VAT in UAE: How Will the New Tax Affect Your Accounting?

Published June 10th, 2017 - 02:25 GMT
The implementation of VAT in 2018 is expected to increase accounting complexity for businesses in the UAE. (Pexels)
The implementation of VAT in 2018 is expected to increase accounting complexity for businesses in the UAE. (Pexels)

The UAE is the third least complex jurisdiction in the world for accounting and tax compliance after the British Virgin Islands and Cayman Islands as the emirate emerged as a nil-tax haven with zero per cent tax, no personal tax and no limits on repatriation of capital or profits, says a latest study.

TMF Group's inaugural Financial Complexity Index 2017 shows the UAE secured 92 points compared to 94 by British Virgin Islands and 93 by  Cayman Islands. Hong Kong and Jersey got 91 and 90 points to secure fourth and fifth positions respectively. 

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Among the most complex jurisdictions for accounting and tax compliance, Turkey secured the first place followed by Brazil, Italy, Greece and Vietnam. China (7th), Belgium (8th) and India (10th) were also among the top 10 nations for the most complex accounting and tax compliance.

The provider of global business and compliance services ranked 94 jurisdictions across Europe, the Middle East, Africa, Asia Pacific and the Americas; 1 being most complex through to 94 the least complex. 

In determining the rankings with its in-house accounting and tax experts, TMF Group used four weighted complexity parameters, considering the accounting and tax rules and regulations in different jurisdictions, and risks associated with non-compliance.

At seven per cent, the UAE rates as the least complex jurisdiction globally for 'tax'. Curacao (eight per cent) is least complex for 'reporting', Cayman Islands (27 per cent) for 'bookkeeping' and it's also the least complex jurisdiction for 'compliance' at 32 per cent.

Beneficial tax rates 

TMF Group's head of EMEA Juraj Gerzeni said the five least complex jurisdictions in the Index all have simplified reporting requirements and beneficial tax rates to encourage investment. Any complexity that exists in the UAE arises from different laws and requirements between the emirates' 35-plus free zones. 

"For example: While a branch of a foreign company is generally exempt from submitting audited reports in free zones, this is mandatory in the onshore market in Dubai and Abu Dhabi. It's exactly the opposite with private limited liability companies," Gerzeni said.

Saad Maniar, senior partner, Crowe Horwath UAE, said as a place to do business, and as a hub for the region and beyond, the UAE has always endeavoured to simplify the registration processes involved in the formation of new businesses. 

He said companies law aspects sit alongside other fundamental issues such as specific legal jurisdiction requirements (whether free zone or mainland), employment visas, accounting requirements which follow the International Financial Reporting Standards (IFRS) and simple taxation issues including customs, when considering the establishment or development of businesses in the country. 

"Due to this nature, the UAE's legal framework is quite straight forward, providing entrepreneurs the choice to set up their business in a jurisdiction that favours their requirements as per their respective international and local contractual relationships," Maniar told Khaleej Times

Pankaj Mundra, chairman ICAI Dubai and founder of Nimai Dubai, said the UAE is a least complex jurisdiction because of the ease of doing business with all free zones, including the DIFC. He said Dubai has become a financial services hub because of the DIFC which hosts major MNCs and banks who are doing business with GCC countries and Africa. There is no income tax levy on banks based in the DIFC and companies based in freezones and mainland. Only banks regulated by the cenral bank and oil companies' income are taxable, he said.

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"The UAE has been following IFRS for a long time. The UAE also hosts major audit firms and employs more than 10,000 chartered accountants from various countries, who are instrumental to maintain good books of accounts as per global standard," Mundra added.

Introduction of VAT

Gerzeni of TMF Group said the implementation of VAT in the UAE in 2018 is expected to increase accounting complexity for businesses, mainly due to the related tax compliance requirements.

"Companies operating in the UAE and those looking to enter should prepare for the change now - and this is where working with in-country experts who understand the local requirements for financial compliance can be very beneficial," he said.

Read more: 5 simple steps for GCC businesses to get VAT-ready

Jeremy Cape, partner at international law firm Squire Patton Boggs, said it's not surprising the UAE is considered one of the least complex jurisdictions globally for tax given that for most UAE individuals and businesses, tax does not arise in any meaningful way on non-international transactions.

"This absence of complexity is a double-edged sword for the UAE, given the arrival of VAT in 2018. The VAT is not always straightforward to apply in theory or in practice, and the fact that UAE businesses have not had to deal with tax complexity in the past gives rise to the risk that they will be ill-equipped to deal with it in the future," he said. 

"The risk is that VAT may have the same impact on UAE businesses that ship rats had on the bird populations of the Pacific Islands," he added.

Rakesh Pardasani, partner at audit, tax and consulting firm RSM, said the UAE has tried to attract big businesses to its shores by having a simple approach to compliance and accounting. 

"And it has been successful to a large extent. However, with the planned introduction of VAT, we expect to see this rating go down in the next year," Pardasani told Khaleej Times.

"It is no surprise the UAE was ranked as one of the least complex places in the world for accounting and tax compliance since most businesses in the UAE aren't subject to tax at all. With the exception of oil and gas companies and subsidiaries of foreign banks, there are no taxes levied by the federal government on income or wealth of companies and individuals," he said.

By Muzaffar Rizvi


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