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UAE Freezones Biz News Updates
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No blanket relief from VAT in UAE free zones
Businesses across the board are not ready for VAT, say tax consultants
Businesses operating out of free zones in Dubai are unlikely to get complete
relief from value added tax (VAT) from January 1, 2018, say tax consultants.
"It may not be practical to provide total relief from VAT because of
potential distortions of competition and the risk of undermining the tax
base. It could distort the Dubai economy if so many businesses are outside
the VAT net. There won't be a blanket relief," says Brian Conn, VAT partner,
BDO UAE, Saudi Arabia and Kuwait.
"Duty-free goods in bonded areas will remain VAT-free until they are removed
from bond and any sales of the goods prior to the point where they become
duty paid will be VAT-free," adds Conn, informing that a bonded free zone is
one where you can hold goods before they are duty paid, such as Jebel Ali
Free Zone.
Small and medium enterprises (SMEs) are likely to face cash flow issues in
the initial stages of VAT implementation.
"Cash flow is one of the things often forgotten with VAT with no clarity on
how long the refund processes will take," says Conn. "If you have a business
where the money is flowing through, you can say VAT does not have much
impact on my business, but naturally at any one point, you might either be
owing a lot of money to the government or you might be waiting for a
refund."
Citing the example of Malaysia, where a goods and sales tax was implemented
in 2015, Mok Chew Yin, executive director, advisory at BDO, said the
country's tax officials delayed refunds as they were inundated with tax
returns. Authorities wanted to first audit the returns before starting the
refund process, thus resulting in delays.
While the standard VAT rate of 5 per cent to be levied in the UAE is low
compared to other jurisdictions, there will be an impact on the economy,
with some industries affected more than other.
"The UAE's retail trade will be affected by VAT because of its sheer volume.
Consumers will also be careful with their discretionary spend in the initial
stages," observes Conn.
While most financial services are likely to be exempted from VAT, for
services involving a fee or commission, they will be standard rated,
forecast the tax consultants.
There is little time left for VAT compliance, with companies, even large
ones, set to face an uphill task. "A lot of businesses are not prepared for
VAT. People do leave things for the last minute since they have a lot of
other pressures. Across the board, people are not ready," Conn adds.
Much needs to be done before VAT arrives. If any one part of the puzzle is
missed, consequences could be severe, with lost profits, dissatisfied
customers, unnecessary costs and even penalties for non-compliance being
some potential outcomes.
Businesses need to have an implementation plan in place so that on day one,
they can hit the ground running. Companies need to ensure sales staff know
what is happening and have the training to deal with customer queries. Their
accounting processes and IT systems must be able to capture and report VAT
accurately and produce invoices with all relevant information and can deal
with things like discounts, refunds and returns.
With few businesses in the GCC having in-house VAT expertise, they must look
to external advisors for support. Firms may consider additional software or
software upgrades to provide additional VAT functionality.
"Small companies will require not less than three to five months to
implement basic software upgrades. For big companies, this could take
years," says Evgenii Podborskii, head of automation at First BIT. He
suggests that businesses can opt to work with cloud infrastructure and avoid
spending on big servers and software.
April 17, 2017
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Courtesy Khaleej Times.
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