www.pwc.com/me An introduction to Value Added Tax in the GCC January 2017 170115-110114-AP-OS_v1.indd 1 1/17/2017 2:00:24 AM Contents Introduction 3 What is VAT? 4 How does VAT work? 4 Different types of VAT supplies 5 Compliance requirements under VAT 6 VAT implementation considerations 7 Business considerations 10 Specific industry considerations 12 Frequently asked questions on VAT implementation 14 How can PwC help? 15 PwC contacts 15 170115-110114-AP-OS_v1.indd 2 1/17/2017 2:00:24 AM Introduction This publication has been prepared to provide a general overview of how VAT works and the related operational considerations in order to assist businesses to successfully implement the tax and manage VAT post implementation. The information included is based on our global collective knowledge and experiences of VAT including our work with Government and Revenue Authorities around the world, and also our networks and work with various tax authorities within the GCC. The proposed introduction of VAT in the GCC will present a number of challenges for businesses operating in the region as VAT will impact all parts of your business. Experience from implementation in various jurisdictions has shown that businesses need significant lead time to prepare their people, customers, vendors and systems for the introduction of VAT. Such a transformation will require the involvement and support of Senior Management to ensure the necessary ‘whole of business’ engagement in the implementation project. A well planned and executed VAT implementation will result in benefits for the business in respect of on-going compliance and management of risks, as well as, cash flow management. We hope you will find this useful. Should you require any further information or have any questions on VAT we are happy to assist. You will find our contact details set out at the back of the document. Jeanine Daou Middle East Indirect Taxes Leader Key considerations when embarking upon a VAT implementation project are: • Competition for resources within the business, as the VAT implementation project may coincide with other transformation projects planned for the business. • The availability of internal resources such as project managers, business analysts, IT and others needs to be evaluated early. • An early assessment of the requirement and availability to leverage external resources (such as VAT specialists, IT systems and business analysts as well as project management consultants); upon which the necessary resources should be procured early. • An early assessment of any impact the introduction of VAT may have on your cross border transactions and GCC trade as well as any impact on pricing, customers, vendors, intermediaries, capital expenditure planning and your supply chain. An introduction to Value Added Tax in the GCC | 3 170115-110114-AP-OS_v1.indd 3 1/17/2017 2:00:29 AM What is VAT? How does VAT work? VAT is an indirect tax applied upon the consumption of VAT registered businesses charge and add VAT to the value most goods and services. VAT is levied by VAT registered of goods and services they supply. Such businesses can also businesses which make supplies of goods and services in reclaim VAT incurred on goods and services acquired for the course or furtherance of their business. VAT will also business purposes (subject to some restrictions) such as apply on the importation of goods. the purchase of raw materials and other consumables used for the purposes of business. VAT is levied at each stage in the supply chain and is collected by businesses on behalf of the Government. VAT is For imports, VAT is charged at the first point of entry into ultimately incurred and paid by the end consumer. home consumption (when customs duty may also apply). Please refer to the illustration for ease of understanding. Although VAT will apply to most goods and services there are some likely exceptions: this includes basic food items, essential medicines and exports of goods and international services which are expected to be zero rated supplies. Furthermore other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempt from VAT. Sales 5% charged VAT recovered Net VAT on the sales on the purchases payable Beans Manufacturer AED10.50 AED0.50 AED0 AED0.50 Beans Distributor AED15.00 AED0.75 AED0.5 AED0.25 Coffee AED20.00 AED1.00 AED0.75 AED0.25 Shop Total VAT paid by end consumer* AED1.00 * VAT is collected through the supply chain and the end-consumer pays and bears the VAT cost 1. The manufacturer sells the raw beans and charges 5% 3. The coffee shop has incurred input tax of 0.75 AED on his (0.50 AED) on the sale price as output tax (VAT) to the purchase from the distributor, and charges 5% (1.00 AED) distributor. As the manufacturer has not incurred any on his selling price as output tax to the final consumer. The input tax on his purchases, he has a net VAT payable to the coffee shop therefore has net VAT payable of 0.25 AED tax authority of 0.50 AED (0.50 AED output VAT – 0 AED (1.00 AED output VAT – 0.75 AED input VAT amounting to input VAT=0.50 AED payable) 0.25 AED payable to the tax authorities) 2. The distributor has incurred input tax of 0.50 AED on his 4. The final consumer bears the full burden of the tax paid to purchase from the manufacturer, and charges 5% (0.75 the tax authorities, 1.00 AED AED) on his selling price as output tax to the coffee shop. The distributor therefore has a net VAT payable of 0.25 AED (0.75 AED output tax – 0.50 AED input tax amounting to 0.25 AED payable to the tax authorities) 4 | PwC 170115-110114-AP-OS_v1.indd 4 1/17/2017 2:00:33 AM Different types of VAT supplies VAT will apply to most supplies of goods and services and this may be at a standard rate (5%) or at a zero rate (0%). These are called ‘taxable supplies’. There are other types of supplies that are not subject to VAT – these are referred to as exempt supplies. Illustrative example – VAT taxable supplies at Before VAT VAT collected VAT credit After VAT the standard rate (5%) Sales 100 5 105 Features: VAT charged, Purchases (80) (4) (84) VAT credit available VAT to revenue authority 5 (4) 1 Examples: Most goods, including vehicles, Margin 20 20 clothing, business consumables, etc. Illustrative example – VAT taxable supplies Before VAT VAT collected VAT credit After VAT at the zero rate (0%) Sales 100 0 100 Features: No VAT Purchases (80) (4) (84) charged, VAT credit available VAT to revenue authority 0 (4) (4) Examples: Basic food Margin 20 20 items, essential medicines, exports of goods and international services Illustrative example – exempt supplies Before VAT VAT collected VAT credit After VAT Features: No VAT Sales 100 0 100 charged, no VAT credit Purchases (80) (4) 0 (84) available VAT to revenue authority 0 0 0 Examples: Healthcare and education services, Margin 20 16* financial services, insurance, sale and lease of residential property and * As illustrated in this example, the restriction on businesses making exempt supplies to recover input tax incurred has the domestic public ability to erode business profit margins. transportation An introduction to Value Added Tax in the GCC | 5 170115-110114-AP-OS_v1.indd 5 1/17/2017 2:00:35 AM Compliance requirements under VAT Introduction Calculating and reporting VAT Each member state of the GCC will establish their own Following registration, a VAT registered business is required separate national legislation concerning VAT and as such the to charge and remit VAT collected to the Tax Authority on a detailed compliance requirements and set of rules will be periodic and regular basis. The total amount that must be outlined in each respective legislation. As such we outline remitted is determined by the amount of VAT charged on below an overview of the expected general underlying VAT the total supplies of goods and services less the amount of compliance requirements. VAT credits incurred on purchases, for the respective reporting period. An inherent feature of the VAT is the self-assessment nature, meaning every business which is VAT registered (or required In most jurisdictions, the process of reporting and paying VAT to be VAT registered) must record, assess and report its VAT is completed through the filing of a VAT Return. VAT obligations and entitlements, in accordance with the law, to registered businesses are required to file the VAT Return the tax authorities. usually by the end of the calendar month following the end of the reporting period, which may be monthly or quarterly. The Other requirements of the VAT will include: remitting of VAT either on a monthly or quarterly is a serious • Mandatory registration for VAT for all businesses business consideration in view of the potential cash flow exceeding the mandatory VAT registration threshold. implications for the business. • Filing of periodic VAT returns with the tax authorities (either monthly or quarterly). Invoices • Remitting any VAT payable by a specified date. The process of charging VAT on supplies of goods and services • Record keeping in respect of all business transactions: requires businesses to issue VAT invoices. A VAT Invoice is a – Tax invoices document that must be produced and issued by VAT registered – Debit or credit notes businesses to provide documentary evidence of the sale of – Import and export records goods and services in compliance with the VAT law. – Records of goods/services provided for free or A VAT Invoice is also required by the business as documentary allocated for private use evidence to support VAT credit claims, i.e.