The United Arab Emirates (UAE) introduced Value Added Tax (VAT) from 1 January 2018. Most taxpayers are on a quarterly tax period, with their first VAT returns due on 29 April 2018. During the VAT return preparation and review process, a number of common issues were identified across many businesses.
These issues are summarized below, to enable businesses to assess whether the issues impact them, and if so, to rectify them before the next quarterly VAT return is due.
1. Recovery of Input VAT using invoices which do not meet the Tax Invoice rules set out in the VAT Executive Regulations.
This was by far the most prevalent issue, due to a misconception that the Federal Tax Authority (FTA) will take a soft approach to enforcing the Tax Invoice rules. EY is aware that the FTA has already started auditing compliance by requesting sample invoices from businesses, following the submission of the first VAT return. Businesses should review their accounts payable process and ensure that the Tax Invoice rules are applied correctly and consistently.
2. Pre-populated Box 6 of the UAE VAT return.
The FTA prepopulates Box 6 of the UAE VAT return with data obtained from customs information. The figure in Box 6 is the 5% VAT based on the customs value of goods (the net value, plus insurance, plus freight, plus customs duty). EY reviews found that the Box 6 figure rarely matched the data held by the business and a reconciliation was required to verify that the figure was correct. This can take some time and generally requires the involvement of the supply chain and operations team dealing with customs clearance. Box 6 data as it appears in the return should be reconciled to the business records.
3. Inadequate number of tax codes within the VAT accounting system to allow for accurate VAT reporting.
Many VAT accounting systems were set up with around six tax codes, which for most businesses is not sufficient. A particular issue was the use of one ”non-VAT” code to record all out-of-scope, exempt, and zero-rated transactions. For purchases, many businesses are using one tax code for both imports of goods and services, which makes the Box 6 reconciliation extremely difficult. Businesses need to ensure that their tax codes allow them to adequately track and report all types of sales and purchases separately.
4. The quality of data generated by many businesses was incomplete, with details such as Tax Registration Numbers (TRNs) of vendors and customers missing.
Many businesses performed a number of manual adjustments outside of the system to comply with VAT, requiring complicated reconciliations before the VAT return could be prepared. A review of the IT processes including the adequacy of tax codes, and accounts payable and accounts receivable processing, should be undertaken before these errors build up into significant financial and operational risks.
5. A number of businesses importing goods on behalf of other parties due to customs import license restrictions, attempted to recover the VAT charged on the import through the reverse charge mechanism.
If businesses incur VAT relating to the import of goods on behalf of other businesses, the VAT is generally not recoverable by such importers.
6. Across VAT groups, there were many instances of intra-VAT group transactions between VAT group members treated as supplies or purchases for VAT purposes, and not excluded as they are supposed to be.
Businesses should use separate tax codes for intra-VAT group transactions as they must be separately identifiable and must not appear on the VAT return.
7. There were a number of instances where VAT from other countries was incorrectly recovered through the UAE VAT return, for example, Saudi Arabian VAT being recovered through a UAE VAT return.
There appears to be a misconception that, as the UAE and Saudi Arabia are both within the Gulf Cooperation Council, this is permitted. EY has also noted instances of EU VAT being recovered through the UAE VAT return. VAT is only recoverable through the VAT return in the country in which the VAT is incurred.
8. There appears to be some misunderstanding in relation to the requirement to apply the reverse charge to imported services. There were many businesses subjecting every foreign purchase to the reverse charge, while others were not using the reverse charge at all.
This issue highlights gaps in transaction mapping, and the practical application of the VAT rules at the accounts payable processing point. Businesses which have not done so already, should map their transactions, including foreign purchases, and assess the UAE VAT reporting obligations of each transaction.
9. The Emirate level reporting requirements were often applied incorrectly, with businesses accounting for VAT on sales based on the location of their customers.
The latest guidance from the FTA states that for established businesses, Emirate level reporting should be based on the location of the supplier’s fixed establishment most closely connected to the supply. For non-established businesses, it should be based on the location of the customer.
10. Input VAT relating to exempt supplies or incurred in relation to expenses such as business entertainment, company cars, private use, mobile phones with non-business use should not be recovered.
However, EY has noted that many businesses were not blocking input VAT on such expenses, or VAT relating to exempt supplies if the exempt supplies such as intracompany loans were not part of their main business activities. Accounts payable teams were often not aware of the requirement. Accordingly, businesses should consider a separate tax code for blocked input VAT to ensure it is not incorrectly recovered through the VAT return, and that businesses review their partial exemption position.
11. Businesses established in Designated Zones were incorrectly applying VAT on supplies which should be treated as outside the scope of VAT. There was also a lack of consideration to the VAT treatment of goods consumed within the Designated Zones, with a lack of clear guidance from the FTA on the practicalities of dealing with this.
It is important that Designated Zone entities understand their obligations not only from a VAT perspective, but also from a customs reporting perspective, as a lack of adherence to the existing customs rules is causing VAT errors.
12. When processing purchase invoices, some accounts payable teams were taking the net value of the invoice and inputting this into the system, which then automatically calculated 5% VAT. This led to discrepancies between the actual amount of VAT charged by the supplier, and the VAT being recovered in the return (due to exchange rate differences, or suppliers charging the wrong amount of VAT).
It is important that only the VAT actually charged by the supplier is recovered, and if the VAT rate applied by the supplier is incorrect, the supplier should be requested to issue a credit note for the incorrect invoice, and to issue a new invoice with the correct amount of VAT.
13. Some retailers are still charging VAT incorrectly, with VAT exclusive amounts being displayed across a store, and VAT being added to the price of goods at the point of sale.
Prices should be displayed inclusive of VAT. EY understands the authorities are applying this requirement stringently, with on the spot fines for violations.
14. VAT reporting requirements were often confused with accounting rules.
EY has observed input VAT being recovered based on accruals, without a tax invoice, and no consideration given to the VAT time of supply rules for the reporting of output VAT, with businesses incorrectly thinking that they only have to declare output VAT to the FTA when they recognize income from an accounting perspective.
15. Partial exemption calculations were often performed incorrectly, particularly across VAT groups.
Apportionment for the purpose of the calculation should be performed at the VAT Group level, and not the individual entity level.
16. A number of entities did not realize that they could recover VAT incurred on capital assets, and had incorrectly blocked the recovery of such input VAT.
Input VAT incurred on capital assets can generally be recovered (subject to the normal rules, and subject to adjustments for change in use).
Before the next VAT returns are due, UAE businesses should address the specific issues noted above and review their VAT compliance requirements and processes relating to:
- VAT return preparation
- VAT return reviews
- Systems reviews and testing
- Post-VAT implementation health-checks
- VAT training
- VAT advisory services
- Customs and global trade advisory services
EYG no. 02624-181Gbl
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.