The publication of the Executive Regulations paving the way for the introduction of value-added tax (VAT) in the United Arab Emirates last week has cleared up doubts, but also left many questions unanswered, according to experts.
The regulations provided more comprehensive details on the categories of goods and services that will attract the full 5 percent VAT charge, those that will be VAT-exempt and those that will be zero-rated (allowing businesses to reclaim VAT on input costs).
A table detailing the VAT treatment of sectors such as food & beverages, transport, financial services, real estate and precious metals was published by the UAE’s Federal Tax Authority (FTA) on Tuesday.
James Mitchell, a business tax specialist with accountancy firm Smith & Williamson, said that while the publication of the rules had provided greater clarity, there "are still a great number of questions left unanswered for complex businesses, such as those in the insurance and property sectors".
In an emailed statement to Zawya, Mitchell argued that many local businesses and their tax advisors "may not understand, or indeed realise, the potential implications where there are areas of subjectivity, which have puzzled European courts for decades".
One famous case in the United Kingdom settled by a VAT tribunal saw biscuit company McVities successfully prove that its Jaffa Cakes product was actually a cake (not subject to VAT) , not a chocolate-covered biscuit (subject to VAT). Another UK anomaly is that paperback books are zero-rated, but e-books are subject to VAT.
Ton van Doremalen, the newly-appointed head of tax for law firm DLA Piper in the Middle East, said the UAE’s new rules provided more clarity in the area of how long term contracts should be treated for VAT purposes.
"The standard rule is that if a contract is silent on VAT, the price in that contract is considered to be inclusive of VAT, which obviously is a problem for the supplier because they will have to take that hit," he said in a telephone interview with Zawya.
Van Doremalen said that the rules allow for suppliers to write to customers before the end of this year to state that the contract agreed excludes VAT, adding that they intend to add on 5 percent to cover VAT. However, in order to do this, the customer needs to be VAT-registered and to be able to reclaim VAT on the expenses it is incurring from the supplier.
"There are a number of conditions there, but I think (with) the level of uncertainty that was in the market, it has been very helpful that in these final regulations, at least, there has been some clarification on that," van Doremalen added.
"You can imagine the amount of time and energy that would go into renegotiating...these contracts and signing new agreements would be a hell of an operation for any big company."
Despite this, he said that there are still areas that remain unclear - specifically which areas will be classified as designated zones, which still need to be confirmed by the government.
Jeremy Cape, a tax and public policy partner with Squire Patton Boggs, a law firm headquartered in the United States, said that the definition of designated zones within the Executive Regulations is quite clear, relating only to fenced off, secure zones with bonded warehouses and other customs controls. He said that the notion that areas such as Dubai International Financial Centre or other open, regulatory free zones in the country might not attract VAT was fanciful.
"That's not really how VAT works, and my sense always was that I don't think the (Gulf Cooperation Council) Framework Agreement allowed (it). It would give rise to some economic imbalances," he said in a telephone interview.
Cape said that he felt there were unanswered questions around government entities - some services provided by the government are considered to be outside of the VAT system, but others competing with the private sector are subject to the same VAT treatment. Given the number government and quasi-government entities in the UAE, this is an area that "could be a real problem", he added. Courting controversy
Cape also said that further uncertainty is likely to arise once the law comes into practice and begins to be interpreted by the courts.
Van Doremelan agreed, arguing that VAT comprises most of the tax law cases occurring in European courts some 40 years after its introduction.
"That tells you that there are so many discussions on interpretations, on certain situations. So I think that there will be a lot more clarification coming in a number of areas within VAT here," he said.
He said readiness among businesses for VAT within UAE businesses varied hugely, with many larger firms well-prepared but that lots of SMEs had adopted a 'wait-and-see' attitude until the rules had been published. He urged firms that had taken the latter approach to "act as quickly as possible".
Companies needed to register before last Monday (December 4) to allow the Federal Tax Authority the 20 business days required to process their application ahead of the introduction of VAT on January 1, 2018. Those that miss the deadline potentially face a fine of up to 20,000 UAE dirhams ($5,446).
Mitchell said that "our experience to date suggests that most businesses will not be ready" by January, 1 2018.
"Whilst we hope the FTA will apply leniency in the first year to allow taxpayers to prepare for this huge shift in reporting requirements, the unforgiving approach adopted by the FTA toward issuing penalties for non-compliance with the recent implementation of Excise Tax does not bode well for businesses," he said.
To read Zawya's Special Coverage on the introduction of VAT to the GCC, click here
© ZAWYA 2017