Posted on Nov 20, 2017
The members of the GCC council are in the midst of approving the highly anticipated common framework for the introduction of a Value Added Tax (VAT) system in the GCC. The common VAT framework will form the basis for the introduction of a national VAT system by each Member State.
There are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes. The exact details of the VAT regime which will need to be set out in the common framework and national legislation are yet to be made available.
The President, His Highness Sheikh Khalifa bin Zayed Al Nahyan, has issued the landmark Federal Law No. 7 of 2017 for Tax Procedures, which sets the foundations for the planned UAE tax system, regulating the administration and collection of taxes and clearly defining the role of the Federal Tax Authority, FTA.
"The Tax Procedures Law is a significant milestone towards establishing the UAE's tax system and diversifying the economy," said Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai, UAE Minister of Finance and FTA Chairman.
The unified agreement sets out the framework under which VAT can be implemented in each of the GCC member states. The framework includes agreement on certain matters but allows member states discretion on how to treat others.
Once the agreement is ratified, each member state can interpret the framework into its own local law and implement VAT. Some member states, notably the United Arab Emirates and the Kingdom of Saudi Arabia, have indicated an intention to implement VAT with effect from 1 January 2018. The framework allows for a basic rate of a VAT of five percent as well as allowing for certain supplies of goods and services to be zero-rated or VAT exempt.
The Law defines a clear set of common procedures and rules to be applied to all tax laws in the UAE, namely, VAT and excise tax laws, and clearly states the respective rights and obligations of the FTA and the taxpayer.
The Law covers tax procedures, audits, objections, refunds, collection, and obligations - which include tax registration, tax-return preparation, submissions, payment and voluntary disclosure rules - in addition to tax evasion and general provisions.
When the Tax Procedures Law goes into effect, all UAE-based businesses will be required to keep accurate records for five years. The law also sets penalties for non-compliance, as well as clear processes for appeals which align with international best practices and establishes a fair and transparent environment for the FTA to carry out its mandate.
A potential VAT implementation will also have immediate effects on consumer behavior which gives opportunities for companies to assess their business direction and to plan strategically.
The Tax Procedures Law also establishes the register of tax agents who may interact with the FTA on behalf of taxpayers, specifies the basic requirements for appointing said tax agents, and sets the standards for maintaining confidentiality by the Authority as well as its officers.
Businesses will have to adapt to the changes by identifying the impact of VAT on their business, and key immediate considerations are to:
• Assess capability of existing systems
• Identify VAT implementation strategy
• Identify contracts that need a VAT action
• Identify intercompany transactions
• Undertake training/awareness
The new Law comes after the UAE, represented by the Ministry of Finance, ratified the Common Value Added Tax, VAT, Agreement of the States of the Gulf Cooperation Council and the Common Excise Tax Agreement of the States of the Gulf Cooperation Council, following Federal Decrees No. 31 and 32 of 2017, issued by Sheikh Khalifa.
It is a follow-up step from Federal Decree-Law No. 13 of 2016 on the Establishment of the Federal Tax Authority, which created the FTA and tasked it with executing tax laws in the UAE.