BDO’s Analysis of the Unified Agreement for VAT Key facts, Compliance Obligations, Action points 17 April 2017

VAT Overview THE LAW Unified Agreement for VAT– provides a framework for all of the GCC members to follow National law – each GCC country will enact their own law to implement the tax, based on the Unified agreement. Unified Agreement heavily based on European Law To be introduced 1 January 2018 5% rate This presentation is based on our expectations of the VAT law. Definitive advice cannot be given until the final law is published

KEY FACTS

VAT – KEY FACTS The Basic Principles VAT is charged on sales (Normally referred to as ‘output tax’ and ‘outputs’) VAT is paid on purchases (Normally referred to as ‘input tax’ and ‘inputs’) The OUTPUT TAX is collected from customers and paid to the government The INPUT TAX is paid to your supplier and claimed back from the government Company INPUTS OUTPUTS

VAT – KEY FACTS Filing VAT returns – pay and claiming VAT VAT is declared monthly or quarterly The output tax is paid over minus input tax The VAT declaration (NB the VAT return will require additional data) Output tax 1000 Input tax (400) payable 600

VAT – KEY FACTS The scope of VAT: Taxable supplies made by taxable persons in the course or furtherance of a business Imports of goods Reverse charges Definitions: Taxable supply – any transaction on which VAT is charged at zero or standard rate Supply – anything done for consideration Supply of Goods – transfer of ownership of tangibles, finance leases, real estate Supply of services – anything that is not goods, includes refraining from doing something Taxable person -A person who is or should be registered for VAT Person - Company, partnership individual, unincorporated body Business (economic activity) -An activity being practiced continuously and regularly, including commercial, industrial, agricultural, professional, service activities, or any usage of material and non-material property and any similar activity.

VAT – KEY FACTS Who has to register? Registration threshold: 375,000 AED Voluntary registration: 187,500 – 375,000 AED Calculation based on: Look back over past 12 months; or expected turnover for next 12 months VAT grouping possible Registration open October 2017 (expected)

VAT – KEY FACTS Basic principles of VAT recovery VAT recoverable if: Its is incurred in connection with taxable supplies; In the course or furtherance of the business. VAT is not recoverable if it relates to: Exempt supplies Non-business activities VAT that relates partly to taxable supplies: Apportioned (‘partial exemption’) Evidence (tax invoice) will be required I N P U T A XI TAXABLE CLAIM EXEMPT BLOCKED PART TAXABLE PART EXEMPT PART CLAIM

ZERO-RATE AND EXEMPTION

VAT Zero-rate and exemption No VAT is charged The supplier can reclaim all of the VAT on its costs Result: complete relief from VAT  EXEMPTION No VAT charged The supplier cannot reclaim VAT on costs linked to the supply. Result: partial relief from VAT – the customer may benefit from a slightly lower price but the supplier has an additional cost. 

VAT Zero-rate Note: The UAE will have flexibility about how it applies the rules: Medicines and medical equipment International and intra-GCC transport of goods and passengers - and related services Exports of goods to outside the GCC Some international services Supply of investment gold, silver and platinum

VAT Zero-rate or Exempt (Unified Agreement allows a choice): Education Medical Real Estate Local transport The UAE will have flexibility about how it applies the rules: MOF has confirmed Real Estate: Commercial lettings and sales VATable Residential exempt - first letting or sale zero-rated No option to tax No capital goods scheme Medical and Education: Zero-rated Local Transport Likely to be zero-rated

VAT Exempt Financial services The UAE will have flexibility about how it applies the rules: What we expect: Banks likely to partly exempt (ie not all supplies exempt) Life insurance likely to be exempt General insurance likely to be subject to VAT at 5%

VAT May be treated as Zero-rated – the UAE can choose The oil and gas sector Certain food items. Supply of maritime, air and land means of transportation for commercial purposes Insight: All of these are expected to qualify for Zero-rating

THE REVERSE CHARGE

VAT Reverse charge A business buys services from overseas Services (VAT zero) Price 100 Seller A Reverse charge Buyer UAE Oman REVERSE CHARGE The reverse charge ensures VAT is paid in the buyer’s country. It ensures the buyer can gain no advantage by buying from a foreign supplier For most businesses it is a paper exercise with no VAT cost. For a business that cannot claim all of its VAT– the reverse charge will create a ‘real’ cost. Buyer’s VAT declaration (for illustrative purposes assume no other sales or purchases) Output tax 5 Rev charge Input Tax (5) Rev charge plus input tax Payable ZERO

INTERNATIONAL TRADE

VAT Movement of goods – expected treatment Sales between GCC countries Business to Business sales – Reverse charge for buyer Business to consumer – seller charges VAT Export sales (ie to buyers outside GCC) Zero-rated – all customers The above is based on our understanding of the framework agreement. The National law, when it is released, could contain variations.

VAT Movement of goods (B2B) - example KSA UAE Buyer Seller Goods No VAT in UAE Reverse charge in KSA Seller will need evidence of export to support zero-rating

VAT Movement of goods – Local stock UAE KSA Seller Buyer INVOICE As goods are located in KSA when allocated to customer the seller makes a supply in KSA Seller must register for VAT in KSA Goods

VAT International Services Place of supply of services – basic rule B2B – place where the customer belongs (reverse charge kicks in) B2C – place where the supplier belongs Exceptions to the basic rule Land – where the land is located Catering and hotels - location Telecoms – where the service is enjoyed Events – where the event takes place

FREE ZONES

VAT Free Zones What do we know? Very little comment from MOF No real mention of Free Zones in Unified Agreement – but an indication that goods in bond (held duty free) will be VAT free until released The law will need to specifically exclude free zones if there is any specific relief. Possible outcomes Relief for gated zones? Blanket relief? - unlikely Likely outcomes Reliefs for international trade and movement of goods and passengers might facilitate some level of relief No relief for un-gated zones

WHAT SHOULD BUSINESSES BE DOING NOW?

VAT – GETTING IN SHAPE Form a project team Carry out an impact assessment Make a plan …..and give yourself plenty of time VAT affects all parts of Business

VAT The BDO road map TIMELINE (example) PROJECT ACTIVITIES ACTION (examples) Phase 1 Impact assessment & implementation road map Review and mapping of the ‘as is’ position Identify VAT touch points and risk Design a road map Assess system capabilities Phase 2 Plan and build; blueprinting design; implementation roll out, testing and staff training Plan and design process, accounting and IT requirements Identify additional software needs Implement system and process changes Testing and dry-run Run training program Communicate with clients and suppliers Phase 3 VAT compliance , system and reporting support Assist with submitting first VAT returns Review first returns and system outputs On-going VAT compliance (optional) Systems support (optional) WEEK # 0-5 WEEK # 5- 30 Pre and Post January 2018

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