One hundred days have just gone by since the UAE, an erstwhile tax haven like several of its GCC counterparts, implemented a new value-added tax (VAT) system. Across the country, government, companies and consumers are gradually adjusting to the new normal.
The introduction of VAT has brought with it a wave of change for consumers and businesses that have long been accustomed to minimal taxation. In line with the growing competitiveness of the world economy, the UAE’s shift towards a taxation economy is both commendable and necessary, as it encourages economic diversification and boosts transparency.
As is the case with anything new, companies, particularly small and medium businesses, are facing challenges in the early days of the VAT environment. Through exchanges with UAE-based companies of all sizes, Sage has discovered that the biggest challenge for businesses is in finding trained human resources in the region or in fact, training internal employees to understand the complexities of a tax economy. Companies are also facing difficulties in getting the right VAT accounting systems up and running.
The implementation of VAT at the start of the year included transitional provisions that clearly outline what happens to contracts and the supply of goods and services that overlap the tax and non-tax periods. Several businesses did not understand or indeed spend enough time to understand these regulations. Furthermore, they did not make the effort to go back to their customers to explain what will happen to contracts that span months or years, and the impact on outstanding payments or invoice settlements. Today, such businesses are struggling because they are required to pay VAT on most of those transactions.
In addition to transitional provisions, companies have also found themselves grappling with the reverse-charge mechanism that is applicable in VAT economies. The complication arises from the fact that most companies do not have existing systems in place to handle tax groups, which are very different from the more familiar financial groups, consolidation or group of companies concept. Meanwhile, the reverse-charge concept is also not native to the region, and is not common practice in most tax economies. Companies are increasingly finding it a challenge to account for reverse charges in case of purchases made outside the region, because they are mandated to carry out several manual transactions to book both import and export tax.
The UAE’s Federal Tax Authority (FTA), for its part, has taken proactive measures to clarify existing regulations and introduce new ones in the past few months, such as defining designated zones and clarifying in depth how to file tax returns. The tax authorities have also shown flexibility — to the benefit of UAE companies — through waiving the penalties for non-registration until April 30 and relaxing the timeline for filing the first VAT returns.
The FTA is cognisant of the challenge that companies are still trying to overcome, and is aiming to make the VAT transition as smooth as possible.
Most of these problems could have been avoided, and can still be easily addressed if the right accounting system is implemented. The accounting system must be smart and capable of handling each step of VAT accounting on a single platform, including invoice generation, returns-filing, and tax audits, without resorting to multiple add-ons or the tweaking of existing systems.
The good news is that for most businesses, these accounting systems are not overly complicated in terms of adoption or implementation. Firms can still make their lives easier and move seamlessly to an FTA-approved and VAT-compliant accounting application. However, they will need to act quickly because time is running out.
Mansoor Sarwar is the regional director of Technical Services and Pre-Sales at Sage Middle East.