Many ways UAE businesses can make use of its cash in COVID-19 infected times
Countries have started to see the economic impact of COVID-19 ... and it’s unlikely to get better in the short-term. Governments have announced stimulus packages for small and medium enterprises to reduce the cost of doing business and provided deferment on tax payments to provide the much necessary liquidity.
The UAE has also offered stimulus in billions of dirhams and more than 100 economic and financial incentives to support the community and businesses. There is a visible impact on travel, tourism, hospitality and entertainment sectors as they experience a drastic plunge in customers. There is a possibility of a drop in other sectors as well, such as real estate, shipping and logistics as customers opt for a reduction in rentals, adjourn entering into lease/purchase of real estate and temporarily freeze imports.
These are some of the tax and business considerations that are important for companies to manage their working capital and ensure minimal business disruption. On the tax side, efforts should be placed by businesses on how to recover the input VAT at the soonest. The more input VAT is recovered, the more a business would be in a position to utilise its cash optimally.
Possibility of recording the purchase invoices in the ERP should be moved faster to recover the VAT. This will be critical for real estate and construction companies, where significant delays in the processing of invoices (because the lead time it takes to sign off the invoice until it reaches finance for payment) lead to more time being taken up in recovery of VAT charged by contractors.
Payments to vendors can still be made within six months without losing the recovered VAT. Efforts can also be made to check if any vendor invoices issued in the past were missed while recovering the VAT charged.
Make it snappy on refunds
The focus should be placed on fast-tracking the refund claims not yet filed with the tax authorities. Governments are announcing measures to fast track refunds that will help businesses with more cash. Knowing how the UAE Government has always been a leader in such initiatives, one can assume that refund claims that are either not yet released or new ones to be filed would be processed faster.
Businesses should ensure that statutory and tax compliances are managed without disruption, especially when staff is working from home. The last thing any organisation would want at this stage is a fine for tax non-compliance. Appropriate technology tools should be used to ensure the extraction of data from the source system is available to the teams.
A seamless pre- and post-extraction of data with a strong review mechanism should be in place to avoid unnecessary misses, leading to penalties later. Here, the “maker-checker” concept will play a critical role in finalising the tax workings, including regular discussions over calls, web exchanges, etc.
Unless there is an announcement to defer payment of taxes or file tax returns, businesses have to be ready with the infrastructure to work remotely and yet ensure compliance with the law.
More ways to cut tax charges
Businesses should explore the possibility to submit an administrative exception request to the Federal Tax Authority (FTA) for an increase in the length of the tax period from monthly to quarterly or quarterly to six-months, subject to conditions. The longer tax period would give much needed extended credit term for tax payments.
Other tax optimisation strategies could be evaluated include use of bank guarantees for goods imports meant for re-export, setting-up bonded warehouse for imported excise goods, seek 1 per cent customs duty refund on imported goods sold locally (announced recently by the Government).
On the business side, all efforts should be made to preserve cash, collect the receivables as swiftly as possible and limit the costs. Regular interaction with customers at this stage is essential to understand their cash positions and identify ways to collect money. Offering a discount for early payments could be lucrative for some.
Efforts should also be made to unlock money blocked on unfinished or partially completed projects and requesting customers to release some portion of the project costs.
The CFOs need to figure out the costs that could be shunted out of the P&L (profit and loss) and continue the ones that are critical for business. Rationalisation measures, including effectively using office premises could result in cash optimisation. Layoffs should be the last resort — but working with temp and contracted staff and outsourcing non-core functions should be explored immediately.
The long-term interests of the organisation should be kept in mind while undertaking the cost reduction drive as some costs that may look unwarranted now, could be critical to continue.
Organizations should ensure that enough oil is kept in the supply chain machinery for minimal disruption of their manufacturing and services. This will be achieved by continuously talking to vendors to explore extending credit period and preparing revised payment schedules. But never at the cost of disrupting supplies from them.
This could also be the right time for organisations to identify all the slow performing businesses that are cash guzzlers but not giving enough returns. Investments in such businesses could have been strategic in the past and may now need a re-look. Possibility of selling a stake in such businesses could also lead to an inflow of much-needed cash.
Well thought through actions will help organisations sustain in the long term.
— Nimish Goel is Partner at WTS Dhruva.