VALUE ADDED TAX (VAT)

Are You Ready?

23 August 2017

0 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
AGENDA
1. Understanding of VAT
2. VAT – How it Works
3. VAT Basics and Terminologies
4. Progress so Far
5. Expected Next Steps
6. Compliance Requirement
7. Generic Impact Areas and Challenges
8. VAT Impact on ERP Systems
9. Typical IT Implementation Issues
10. Readiness Requirement
11. Questions?
UNDERSTANDING OF VAT

2 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 UNDERSTANDING OF VAT – GLOBAL PERSPECTIVE
Following is brief on VAT and the global framework adopted.

B A S I C F R A M E W O R K
Indirect tax
applicable on Deductions of
consumption of VAT would be
with some
goods or
exceptions
services
Currently
present in
more than
Businesses will One of the most Concept of Zero 150 countries
have to charge common types of Rate Supply &
VAT on supplies consumption tax Exempt Supply
made found around the relevant to
world examine

VAT shall be May apply on

charged with Charged at imports in
eligibility to claim each step of addition to
off-set of input the ‘supply existing
taxes paid chain’ Customs duty

3 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT – HOW IT WORKS

4 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT – HOW IT WORKS
HOW VAT WORKS?

#1 : Collects AED 1 as VAT

VAT Deposited to Govt. AED 2.5
 Net VAT to
Government = AED 1
GOVERNMENT
#2 Supplier of services
#2 : Collects AED 2.5 VAT
 Net VAT to
Government = AED 2.5
VAT Deposited to
Govt. AED 1 #3 : Pays AED 0.5 VAT;
Collects AED 4 VAT
from customer  Net
VAT to Government =
AED 0.5
#4 : Pays AED 4 VAT [total
#4 CUSTOMER of VAT # 1+2+3 (to the
#1 Supplier of goods
extent of AED 0.5]

5 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 VAT BASICS & TERMINOLOGIES

6 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT IMPACT – TAXABLE SUPPLY
Synopsis

Output tax @5% Input VAT – ‘Creditable’ Net impact – Tax on

‘Value Addition’

Illustration:

Value: 150 • Value: 200

Procurement Input VAT: 7.5 Output services • Output VAT: 10

Customers
An Organization
Analysis:

Cost of procurement Amount Cash outflow / refund Amount Cost to Customer Amount
Value of procurement 150 Total Output Liability 10 Value of service 200
Add: Non-creditable VAT 0 Input VAT (creditable) 7.5 Add: Output VAT @ 5% 10
Total cost 150 VAT outflow in cash 2.5 Total cost to customer 210

7 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT IMPACT – ZERO/ NIL RATED SUPPLY
Synopsis

Output tax @ 0% Input VAT – ‘Creditable’ Net impact – No VAT

Illustration:

Value: 150 • Value: 200

Procurement Input VAT: 7.5 Output services • Output VAT: 0

Customers
An Organization
Analysis:

Cost of procurement Amount Cash outflow / refund Amount Cost to Customer Amount
Value of procurement 150 Total Output Liability 0 Value of service 200
Add: Non-creditable VAT 0 Input VAT (creditable) 7.5 Add: Output VAT @ 5% 0
Total cost 150 VAT Refund 7.5 Total cost to customer 200

8 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT IMPACT – EXEMPT SUPPLY
Synopsis

Output VAT – No Input VAT – Non- Net impact – Blocked

VAT chargeable creditable credit
Illustration:

Value: 150 • Value: 200

Procurement Input VAT: 7.5 Output services • Output VAT: 0

Customers
An Organization
Analysis:

Cost of procurement Amount Cash outflow / refund Amount Cost to Customer Amount
Value of procurement 150 Total Output Liability 0 Value of service 207.5
Add: Non-creditable VAT 7.5 Input VAT (creditable) 0 Add: Output VAT @ 5% 0
Total cost 157.5 Cash outflow / Refund 0 Total cost to customer 207.5

9 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT OVERVIEW & IMPACT ON BUSINESS FUNCTIONS
OVERVIEW
5% VAT  Tax charged at each
step of supply chain and
GCC paid by the customer.
 Charged as a (%) on Legal &
Financial
Accounting &
price of goods &
services.
compliance Reporting
 VAT zero rate /
exemption include
health, education, basic
foods, etc.
VAT Impact on Procurement
01 January 2018 various
Anticipated Implementation Date IT systems and
business Manufacturing
• Common VAT framework will form domains
the basis for the introduction of
domestic VAT Law by each member
State;
Sales & Inventory
• VAT would have a direct impact on
nearly all business operations; Distribution Management &
Logistics
• it would also have an significant
bearing on the support and
administrative functions which are
as follows:

10 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
PROGRESS SO FAR

11 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 VALUE ADDED TAX
Progress so far
July 2017 August 2017
VAT March - MoF, UAE released
The FTA, UAE and MoF in
KSA – KSA – VAT cooperation with institutions
Framework
May 2017 VAT Law
updated FAQs in the
Regulations and government authorities
public domain; such as ‘Chamber of
Ministry of Finance Commerce launched
(MoF), UAE MoF, UAE issues Tax second phase of
conducted workshops Procedure Law as awareness workshop on
and awareness foundation for planned VAT and excise tax
sessions UAE taxation treatment

Nov 2016 May 2017 July 2017

GCC member KSA released its KSA issues its draft
countries ratify the draft VAT Law for VAT Implementing
VAT Framework for public consultation Regulations for
the whole GCC public consultation
Updated FAQ; Awareness
region VAT Awareness
Workshop – Phase II
session for business
UAE – Federal
sector and relevant
Law No. (7) of
stake holders
2017 on Tax
Participation of around
Procedures
15000 Companies

12 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
EXPECTED NEXT STEPS
The UAE’s tax official said the
excise tax law will be signed
by the government in the third
quarter, while its regulations
will be released in the
following quarter.
Implementing
VAT Roll Out
Draft VAT Regulation to
01 January
Law – Q3 follow the
2018
Draft VAT Law

1 2 3 4 5

He also said the law regarding the

new value-added tax (VAT) will also
Registration – be signed in the third quarter and its
Excise Tax
Mid September regulatory framework will be
Implementat
2017 released in the fourth quarter.
ion by Q4 "We are starting with Saudi Arabia
350,000 firms
expected to and the UAE in January and the
register rest could implement until the end
of 2018," he said.
Source : https://www.zawya.com/mena/en/story/Excise_Tax_UAE_to_implement_tax_on_tobacco_and_energy_drinks_this_year-ZAWYA20170816052646/
13 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
COMPLIANCE REQUIREMENT

14 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE

COMPLIANCE REQUIREMENTS CHECKLIST

Option for Voluntary Registration Group Registration

Registration Available likely to begin likely to be
from End of permissible
September 2017

  
2 4 6

1 3 5 7
Every person Threshold limit Penal One Registration
exceeding likely to set at Consequences if for one entity
Threshold AED 375,000 liable to register within Member
Turnover limit but not registered state
to Compulsory
Register    
15 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE

PAYMENT OF TAXES & FILING OF RETURNS

Payment of Tax is net of Filing of Return also Non-compliance

output less input mandatory for disclosure may lead to Penal
of procurement and
implications
Supply
transactions, Emirate-

 wise
 
2 4 6

1 3 5 7
Every taxable There could be Payment & Return Likely Tax period
person liable to refund scenario Filing likely to be on to be 3 months
pay taxes due as well E-Platform (Arabic ?) or less
at end of Tax
period
   
16 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE

INVOICE & RECORD KEEPING

Prescribed particulars to be Books of Accounts and To be preserved
printed on invoice Records to be for 5 years
maintained are
prescribed in framework

  
2 4 6

1 3 5
Every taxable Invoice to be valid Additional Records
supply has to be document for claim may be suggested
supported by of credit by Buyer
invoice

17
 
CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.

GENERIC IMPACT AREAS AND
CHALLENGES

18 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
IMPACT OF VAT ON YOUR BUSINESSES
While VAT is charged and collected by businesses on behalf of the Government and as such
should not be considered as a cost, there will be an additional burden in terms of administration
and compliance with the new legislation
• Charging VAT on supplies at the correct rate

• Calculating VAT deductible on purchases

• Calculating the overall net amount of VAT to pay/ refund

• Submitting VAT returns, showing the required information, within the prescribed deadlines

• Paying the net amount of VAT due, within the prescribed deadlines

• Keeping the correct documentation in relation to invoices, records, accounts, VAT returns, etc.

Businesses will need to amend systems, processes and procedures and will
need to ensure they comply with the new requirements, such as for example:

Accounting and Program Indirect Tax

Technology Supply Chain Advocacy Compliance
Reporting Management Assessment

19 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 BUSINESS IMPACT & IT CHALLENGES
Classification
• Classifying the supply into taxable, Compliance Requirement
zero-rated and exempt supply • Serial number invoicing;
• Treatment for Government & Non- • Compliance burden i.e. filing of
Government entities Returns, making timely Payments,
• Treatment for Education & Medical Records maintenance, etc.
sector • Electronic Records
• Not for profit organisation • Reporting in English or dual language

Transitional Impact Information System

• Understanding impact on cut-over • Integrating various systems on
transaction; which the organization operates;
• Changes to be considered in the • Configuring various formats for
contracts/ IT system from cut-over complying with the prescribed
perspective requirements
• Configuring requisite fields to
generate reports in desired formats
Functional Impact Key VAT issues
• Government Grants & Subsidy • Valuation on related part transaction;
• Treatment of free supplies and • Inter Co. transaction & Cross Charge
discount between Group Co.
• Supply Chain Re-engineering and • Group reg vis-à-vis single reg;
mapping the same through system • Availment of correct Input Credit;
• Location of server ? • Leakage of tax due to dealing in multi
• Aligning chart of accounts tax structure products;

20 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
VAT IMPACT ON ERP SYSTEMS

21 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 VAT IMPACT ON ERP SYSTEMS

• Invoices • Legal Entities

• Reports • VAT Groups
• Payments • Locations

TAX
STRUCTURES
• Codes and Rates • Customer Master
• Classification • Product Master
• Logics & Rules • Vendor Master

• Inter / Intra company Ops

• Chart of Accounts (Tax) • Supply Chain
• Fixed Assets • Sales processing
• Payables Management ERP • Petty Cash and Expenses
• Receivables Management • Service contracts
SYSTEM • Projects

22 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
ILLUSTRATIVE ERP SYSTEM CONSIDERATIONS FOR VAT
• Various master data such as chart of accounts, vendor master, customer master, price
Master Data master, material master etc.. need to be updated

Business • Business transactions like sales, purchase, inter company services etc. needs to be aligned
Transaction with the VAT law

Tax Invoice • Design, development and logic formulation of tax/ proforma invoices will be required
Formats as per the provisions of the VAT law, where prescribed

Accounting • Various accounting aspects of the VAT for eg: accrual and reversal of VAT etc. will be required
Aspects to be aligned with the VAT law

Tax
• Configurations for automatic tax calculation procedures and credit mechanism for VAT would
Calculation
be required to be aligned with the VAT law
and Credit

Data • Transaction data like open sales orders, purchase orders, contracts and
.M.iigration agreements will be migrated during the cutover activities

• Design, development and testing of various tax reports, forms etc. is required during the VAT
Reports
transition

24 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
TYPICAL IT IMPLEMENTATION ISSUES

25 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
TYPICAL IT IMPLEMENTATION ISSUES

* Initiating it very late;

* IT team/software vendor not clear about the VAT requirements and configurations
* Delay in issuing VAT patches by the software service providers which results in delay and ineffective
implementation

* Issues in configurations and customisation – post download of patches

* Issues while migrating from test environment to production
* Not clear about the chart of accounts requirements under VAT
* Errors in issuing invoices, generating reports, etc in test scenario
* Errors faced while conducting UATs are not addressed
* Many systems are outdated and can’t support changes/ modification made to it
* Integration of multiple ERP or softwares used

* Many users are accustomed to entering fixed set of data and sudden change makes it difficult for users
to adapt

* Large number of master data of customers and vendors is required to be collated and updated in the
system

26 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 READINESS REQUIREMENT

27 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 READINESS REQUIREMENTS 28

01 Sept to 31 Oct 2017 01 Nov to 15 Dec 2017 01 Jan to 28 Apr 2018

Implementation & IT Post Roll Out

START ANALAYZE TEST
Training Implementation

• Formation of VAT • Conducting impact • VAT Registration; • Coding the tax • Performing user • Mapping on weekly

task force; assessment • Implementing the masters; acceptance test; basis the system

• Planning and • Including all recommendations • Configuring • Verifying the tax performance;

initiation functions; of Impact report; formats; logics; • Monthly

• IT systems Gap • Conducting • Coding tax logics • Extracting sample reconciliation of

analysis functional and reports and VAT liability and

compliance documents VAT input tax;

training • Maintaining records

28 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 Questions ?

29 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.
 THANK YOU!!

30 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party.