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5 Valuable lessons from VAT consultancy services

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The Kingdom of Saudi Arabia and United Arab Emirates were the first of the Gulf Cooperation Council member states, a six-membered entity, to introduce Value Added Tax (VAT) in the year of 2018. Introduced in the month of January, the VAT for these two states was set up at 5%. Due to relatively new entry of VAT in these states, companies are still struggling to figure out the nitty-gritties of VAT, making it difficult for them to be compliant. Here are Valuable lessons from VAT consultancy services.

Valuable lessons from VAT consultancy services

Many companies in the UAE still need assistance to set up their tax treatment in an error-free manner. Apart from understanding the repercussions of non-compliance, the implementation of VAT itself has proved to be quite challenging for the companies. Here are five valuable lessons from VAT advisors for business across the GCC member states to help them in the VAT rollout.

Linking is an ongoing process

A number of businesses have been facing issues linking their tax registration number ad customs registration to official systems, a step crucial in the process of finalizing and submitting the VAT return. As per the GCC’s VAT agreement, VAT which is due on imported goods in member states need to be paid at the first point of entry, deposited and then transferred to the destination state within the framework of customs union of GCC. In order to execute this practice, each of the member states is required to create its own electronic tax system. This would then need to be linked to GCC tax information centre operating through a central website. As of now, not all GCC states have implemented VAT, due to which the unified GCC tax information centre is not linked to each local tax system. Until the time, all six members of GCC implement VAT, local tax complexities remain elevated with several transitional rules playing their roles. Once the remaining GCC states introduce VAT, companies will be required to make readjustments in their tax treatment for inter-GCC transactions and comply with the unified GCC CAT agreement.

Understand VAT through accounting requirements

There is a lot of confusion between VAT reporting requirements and accounting rules in the United Arab Emirates and Kingdom of Saudi Arabia. The arising VAT consultancy services liability is determined on the basis of the period in which the related payment is released, or the products are delivered, regardless of the date of issue of a sales invoice. Therefore, it is extremely important for companies to test their ERP systems accordingly to ensure that the VAT is accurately adopted.

Different tax treatments in different zones

There are different tax treatments for free zones and mainland entities in the UAE. Free zones offer various incentives for different businesses and act as tax-free zones for good. They do not fall in the remit of UAE for VAT purposes. However, this does not mean that a company established in a free zone is exempted from VAT. It is completely dependent on the ways activities are handled inside the zone.

Reporting is important

Due to the repercussions of inaccurate VAT reporting, it is advisable that the companies work with tax experts to ensure that they report in accordance with the correct requirements. Non-compliance with VAT law may lead to administrative penalties and other fines. The VAT return must be filed with the tax authority no later than the 28th (in the UAE) or before the last day (in KSA) of the month following the end of the tax period.

Business expenses and personal expenses

Some expenses made under the name of a company can be input VAT recoverable, but only if they are used - or used with the intention - for making taxable supplies. The input tax may not be recovered if the business provides exempt supplies. The VAT law also provides a Capital Assets Scheme to recover the input tax paid at the time of acquiring new assets. The initially-recovered input tax is adjusted based on actual use during a specific period.

To know more about VAT implementation in GCC, contact us.