Fraud will be one of the big issues tax authorities in the United Arab Emirates and Saudi Arabia will have to contend with when value-added tax (VAT) is introduced from January 1, 2018, an expert has warned.
Speaking at the Excellence in Construction summit on Sunday, which was held as part of the Big 5 exhibition at Dubai World Trade Centre, John Voyez of accountancy firm Smith and Williamson said: "I think we're going to see throughout 2018 major issues with compliance."
Voyez, who is a VAT partner at United Kingdom-based Smith & Williamson and the chair of the global indirect taxes group for independent accountancy network Nexia International, said: "I would unfortunately suggest that there is maybe going to be a lot of fraud about, because you'll find that a lot of people will make up a VAT number, issue an invoice with an extra 5 percent attached and not account for the VAT to the tax authorities."
He said this was a major issue in Europe and often involves smaller contractors which appear for a while, charge VAT on goods or services to companies but then disappear before tax authorities can catch up with them.
"Certainly, within the EU, fraud in the construction industry, or fraud generally in VAT, is one of the major problems," he said.
This phenomenon of companies disappearing before paying any VAT is collected is a significant contributor to the 'VAT Gap', which measures the amount of VAT revenue governments expect to collect and the amount that is actually collected.
In September, the European Commission issued a report which stated that European Union countries lost an estimated €152 billion ($180 billion) as a result of the VAT Gap, a figure which it described as "unacceptably high".
"I think the FTA (The Federal Tax Authority of the United Arab Emirates) during 2018 are going to focus much more heavily on compliance and making sure the rules are observed," Voyez said.
Ongoing contracts
Other challenges for the construction and real estate industries relate to the introduction of VAT on ongoing contracts. For instance, if a contract to build a property was signed two years ago and takes three years to complete, in most cases VAT clauses would have unlikely been included.
Speaking on the sidelines of the conference, James Mitchell, a VAT specialist with Smith & Williamson, said the treatment of such contracts differ in Saudi Arabia and the UAE, which are the only two of the six Gulf Cooperation Council countries which have agreed to firmly stick to the agreement made last year to introduce the new tax on January 1, 2018.
Mitchell said that in the UAE, contractors need to write to clients before December 31 stating their intention to charge VAT, seeking a reply within 20 days. If the client is VAT registered and can recover the VAT, costs incurred in current contracts can be passed on. If the client is not VAT registered, however, or they cannot recover the VAT amounts, the contractor will have to absorb the additional cost.
In Saudi Arabia, the terms are slightly different. Contracts that were entered into before May 31 this year can be treated as zero-rated and will not be liable for VAT. Contracts entered into after that date will be subject to the normal treatment of VAT, but since implementing regulations have been available since September in the kingdom, many contractors have already introduced VAT clauses on new contracts.
During the panel debate, Gurdeep Randhay of accountancy firm Grant Thornton, stated that retention payments held by clients (to account for possible defects) for work that was completed this year should not be subject to VAT, unless the client has refused to acknowledge a formal handover of the building.
Randhay said VAT represents "a whole new way of doing business for construction companies".
"The process.... is fairly elaborate," he said. "What's quite critical is the document retention requirements by the FTA (in the UAE). Basically, they would like companies to maintain records in a document management system, not just PDF invoices and put them away on a server somewhere. So it's a fairly lengthy process and there is not much time left."
Residential challenges
Voyez also said that the exemption of residential buildings from VAT in the UAE also presents a headache for landlords, given that most of them will now pay VAT on a range of commercial services such as cleaning, maintenance or professional services work, but they cannot pass this on to customers through higher rents.
"That landlord will need to look at the service charge agreements for the tenants, because what he will want to do is pass that irrecoverable VAT cost onto the tenants in the form of service charges," he said. "But that will mean looking at the service agreements and seeing if he has the ability to do that. Maybe he has to absorb that cost."
(Reporting by Michael Fahy; Editing by Shane McGinley)
(micheal.fahy@thomsonreuters.com)
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
Our Standards: The Thomson Reuters Trust Principles
© ZAWYA 2017
Speaking at the Excellence in Construction summit on Sunday, which was held as part of the Big 5 exhibition at Dubai World Trade Centre, John Voyez of accountancy firm Smith and Williamson said: "I think we're going to see throughout 2018 major issues with compliance."
Voyez, who is a VAT partner at United Kingdom-based Smith & Williamson and the chair of the global indirect taxes group for independent accountancy network Nexia International, said: "I would unfortunately suggest that there is maybe going to be a lot of fraud about, because you'll find that a lot of people will make up a VAT number, issue an invoice with an extra 5 percent attached and not account for the VAT to the tax authorities."
He said this was a major issue in Europe and often involves smaller contractors which appear for a while, charge VAT on goods or services to companies but then disappear before tax authorities can catch up with them.
"Certainly, within the EU, fraud in the construction industry, or fraud generally in VAT, is one of the major problems," he said.
This phenomenon of companies disappearing before paying any VAT is collected is a significant contributor to the 'VAT Gap', which measures the amount of VAT revenue governments expect to collect and the amount that is actually collected.
In September, the European Commission issued a report which stated that European Union countries lost an estimated €152 billion ($180 billion) as a result of the VAT Gap, a figure which it described as "unacceptably high".
"I think the FTA (The Federal Tax Authority of the United Arab Emirates) during 2018 are going to focus much more heavily on compliance and making sure the rules are observed," Voyez said.
Ongoing contracts
Other challenges for the construction and real estate industries relate to the introduction of VAT on ongoing contracts. For instance, if a contract to build a property was signed two years ago and takes three years to complete, in most cases VAT clauses would have unlikely been included.
Speaking on the sidelines of the conference, James Mitchell, a VAT specialist with Smith & Williamson, said the treatment of such contracts differ in Saudi Arabia and the UAE, which are the only two of the six Gulf Cooperation Council countries which have agreed to firmly stick to the agreement made last year to introduce the new tax on January 1, 2018.
Mitchell said that in the UAE, contractors need to write to clients before December 31 stating their intention to charge VAT, seeking a reply within 20 days. If the client is VAT registered and can recover the VAT, costs incurred in current contracts can be passed on. If the client is not VAT registered, however, or they cannot recover the VAT amounts, the contractor will have to absorb the additional cost.
In Saudi Arabia, the terms are slightly different. Contracts that were entered into before May 31 this year can be treated as zero-rated and will not be liable for VAT. Contracts entered into after that date will be subject to the normal treatment of VAT, but since implementing regulations have been available since September in the kingdom, many contractors have already introduced VAT clauses on new contracts.
During the panel debate, Gurdeep Randhay of accountancy firm Grant Thornton, stated that retention payments held by clients (to account for possible defects) for work that was completed this year should not be subject to VAT, unless the client has refused to acknowledge a formal handover of the building.
Randhay said VAT represents "a whole new way of doing business for construction companies".
"The process.... is fairly elaborate," he said. "What's quite critical is the document retention requirements by the FTA (in the UAE). Basically, they would like companies to maintain records in a document management system, not just PDF invoices and put them away on a server somewhere. So it's a fairly lengthy process and there is not much time left."
Residential challenges
Voyez also said that the exemption of residential buildings from VAT in the UAE also presents a headache for landlords, given that most of them will now pay VAT on a range of commercial services such as cleaning, maintenance or professional services work, but they cannot pass this on to customers through higher rents.
"That landlord will need to look at the service charge agreements for the tenants, because what he will want to do is pass that irrecoverable VAT cost onto the tenants in the form of service charges," he said. "But that will mean looking at the service agreements and seeing if he has the ability to do that. Maybe he has to absorb that cost."
(Reporting by Michael Fahy; Editing by Shane McGinley)
(micheal.fahy@thomsonreuters.com)
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
Our Standards: The Thomson Reuters Trust Principles
© ZAWYA 2017
