LEGAL UPDATE: VAT has applied in the UAE and in Saudi Arabia (KSA) since 1 January 2018. Bahrain's VAT goes live on 1 January 2019, with Qatar and Oman expected to follow suit in 2019. Kuwait is indicating it will implement in 2021. In the UAE and KSA there are indicators of a more settled environment. Tax authorities are turning their attention to investigations, audits and the imposition of penalties for failures to comply with the rules. Procedures are in place to challenge a tax authority's decision and to progress the matter to a review committee or competent court. Businesses should assess their VAT health status.

The United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) implemented VAT on 1 January 2018 and other GCC countries are following suit, with  Bahrain's VAT going live on 1 January 2019; Qatar and Oman expected to follow suit in 2019 and Kuwait indicating it will implement in 2021.

Although it has been a challenging road for domestic and international businesses alike, gradually we are seeing initial indicators of a more settled environment, with better communication and collaboration between businesses and the tax authorities.

This is mainly driven by:

  • more structured procedures for submitting requests for VAT technical clarifications, and more prompt timelines for receiving responses
  • continued scheduling of tax authority VAT workshops
  • the frequent issuance of public guides and clarifications dealing with specific industry sectors and/or ambiguous areas of law
  • more timely filing of returns and payment of liabilities by VAT registrants.

In this context, the most recent developments with the tax authorities in their role of interpreting the law and monitoring its application in the region include:

  • tax period - The introduction of a new UAE biannual tax period effective from November 2018 for some small businesses, commercial real estate owners, and board members.
  • tax authority VAT guides and clarifications - more than 120 supporting documents including additional supporting laws, guides, public clarifications, e-learns, fact sheets, FAQs, on-line video clips, etc. have been issued to date - tax authorities are strongly urging businesses to use them.
  • investigations and audits - virtual investigations and field audits are being undertaken across a broad range of industry sectors, in particular for complex industries or where large refund positions have been filed. These can range from reviewing listings of transactions and sample documents right through to reconciliation of VAT returns with trial balance / financial statements.
  • penalties - fixed penalties per incident for failing to register, file returns and pay liabilities on a timely basis are automatically being applied across the board, with additional tax geared percentage based penalties being levied where liabilities remain outstanding.
  • tax disputes - procedures are in place to challenge a tax authority's decision, progress the matter to a review committee or competent court. Although there are no Committee/Court Decisions to date, this is an area that we expect will progress in 2019.

Do you know the VAT health status of your business?

Businesses should be assessing their VAT health status. These questions are a good starting point:

VAT governance

  • Have you discussed, identified and implemented a suitable governance structure for VAT in your business?
  • Have you hired or trained the relevant resources responsible for VAT in the business? If no, have you sourced sufficient external consultant support?
  • Has the broader business received sufficient training on VAT and the governance of it across the business?
  • Have you confidently determined the VAT treatment of all your transactions?
  • If not, has a clarification been issued by the relevant tax authority?
  • If not, have you submitted an official clarification/ruling request? Have you received a
  • response?

Tax technology

  • Are your tax codes sufficient for VAT reporting purposes?
  • Is the set-up of your tax reports allowing for the extraction of relevant and sufficiently detailed data from your systems for VAT return completion?
  • Is further automation necessary in your VAT return process?

 Internal procedures and controls for VAT

  • Have internal procedures across all business functions (sales/AR, purchasing/AP, marketing, legal, finance, HR, etc.) been updated for VAT?
  • Are sufficient controls in place to ensure compliance and to mitigate risk of error?
  • Has VAT been implemented in to internal and external audit procedures?

Documentation

  • Is the necessary wording for VAT purposes included in all internally generated documentation? Think about contracts, agreements, invoices, credit notes and publicly displayed pricing.
  • Are the internal procedures and controls also ensuring that externally generated documentation such as supplier invoices are sufficient for VAT purposes?
  • Are procedures in place for sufficient retention of VAT documentation in paper or electronic format?

 Voluntary disclosure

  • Have you identified errors in your VAT compliance records?
  • If so, have you identified the monetary value of the error?
  • If so, has a voluntary disclosure been submitted to the tax authority in order to regularise the situation and mitigate administrative penalties?
  • Is a VAT health check scheduled in order to assess your VAT health status as a business after your first 12 months of trading under the VAT regime?

Compliance

  • Are you filing returns and making payments on a timely basis?
  • If not, have you suffered penalties for noncompliance?
  • Could VAT grouping optimise your compliance process?
  • Do you use the services of a tax agent for filing?

Joanne Clarke is a Middle East VAT expert at Pinsent Masons, the law firm behind Out-Law.com.