recovering input VAT, but also the requirements for reporting within VAT returns. For example transactions classified as outside the purview of VAT are not required to be reported within VAT returns.
2. Filing of Returns – The FTA recently released guidelines specifying the procedure for depositing tax and filing VAT returns. The guide also specifies the details to be reported within the return. As a result businesses need to ensure that the changes carried out in their IT systems are capable of generating reports as per the requirements of the VAT returns.
3. Inter-company transactions – Since all inter-company transactions (except when under a same tax group) may trigger VAT implications, the transactions undertaken between group companies needs to be formalized by appropriate agreements. For all such inter-company transactions, a tax Invoice is required to be raised with applicable VAT. The tax invoice would define the transactions being undertaken and is essential to support the tax positions taken thereby.
4. Reverse Charge Mechanism (RCM) – VAT is applicable on the import of goods and services from outside the UAE. It is essential to identify such transactions where RCM would apply so that the VAT liability and the subsequent input VAT recoverable are appropriately accounted for.
5. Export of Services – Services provided to a service recipient not having any presence in the UAE qualify as zero-rated transactions. However, it is imperative for businesses to evaluate whether the relevant conditions to qualify as exports are being satisfied (specifically relating to services actually performed or directly related to real estate property in the UAE). It is also critical to ensure that appropriate contracts have been executed for such transactions, as to substantiate that the contractual service recipient is outside the UAE.
6. Re-validate availability of ITC on various expense heads (especially on items where input VAT cannot be recovered) – Since input VAT can be recovered only against a valid tax invoice, the relevant team needs to be guided to ensure that the invoices received are in an appropriate format so that there are no challenges at a later stage.
7. Transaction in/ from Free Zones – The FTA has released a list of specified Free Zones which would be considered as Designated Zones for VAT purposes. It is essential to track all transactions to/from such Designated Zones to ensure that correct tax positions have been taken. For example procurement of goods from Designated Zones would trigger RCM in the hands of registered buyers; whereas in the case of services, VAT would be charged on invoices by the Designated Zone suppliers.
VAT is going to transform how businesses operate in the UAE, and as a result indentifying the issues that could have an impact early on could be vital to keeping companies ahead.