What a year for both UAE based-businesses and the Federal Tax Authority (FTA). It began, hearts in mouths, with the opening of business on 1 January 2018. Have we correctly applied VAT to our sales, will our systems generate compliant tax invoices for customers, will our goods clear Customs without delays — all these were questions asked by many a business owner/manager.
The FTA, on the other hand, may well have been asking, have we reached all businesses for VAT registrations, will our own system cope with finalising, amending and processing VAT registrations.
To ease the burden, several months’ amnesty was given to complete VAT registrations. Are we ready for the first returns on 28 February 2018?
In the months that followed, and to everyone’s relief, business proceeded more or less as usual — which is not to say without some hiccups. Glitches were, however, largely minor given the enormous transition to a new tax regime where both businesses and authorities had no prior tax experience.
Throughout the year, gaps in the application of VAT were filled by the release of several Cabinet decisions, VAT guides for real estate and director’s fees among others, and supplemented by a series of clarifications on various issues.
These included explanations regarding entertainment for employees (businesses were saved additional VAT costs on office flowers, and while dates for meetings were spared taxation, this did not extend to the office birthday cake or employee lunches), whether workers accommodation was residential or commercial in nature, and what exchange rates to use for converting foreign invoices.
Importantly for many UAE businesses, the government approved the introduction of VAT refunds for tourists to the UAE and this came into operation in early November. Whilst a small gesture, given the relatively low VAT rate of 5 per cent in the UAE (compared to an average of 22 per cent in Europe), it is likely to have a powerful impact on the psyche of tourists who are tuned into accessing refunds in other key destinations.
If there is one thing we have learnt, it is that VAT is not a set and forget exercise. It requires on-going compliance, vigilance and adaptation. As the VAT regime matures, and the Federal Tax Authority builds its capacity and expertise, the road ahead is likely to see a lift in FTA audit activity.
Although currently focused on those seeking VAT refunds, this may move on to other taxpayers identified, via use of various metrics, as high risk. As always, the best defence is to be prepared, ensure that appropriate and robust governance procedures are in place and, if in doubt, consider an external independent review prior to any FTA audit.
A New Year’s resolution may perhaps be to put a process into place (either internally or with external assistance), to manage expected changes in VAT interpretation based on the inevitable deluge of new VAT guides, clarifications and guidance materials. We have seen some businesses bring on a dedicated indirect tax manager to ensure on-going compliance.
Finally, spare a thought for those UAE businesses with operations in Bahrain. For many, they will be reliving the experience from the start of 2018 as they prepare to open business on January 1, 2019 with the introduction of VAT in Bahrain.
Rob Dalla Costa is director of VAT at KPMG Lower Gulf.