VAT Awareness & Readiness VAT SME Event VAT Awareness & Readiness September 2017 Strictly private and confidential

Outline 1 2 3 4 5 Recent VAT Developments VAT Laws in UAE Update on latest developments on VAT in the GCC 1 2 Understand the general principles of VAT in UAE VAT Laws in UAE Understand the VAT registration and compliance requirements VAT Compliance 3 Focus on VAT impact for businesses 4 VAT Impact Key issues 5 Implementation Challenges PwC

Recent VAT Developments 1 Recent VAT Developments

Recent VAT Developments A common VAT framework GCC Member States agreed on a common VAT framework (treaty) Tax Authorities and VAT legislation KSA has released the GCC VAT Framework, Draft VAT law and Draft Implementing Regulation UAE has also released the GCC VAT Framework UAE has released VAT Tax Procedures Law and Excise Tax Procedures Law UAE Federal Tax Authorities (FTA) initiated Advanced Registration Pilot (ARP) for VAT UAE FTA has launched their web site recently https://tax.gov.ae. Registrations for business is expected to be opened in end of September UAE Implementing Regulations are expected soon Go live The introduction of VAT in the GCC is expected to take effect from 1 January 2018 We expect that companies may start to register for VAT in the UAE from October 2017 Merge Tax authorities and VAT legislation points 2 & 3 Include point for UAE law, etc Remove VAT regulations Write about ARP PwC

1 2 VAT system in the UAE

What is VAT? Value Added Tax (“VAT”) is a tax on consumption. Transaction based tax - VAT is levied on each transaction throughout the supply chain VAT charged on supplies (output tax) and VAT deducted on purchases (input tax) Collected by VAT registered businesses on behalf of the Tax Administration Self-assessment system - businesses submit a periodic return to the Tax Administration. Net VAT will be either payable or refundable A quick view on the main features of the VAT. Write about compliance Compliance before self-assessment PwC

Our Understanding of the GCC VAT System Standard rate 5% VAT at import Minimum annual turnover VAT on goods & services Possible VAT exemptions Exports subject to 0% Deduction of input VAT Periodical filing and reporting Envisaged system is a standard, fully- fledged VAT system, with VAT applying on most supplies of goods and services with possible exemptions/exceptions PwC

VAT Treatments Standard Rate Exempt supplies Zero Rate Out of Scope Sale / lease of commercial use properties, construction services Utilities Most other goods and services not specifically exempt or zero-rated Subject to VAT at 5% Input tax is deductible Standard Rate Sale / lease of residential property (except for first supply) Local passenger transport Bare Land Some financial services Life Insurance No VAT charged Input tax not deductible Exempt supplies Export of supplies outside GCC International transport services, Education, Healthcare etc. within UAE New residential buildings / Newly converted residential buildings Subject to VAT at 0% Input tax is deductible Zero Rate Accounting adjustments (like depreciation, amortization, etc.) Wages and salaries, allowances, bonuses Dividends Statutory fee Outside the scope of the UAE VAT law Out of Scope PwC

Raw Materials sold to Manufacturer 100 + 5 VAT How VAT works Manufacturer Producer 5+5+5 =15 xxx Retailer Remit 10 -5 = 5 Raw Materials sold to Manufacturer 100 + 5 VAT Product sold to retailer 200 + 10 VAT Remit 5 Remit 15-10 = 5 Product sold to consumer 300 + 15 VAT Government Revenue PwC

Transaction Flow u u GCC (Intra-GCC Supplies) Outside GCC (Export & Import) UAE Customer VAT Goods & services Supplier VAT RCM Goods & services Company A No VAT Customer Supplier Goods & services VAT RCM Goods & services No VAT Customer VAT Customs duty & VAT Goods & services Goods & services Local Supplier Local Supplier Outside FTZ Within FTZ How is the competition placed? Should we plan promotions like “ Buy VAT free” for the initial period? PwC Al Naboodah Group - VAT Awareness Training

1 3 VAT Compliance

Compliance Requirements VAT Invoices Intercompany Transactions Record Keeping VAT Return VAT Deductions & Refunds VAT Groups Only VAT registrants should issue VAT invoices Specific content of a valid VAT invoice Timeline for issuance Documentary evidence for input VAT deduction entitlement All intercompany transactions are subject to VAT Each entity must issue tax invoice for each transaction Each entity will file its own VAT return Require IT system able to collate data from each entity in the group Chances of errors occurring are higher Minimum period (5 to 6 years) Hard copy or electronic Able to be reproduced for Audit in Arabic Retention for 0% or exempt supplies VAT grouping are allowed formed in order to have an ease in VAT compliance for groups However, accessing who can form a group, pros and cons is of utmost importance Periodic basis Report all supplies and purchases Calculate net tax (for payment/refund) Reporting of supplies (revenues) at Emirates level The taxable person registered for VAT purposes can deduct input VAT paid on his purchases/expenses from the VAT due on his supplies to the tax authorities PwC

VAT Groups General conditions to be met by each member of a VAT group in a country UAE VAT Group D A B C No VAT Sales + VAT Legally independent entity in the UAE Legally independent but closely bound to the other members by financial, economic and organisational links Engaged in a business providing economic activity Not a member of another VAT group Bounded by financial, economic and organizational links Effect: Entities within the group are treated as one entity for VAT purposes Results: Intra-group supplies are disregarded for VAT purposes PwC

VAT Registration Criteria Process Documents Needed 1. Persons operating in a business, not a business itself 2. Person can be individual or a legal entity. No separate VAT registration for branches 3. Taxable supplies exceeds AED 375,000 in last 12 months - MANDATORY 4. Turnover or expenses exceeds AED 187,500 in last 12 months - VOLUNTARY Criteria 1. FTA initiated pilot registration program, closed last week – Voluntary registration 2. Create e-services account with the FTA on http://eservices.tax.gov.ae 3. Mandatory Registrations are expected to open from October 2017 4. Easy registration on e-services portal using e-services account login id 5. No requirement of filing physical documentation Process Documents identifying the authorized signatory (passport copy, Emirates ID etc.) Power of attorney in the name of authorized signatory authorizing to represent company before FTA Trade license & other company documents such as articles of association etc. Financial details for last 12 months and many more Documents Needed PwC

Focus on VAT impact for businesses 1 4 Focus on VAT impact for businesses

VAT is just not a tax reform… it’s a Business reform! Finance Impact on cash flow Identification of business transactions and VAT liability Pricing Impact on pricing structures (Residential, Commercial, Industrial) ECRA guideline Information Technology System changes for VAT compliance Tax coding structures (material, location) Compliance Registration and compliance processes VAT Implications xx Human Capital Roles and responsibilities Centre of Excellence Procurement VAT payments on purchases Vendor management Supplier VAT Codes Material VAT Control Codes Business efficiency Cash flow management Credit policies PwC 16

5 Challenges

Key activities for Business Go Live A detailed transition plan will be prepared where cross functional teams will be involved to factor in multiple changes Sales Procurement HR Finance IT Legal Revision of Sales Price Customer communications Renegotiating customer contracts Revision of Purchase Price Vendor communications Renegotiating vendor contracts Training to employees Analyse perquisites given to employees Understand any gifts etc. Reassess cash flow requirement Reassess working capital Finalizing formats for invoices etc. Assess Credit admissibility Obtain registration Upgrading IT systems Installing new IT software Amend in-built logics in IT system Do test runs Re-drafting/ validation of contracts Re-negotiating contracts PwC

Challenges Do you have the appropriate resources to be compliant Who will be responsible Do you understand the new law/regulations How do you keep up to date with changes VAT Implementation Transitional VAT issues – existing and future contracts Understand tax planning and fraudulent VAT practices Test drive overall VAT supply chain before going live Manage increased administrative costs Manage cash flow, understand possible P&L impact Manage change Seeking ruling, clarifications on unclear matters/processes Registration and compliance related assistance Ongoing interactions for refunds/enquiries/audits Interaction with tax authorities Communication Educate and train stakeholders internal and external Interview sessions with all key stakeholders Compile information through standard VAT templates PwC

Time is running! Are you Ready? PwC