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Lessons from the UAE: Digitizing VAT

October 2018

October 21, 2018 – 13:04 – Dubai

The extensive use of technology during the introduction and post-implementation of value-added taxes in the UAE, on the part of the government and UAE-based businesses, has led to a smooth transition to a taxation regime.It is a remarkable feat, especially in a region that has never had to deal with much taxation previously.

The entire process from preparation to implementation offers insightful reference points for the rest of the GCC region, which is heading in the same direction and focusing its efforts on economic diversification.

In the past 10 months and prior, there were many UAE companies that took on the challenge of VAT as an opportunity to upgrade their accounting systems and processes. Not only did this decision help them become compliant, it also boosted staff productivity. There was less time wasted on VAT invoice creation, reconciliation of input versus output of value-added taxes, reverse charge calculations and VAT return filing.

In addition, the savings from potential non-compliance penalties – which can run into hundreds of thousands of dirhams – are also significant. The improved accounting systems brought about enhanced processes and controls that go beyond taxes and encouraged greater transparency in the corporate sector.

On the government front, the UAE Federal Tax Authority (FTA)ensured that the VAT process was digitalised from end-to-end through their online portal, from registration to tax audits.VAT return filings are only available online,and the process is completely paperless, while the auditing process is also designed to be more efficient and less intensive for companies who are using FTA’s approved Tax Accounting software and software vendors were advised by the FTA about digital audit file generation.

Nevertheless, there will always be some pains, as with the introduction of anything new. We have observed several repeated mistakes made by companies. The most common is the issuance of non-compliant invoices due to outdated business systems. Under the VAT law, the invoice must have the words “tax invoice” clearly stated; be in UAE dirhams or converted to UAE dirhams and be issued within 14 days of the date of supply of goods or services. It must include the name, address and tax registration number of the supplier, date of issue, a description of goods or services, the total amount payable and the total VAT chargeable in addition to few more details that are clearly mentioned in Executive Regulation governing this.Needless to say, it is very easy to make mistakes if you are manually invoicing or using dated software.

At our last VAT roadshow, having spoken to hundreds of business owners, especially of small and medium businesses, it appears cost concerns are main reasons why many do not want to upgrade their accounting systems. In reality, there are many cost-effective solutions available in the market including software as a service (SaaS) and cloud-computing that continue to revolutionise the business management software industry.

Companies in the UAE are in a much better position now than when they first started with regard to VAT.Almost all eligible businesses have filed more than one return successfully. They also understand the concepts like zero-rated supplies, exempt supplies, and reverse charge with greater clarity. There is also better comprehension of concepts like Tax Groups & Designated Zones. We are also seeing a growing number of businesses preparing themselves for the VAT refund process and enabling themselves for tax audits.

The UAE’s drive towards positive change is encouraging, as it shows determination by the leadership to create a sustainable economic future that does not focus solely on petrochemical revenues,while continuing to deliver high-quality public services.

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