94 basic food products would be exempted from the tax.
The UAE and other Gulf countries will start implementing a 5 per cent Value Added Tax (VAT) from January 2018 and it has been announced that 94 basic food products would be exempted from this tax.
VAT legislation has not yet been issued in the UAE or any of the GCC countries and therefore there is no confirmed information on the list of basic food items that will be exempted, tax experts have told Khaleej Times.
"It is our understanding that the GCC countries are close to (an) agreement on a common framework for VAT and this may be confirmed by the end of summer in view of a formal announcement shortly afterwards. Following this, each of the GCC countries would issue their own VAT legislation, providing details on what would be subject to VAT," Jeanine Daou, PwC Middle East Indirect Taxes Partner, told Khaleej Times.
Finbarr Sexton, Mena Indirect Tax Leader at Ernst & Young, said there has been no official announcement of the 94 food items that are zero rated for VAT purposes.
"We expect that the supply of basic food items will be zero rated for purposes of VAT. Under the GCC Customs Law, there are a range of 94 basic food products that are exempt from customs duties and we expect the same food items with limited additions to be VAT zero rated," Sexton said.
He explained these food items include fresh fruits, coffee and tea, wheat and cereal flours, sugar, infant milk foods, uncooked pasta and a range of other basic food items.
"Most food items - processed and cooked - and foods falling into the luxury goods category such as confectionery, chocolates, soft drinks are expected to be subject to the standard 5 per cent VAT," he added.
GCC countries are also expected to introduce excise duties on certain beverages that are deemed to be harmful to health, including those with high sugar content. Sexton expected the VAT treatment for basic food items to be standard across the GCC.
Chocolates and candies
A couple of readers asked Khaleej Times if chocolates and candies are exempted from VAT. Unfortunately the answer is no. Sexton said these items fall within the category of luxury food items and they are unlikely to be given a favourable VAT treatment.
PwC's Daou also expected that confectionery items including chocolate and candies to be subject to VAT. She also expected clothing and motor vehicles - regardless of size - to be subject to VAT.
Regarding real estate, she said: "Normally, commercial property is subject to VAT, so we expect the sale and rent of commercial property to be subject to VAT."
Sexton said: "VAT on real estate is one of the most complex areas that governments in the region have to make a determination on. The VAT treatment of real estate can differ between the sale of undeveloped property, developed commercial property and residential property. Additionally the rental of commercial property may be treated differently to the rental of residential properties.
"The sale of new properties by a developer and the subsequent resale by an individual may also be subject to different VAT rules. Given the significance of the real estate sector to the UAE economy, we will need to wait until the UAE VAT law is enacted to see what is the final VAT treatment of the real estate sector.
"We would expect the UAE government to make a distinction between commercial and residential transactions from a VAT perspective. However it is too early to tell what the final VAT landscape on the real estate sector will look like."
Your Guide to VAT
> Why is VAT being considered by the GCC?
Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.
> What is the anticipated rate of VAT?
It is expected that the standard rate of VAT will be 5%.
> Will VAT apply to everything?
Some exceptions may apply, mainly driven by socio-economic policy considerations. For example, some items may be subject to VAT at 0% (zero-rated), such as basic food - where no VAT applies but the related VAT incurred on purchases can be deducted.
Other areas such as healthcare and education may be exempt from VAT - where VAT will not apply and the related VAT incurred on purchases cannot be deducted.
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. Businesses will need to amend systems, processes and procedures and will need to ensure they comply with the new requirements, such as for example:
* Charging VAT on supplies at the correct rate
* Calculating VAT deductible on purchases;
* Calculating the overall net amount of VAT to pay/ refund;
> Will VAT be a cost to the business?
Where you are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) you will be entitled to reclaim VAT you incur on costs. Where you are engaged in activities that are exempt from VAT and you cannot reclaim VAT incurred on costs, VAT will be a cost to your business (as suppliers will charge VAT that you cannot reclaim).
> Will it affect prices/margins?
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods/services. The price will need to take account of VAT, i.e. whether you charge Dh100 or Dh105, the amount will be deemed to include VAT.
> Do I need to start preparing for VAT? What should I be doing now?
There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of your business and it is essential you consider the impact now and determine how best to deal with it.
At this stage, and until there is more clarity on the VAT legislation, we recommend you:
* Understand how VAT impacts your business and operational model and assess the capability of existing systems to cater for VAT
* Identify a VAT implementation strategy and create a project team to manage implementation
* Undertake an initial review and determine a plan/timeline for implementation
* Identify contractual arrangements that need action
* Identify your business transactions including intra-GCC transactions and inter-company transactions
> What if I get it wrong?
We can expect that there will be a penalty regime applicable in cases of errors made, and this is why it will be key to have the right systems and procedures in place to limit your exposure.
Any error that effects the amount of VAT you pay may be subject to penalty.
SOURCE: VAT in the GCC: Frequently Asked Questions, PricewaterhouseCoopers
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