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Gearing up for VAT - Do you have the answers? Imports VAT Regulations Reverse Charge Sale of Company Assets Foreign VAT Reverse Charge Cross Border Transactions Gifts Audits Reversal of Invoices Staff Claims Contractual Obligations

Gearing up for VAT - Do you have the answers? up for VAT - Do you have the answers? Imports VAT ... Questions and Answers ... intra-group transaction

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Gearing up for VAT -Do you have the answers?

Imports

VAT Regulations

Reverse Charge

Sale of Company

Assets

Foreign VAT

Reverse Charge

Cross Border Transactions

Gifts

AuditsReversal of

Invoices

Staff Claims

Contractual Obligations

Gearing up for VAT

Presentation to the Association of Corporate Council - Middle East

Presented by John Peacock

Senior Associate – VAT Compliance, Corporate & Real Estate Services

9 April 2017

1. Background

2. What we know – GCC

3. What we know - UAE

4. Common Principles & Provisions

5. Existing Legislation

6. VAT Compliance Litigation

7. Tips

8. Questions and Answers

Topics of Discussion

• GCC VAT Framework Agreement – signed by all GCC member states - stillawait official release

• What we know –

• All GCC members must implement VAT between 1 January 2018 and 1January 2019

• Allows for a general framework within which member states canformulate their VAT legislation but also prescribes certain agreed terms,such as the standard VAT rate at 5%, prescribes mandatory exemptionsand determines zero rated industry sectors

• Grants each GCC member state the right to formulate their ownlegislation and concessions applicable within that state

Background

• Legislative Framework in the GCC

• Civil Law systems - codified, classified and structured codes but oftenlack detail as these often only deal with general principles as influencedby Sharia’ Law

• National or Federal Laws – applicable within each GCC state as a whole

• Emirate Laws (in the UAE) – applicable only to the respective Emirate inwhich promulgated

• Free Zone Laws, Rules and Regulations – applicable only within theparticular free zone

• Hierarchy of Laws in the UAE - Federal Laws, Emirate Laws, Free Zone Rulesand Regulations

• VAT legislation will be implemented at national / federal level

Background

• VAT is a self assessment system requiring little effort from the respectivestates and tax authorities

• Responsibility for compliance is the sole responsibility of the “taxableperson” for each aspect from registration obligations to the submission ofreturns to the payment to the tax authority in accordance with thelegislation provided

• What do states and tax authorities need to do to facilitate implementation?

• Provide the legislation

• Provide a registration platform

• Provide a platform on which to submit returns

• Provide a platform for payment

• The legislation is not yet available for any of the GCC states however VAT isnot an unknown concept and the essential elements and legislativeprovisions are mostly constant throughout the world

Background

VAT legislation for will consist of a composite of :

• Empowering legislation – creation of a tax authority (see UAE Federal DecreeNo. 13 of 2016 – Regarding the Establishment of the Federal Tax Authority)

• Procedural legislation – creation of the rules and regulations regulating theprocedural aspects relating to taxes, tax reporting and the collection thereof(a Tax Procedures Law expected in the UAE in under 2 weeks)

• VAT laws, Rules and Regulations – promulgation of the laws containing thedefinitions, provisions, and supplemented by the rules and regulations(“expected in “a few months”)

• Directives – mainly used to set out matters not specifically dealt with in theVAT law and to supplement procedural matters

• Rulings – to regulate and categorize particular circumstances or transactionsnot contemplated in the legislation and to obtain clarity in advance oftransactions

• Supplemented by existing legislation (Commercial Companies Law, the PenalCode and the Commercial Transactions Law)

Background

• The UAE will be ready to implement their VAT system on 1 January 2018 andother GCC countries should implement by the end of the 2nd quarter of2018

• Various Government Ministers have announced various fact at pressconferences, the UAE Ministry of Finance has delivered briefings (and has anumber more planned in the next months) and also various VAT forumshave been held at which various accounting firms involved in the planningstages have intimated certain specifics

• It appears evident that the European VAT model will substantially befollowed in the GCC and thus the provisions and regulations applied in theEuropean Union countries will be used as the VAT “blueprint” in the GCC

What we know - GCC

• Different rules will apply in each of the GCC states – different jurisdictionswith different rules will be especially relevant for imports and exports – alsosee GCC Common Customs Law

• Common reporting system will operate between GCC states – imports andexports will be reported between GCC states

• New VAT legislation for the UAE is likely to have similar provisions ascontained in the commercial companies law and the penal code will apply asit does not appear that special provisions will be passed to “decriminalize”VAT related offences

What we know - GCC

• There will not be any “grandfathering” provisions and liability for VAT will beeither the time of supply of services or delivery of the goods - except forcertain property lease agreements entered into before the implementationdate in the “normal course of business”

• Determination of jurisdiction for VAT responsibility – place of supply

• Determination of time of supply – upon delivery of goods or completion ofdelivery of services (with invoice to be issued within 14 days)

• Penalties for evasion – up to 500% and up to 72 hour business closure

• Definition of a “Taxable Person” – includes offshore companies (implicationto licensors and franchisors)

• No special provisions for free zones in the UAE – “fenced and unfenced” freezones may have different/special rules but only regarding goods importedand exported therefrom

What we know - UAE

• Error corrections on VAT Returns will be allowed to be done online if donewithin 30 days of submission date (may still incur penalties)

• Objections/Appeal process – firstly to Federal Tax Authority (within 20 days)then to review Committee of the Federal Tax Authority then to Courts

• The seat of jurisdiction for VAT disputes will be the local courts and thus allsubmissions and proceedings will be conducted in Arabic

• The “taxable person” (company) is the responsible collection agent for theTax Authority – VAT not collected does not excuse payment to Tax Authority

What we know - UAE

REGISTRATION –

• Take law as presented – analyze both thresholds and classifications ofgoods/supplies into standard rated goods and supplies, zero ratedsupplies/goods and exemptions

• Registration of “VAT Groups” will be allowed – understood that widediscretion will be allowed to group different businesses even in differentindustry sectors however that this will only be allowed if:

• the entities keep separate accounting records

• are separately identifiable entities

• under same ownership (unsure of subsidiaries)

• domiciled in the same country

• Group registrations can be frustrated by multiple sponsors

• Group registrations will require and limit extent of consolidated groupfinancials and frustrate inter group entries

Common Principles & Provisions

INVOICES AND INVOICING -

• The “invoice is everything” – correct invoicing is essential to claim legitimateinput VAT credits, avoid penalties and audits

• Provisions will allow for simplified invoices (“till slips”) but generally invoicesmust contain the following:

• reflect the VAT Registration Numbers of both supplier and customer

• contain a stipulation of services/goods delivered

• contain the address of supplier

• contain the delivery address

• The quotation of relevant Article in cases of an exemption

• foreign currency invoices must reflect local currency equivalent

• Coding will allow for easy change in legislation provisions

• Apportionment of Input VAT on certain expenses

• Unclaimable Input VAT (caution on posting of entries and disallowance)

Common Principles & Provisions

RETURNS -

• Will be due quarterly (i.e. first return due – 1 April 2018)

• Will be filed online

• Information required to be included in VAT Returns will differ fromjurisdiction to jurisdiction

• VAT Return (UAE) must contain declaration of revenue per Emirate

• VAT Returns usually require –

• the amount of revenue income at the standard rate and the OutputVAT amount

• the amount of zero rated revenue income

• the amount of exempt revenue income / deemed supplies

• the Input VAT amount

• a declaration of accuracy of information submitted

• Deemed supplies – Output VAT is payable (e.g. gifts, enterprise assets takenfor own use, proceeds of execution sales, insurance claims, rights to usegoods, intra-group transaction (unless under same registration))

Common Principles & Provisions

OTHER ITEMS TO CONSIDER -

• Implementation Law – check definitions

• Appointment of responsible officer/representative taxpayer/public officer

• VAT Rulings – approval of anticipated transactions

• Bad Debts and VAT Recovery

• Disallowance of output VAT - procedures

• Penalties and Late Payment

• Evasion and Avoidance - restructure

• Record retention (Insurance?)

• Retention of an “audit trail” for entries, amendments and corrections

• 5 year audit period by Tax Authority

Common Principles & Provisions

There are numerous provisions contained in existing legislation that will be usedto supplement and facilitate the efficiency of the imminent VAT legislation,

The most prominent is Federal Law No 2 of 2015 – On Commercial Companieswhich inter alia provides for:

• Restriction against exemption from personal liability of office bearers(Article 24)

• Maintenance and retention of accounting records (Article 26)

• Preparation of Annual Financial Statements by auditor(s) (Article 27)

• Every shareholder in a limited liability company and any Director in ajoint stock company shall be responsible for any fraudulent actscommitted and shall be liable for any damages, losses and expensesincurred by the company, its co-shareholders, co-directors or thirdparties due to the contravention of any law or any gross errorscommitted by them (Articles 84 & 162)

Existing Legislation

Some punitive provisions contained in the Commercial Companies Lawapplicable to managers, directors and auditors include:

• AED 10,000 – AED 100,000 for failure to provide access to documentation toinspectors from the Ministry of Economy or the Securities & CommoditiesAuthority (Article 347)

• AED 50,000 – AED 500,000 for failure to keep accounting records (Article348)

• AED 20,000 – AED 100,000 for failure to keep accounting records for theperiod determined by the law (Article 367)

• AED 100,000 – AED 500,000 and/or a sentence of 3 months to 2 years forconcealing the true financial position of a company (Article 364)

and

• Article 371 states – “The penalties as provided in this Law shall be withoutprejudice to any severer penalties imposed in any other Law”.

Existing Legislation

Federal Law No. 3 of 1987 – The Penal Code states:

• Article (26) – “Crimes are of three types: felonies, misdemeanors andcontraventions. The category of the crime shall be determined in accordancewith the penalty thereto provided by law…”

• Articles (28), (29) & (30) – sets out the classification more fully by stating thepunishments

• Article (31) – “The practical element of a crime consists of a criminal activityresulting from commission or omission of an act where such commission oromission is classified as a criminal offense”

• Article (32) – “A person shall not be answerable for a crime if it is not a resultof his own criminal activity; however, he may be answerable for a crime evenif his criminal activity and another proceeding, contemporary or subsequentcause have contributed to its occurrence, where such a cause is expected tohappen or likely to happen in the ordinary course of things”

Existing Legislation

• Article (38) – “The moral element consists of the intent or error…. An errorarises if a criminal result occurs by reason of the offender’s error whethersuch an error is negligence, inadvertence, carelessness, recklessness,imprudence or non-compliance with laws, regulations, rules or orders”

• Article (43) – “An offender shall be answerable for a crime whether he hascommitted it with or without intention, unless the law explicitly provides forintention”

• Article (65) – provides that juridical persons are responsible for any criminalact committed for their account or in their name by their representatives,director or agent. This Article also explicitly states that a financial penaltyimposed on a corporate offender does not prohibit punishment of theindividual offender

• Article (399) – fraud is defined as taking or gaining from another, propertyor money or anything or value by deception, lying or trickery which issupported by verbal means or written documents

Existing Legislation

• Exempt Goods - Jaffa Cakes case – is it cake or a biscuit? (England vs Irelandresults)

• Zero Rated vs Deemed Supply – Online supply of services from offshore waszero rated – tax authority audited and found that the supply was zero ratedby company

• Disallowed Input VAT/Credit – Definition of a “motor vehicle” and does a 4x4qualify for a deduction?

VAT Compliance Litigation

• Get up to speed with general VAT principles as soon as possible - if not already done

• Consider the “business” of the company with regard to –

• registration

• compliance

• operations

• When the legislation is available –

• carefully consider the “definitions”

• carefully consider the provisions

• prepare and adopt an action plan for compliance

• Keep up to date with continuing developments

Tips – What should the legal department be doing?

Questions and Answers

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