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No blanket relief from VAT in UAE free zones

dubai - Businesses across the board are not ready for VAT, say tax consultants

Businesses operating out of free zones in Dubai are unlikely to get complete relief from value added tax (VAT) from January 1, 2018, say tax consultants.

"It may not be practical to provide total relief from VAT because of potential distortions of competition and the risk of undermining the tax base. It could distort the Dubai economy if so many businesses are outside the VAT net. There won't be a blanket relief," says Brian Conn, VAT partner, BDO UAE, Saudi Arabia and Kuwait.

"Duty-free goods in bonded areas will remain VAT-free until they are removed from bond and any sales of the goods prior to the point where they become duty paid will be VAT-free," adds Conn, informing that a bonded free zone is one where you can hold goods before they are duty paid, such as Jebel Ali Free Zone.

Small and medium enterprises (SMEs) are likely to face cash flow issues in the initial stages of VAT implementation.

"Cash flow is one of the things often forgotten with VAT with no clarity on how long the refund processes will take," says Conn. "If you have a business where the money is flowing through, you can say VAT does not have much impact on my business, but naturally at any one point, you might either be owing a lot of money to the government or you might be waiting for a refund."

Citing the example of Malaysia, where a goods and sales tax was implemented in 2015, Mok Chew Yin, executive director, advisory at BDO, said the country's tax officials delayed refunds as they were inundated with tax returns. Authorities wanted to first audit the returns before starting the refund process, thus resulting in delays.

While the standard VAT rate of 5 per cent to be levied in the UAE is low compared to other jurisdictions, there will be an impact on the economy, with some industries affected more than other.

"The UAE's retail trade will be affected by VAT because of its sheer volume. Consumers will also be careful with their discretionary spend in the initial stages," observes Conn.

While most financial services are likely to be exempted from VAT, for services involving a fee or commission, they will be standard rated, forecast the tax consultants.

There is little time left for VAT compliance, with companies, even large ones, set to face an uphill task. "A lot of businesses are not prepared for VAT. People do leave things for the last minute since they have a lot of other pressures. Across the board, people are not ready," Conn adds.

Much needs to be done before VAT arrives. If any one part of the puzzle is missed, consequences could be severe, with lost profits, dissatisfied customers, unnecessary costs and even penalties for non-compliance being some potential outcomes.

Businesses need to have an implementation plan in place so that on day one, they can hit the ground running. Companies need to ensure sales staff know what is happening and have the training to deal with customer queries. Their accounting processes and IT systems must be able to capture and report VAT accurately and produce invoices with all relevant information and can deal with things like discounts, refunds and returns.

With few businesses in the GCC having in-house VAT expertise, they must look to external advisors for support. Firms may consider additional software or software upgrades to provide additional VAT functionality.

"Small companies will require not less than three to five months to implement basic software upgrades. For big companies, this could take years," says Evgenii Podborskii, head of automation at First BIT. He suggests that businesses can opt to work with cloud infrastructure and avoid spending on big servers and software.

- deepthi@khaleejtimes.com