GCC Value Added Tax (VAT) industry sessionIndia 2017: proposed introduction of new indirect tax...

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Finbarr Sexton/ Filip Van DriesscheMENA Indirect Tax Leader

GCC Value Added Tax (VAT) industrysession

TOPICS COVERED

Agenda Page No.

1. New and developing VAT systems: global update map 3–12

2. Overview of VAT in Saudi Arabia 13-15

3. Recent developments 16-17

4. Impact of VAT across the organization 18-22

5. Potential VAT issues 23-29

1. New and developing VATsystems: global update map

Developing and evolving VAT systems

India2017: proposed introductionof new indirect tax regimeconsisting of central GST(CGST) and state GST (SGST)

Malaysia1 April 2015: GST at rate of6% implemented to replaceexisting sales and servicestax

China (mainland)1 May 2016: The final stage of thetransition from BT to VAT occurredwith the extension of VAT to realestate and property, financial andinsurance services, and lifestyleservices

GCCPlans have been announced tointroduce VAT across all GCC memberstates – aiming for a simultaneous dateof 1 January 2018.

EgyptIntroduction of VAT lawto replace existing GSTsystem withImplementation dateaccelerated to 8thSeptember 2016

Suriname2016: VAT due to be introduced inlate 2016/early 2017 (postponedfrom1 January 2016 and from 1 January2014)

Costa Rica2016: Planning toimplement VAT systemto replace GST system.VAT rate of 13% in 2016,rising to 15% in 2017

Puerto RicoMay 2016: Plans to implement aVAT system from 1 June 2016have been repealed. Therefore, theexisting version of SUT remains ineffect.

Bahamas

1 January 2015: VATintroduced at a rate of 7.5%

UKFollowing a referendumin June 2016, the UKvoted to leave the EU.This will effect manyareas of businessincluding indirect taxes

EU1 May 2016: The UnionCustoms Code came intoforce, with significantimpact on companieswith international supplychains

Value-Added Tax (VAT) updates

The GCC VAT Framework Agreement:

► Overarching legislation, allows for derogations► Each GCC Member State will transpose its provisions into their own domestic VAT law► EU type VAT model as GCC is a common economic zone

The key principles of the proposed system are likely to be:

► VATable supplies of goods andservices

► A single standard VAT rate of 5%,0% and exempt

► VAT exemption to be narrow -Government, health, education

► Financial services, Free Zones –still under discussion

► Imports - VATable at the point ofentry into the GCC

► Exports – 0% rated► Intra-GCC supplies of goods and

services – reverse charge principle► Mandatory and elective VAT

registration thresholds► Restriction on reclaim of input VAT

on exempted supplies and non-business expenses

1. What will GCC VAT look like


In principle, every supply of goods and services provided by a business is subject to VAT, unless:► There is a specific exemption, or► The transaction is considered falling outside the scope of the VAT system

TaxableExempt

Allunless falling under specified

provisions5%

Exported goods and services;Certain commodities;International transport

0%

GovernmentHealthcareEducation

Financial services

Goods (tangible property),Certain transfers,

Services

Within the scopeof VAT

1.1 Scope of VAT


Registration provisions in the GCC:

► Tax Identification Number (TIN)

► VAT Group Registration – aggregation and disaggregationlegislation proposed

► Suppliers of Exempt Goods or Services► May still be required to register in respect of:

► Imports from outside the GCC► Services received from abroad (where taxed in place of

consumption)

► Exempt bodies► Government Bodies

1.1 Scope of VAT


Supplies by Government Body

Supplies made by Government bodies, will only be exempt to the extent that the Government is acting in a statutorycapacity.

A Government body will carry out an activity in a statutory capacity where the activity is for the benefit of the publicunder the provisions of a law governing such services.

As such, Government bodies will be required to examine its supplies in order to determine whether these will fall withinthe scope of GCC VAT,

► Telecommunications► Power and water supply► Transportation of goods► Passenger transport► Port and airport services► Broadcasting – radio and television► Cooperatives

Non Statutory Capacity

► Treasury – issue of bank notes► Immigration - Passport and visa processing► Traffic police – fines and licensing► Permitting and licensing – CR/trade licenses► Regulatory - ICT/Central Bank/Courts

Statutory Capacity

1.2 VAT – Government Bodies


An illustrative simplified transaction under a5% VAT regime

Businesses collect the VAT on their sales (output tax) and pay it on purchases (input tax) from otherbusinesses. This effectively turns them into tax-collecting agencies. The VAT moves up the value chain untilthe customer ultimately pays the entire cost of the VAT. An increasingly global supply chain, underpinned bygreater share of GCC region inputs will place burden on the Government sector to ensure compliance whileoptimizing costs and enhancing revenue in relation to their business activities

Who Pays?When the end customer buys theproduct, the 5% VAT is added tothe final sale price (USD 1050)effectively making the endcustomer pay the full cost of theVAT.

The difference between output taxin sales price and input tax inpurchase price is VAT.

Total VAT Collected

VAT

GoodsPurchase Price

Goods SalePrice

Purchase Price Sales Price

Output TaxInput Tax++

Regular SalePrice

Step 1 Step 2 Step 3

Factory processesmaterials and sells itonward to a manufacturer

The manufacturerdevelops a product usingthe materials purchasedand sells to a supplier

The supplier sells theproduct to the endcustomer

USD 100 USD 200 USD 1000

Sale Price+5% VAT USD 105 USD 210 USD 1050

VAT collectedby Seller USD 5 USD 10 USD 50

Credit fromprevious stage -USD 0 -USD 5 -USD 10

Net VATcollected

USD 5 USD 5 USD 40 USD 50=


How does standard rated work?

Supplier passes onVAT

Companypasses on VAT andclaims the input VAT

Consumer pays VATof 5% on the final

price

Goods purchased:USD5m + USD250k

Supplies of goodsUSD10m + USD500k

VAT return:

VAT on sales: USD 500k

VAT on purchases: - USD 250k

Net VAT payable: USD 250k

VAT at 5%VAT at 5%


How does zero rated work?


Companypasses on VAT at 0%and claims the input

VAT

Company applies 0%VAT on specified

goods

Goods purchased(imported):

USD5m + USD250k

Exports:USD7m + 0

VAT return:

VAT on sales: USD 0

VAT on purchases: -USD 250k

Net VAT payable: -USD 250k

VAT at 5% VAT at 0%


How does exempt work?


Insurance co. cannotclaim back any VAT

Consumer does notpay any VAT

Goods purchased(imported):

USD5m + USD250k

Insurance:USD 10m

VAT at 5% VAT exempt

USD 250 is not refundable and is a cost for the exempt business

2. Overview of VAT in SaudiArabia


2. Overview of VAT in Saudi Arabia

Value-added tax► An indirect tax on consumption► A consumption tax because it is borne ultimately by the final consumer; however, collected

through taxable persons► Charged as a percentage of price

Taxable person► Any individual, partnership, company or establishment, which supplies taxable goods and

services► Charges VAT on supplies they make (i.e., output tax)► May deduct the VAT on their purchases (i.e., input tax)► Resulting in taxation of the value added at each stage of the supply chain

Taxable persons charge VAT on their supplies Output VAT

And may deduct VAT on purchases Input VAT


2. Overview of VAT in Saudi Arabia (Contd.)Chargeable events

UK GCC Member State (KSA)

GCC Member State (UAE)

Movement Sale

Sale

Importation5% Input VAT

Supply5% Output

VAT

Intra-community

ReverseCharge 5%

VAT

3. Recent developments


Current challenging environment driven by low oil prices has brought several strong implications tocompanies and governments in the region. The introduction of VAT is one of the key implications nation-wide.

► A GCC value-added tax (VAT) frameworkagreement has broadly been accepted by GCCFinance Ministry representatives in May 2015.

► It is anticipated that the formal approval of the GCCVAT will occur by November 2016.

Nov2016

In January 2016, GCC government officials haveindicated that the target date for VAT introduction isJanuary 2018.

Jan2018

It is expected that the VAT will be up to 5% tax rate formost goods and services (except following):► 0% tax rate for exports and certain selected goods

and services► Exempted goods and services

5%

► A comprehensive levy on all goods and services► Transaction based tax borne by the end consumer► Paid in successive stages, i.e. for each transaction in the manufacturing and distribution process► Invoice based tax credit mechanism with audit trail for authorities► Some inputs may be exempted or zero-rated based on public policy. These will not attract VAT

What isVAT?

► Based on public info, the six Gulf countries will likelyexclude healthcare, education, social services andcertain food items.

► At present there are a couple of areas whereagreement is still awaited.

3. VAT will be introduced in the GCC by 2018impacting Government and Public Sector

4. Impact of VAT across theorganization


4.1 Impact of VAT across the organization

§ Process Scenarios§ Procure to pay & order to cash§ Cut off/Transition§ Document retention

§ Chart of accounts§ Impact analysis/Budget/Cash

flow§ Tax collections

§ VAT awareness training§ VAT communication§ Organizational

structure§ Capability

§ VAT registrations§ Transitionprovisions§ Returns reporting§ Testing

§ Terms & conditions§ Negotiations§ Contracts

§ Procurementguidelines

§ Domestic vs. Import§ Vendor registrations

§ Masters§ Variety of stakeholders§ Tax accounting§ Policies§ Controls

§ System readiness &enhancements

§ Auditability§ Automation§ Tax Payer Services§ Data exchange

§ Customer awareness§ Service: key customer

touch points impacted§ Customer/Service

segmentation

BusinessProcess

Accounting& Analytics

Change

Compliance

Contracts &Policies

InformationTechnology

Customer

SupplyChain Management

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► Obligation to register for VAT withrelevant VAT authority and obtain a VATregistration number

► Periodical filing of VAT returns — likely tobe quarterly and a consolidated annualreturn

► The deadline for submission of VATreturns will be during the month followingthe end of the VATable period. Forexample in the case of quarterly VATableperiods the deadline for submission maybe the 21st day of the month followingthe end of the quarter. If the entity is in aVAT payable position the payment will bedue on the same date

► Likely details required in the VAT Return:

► Output VAT — i.e. amount of VAT chargedto customers

► Input VAT — i.e. amount of VAT chargedto subsidiaries and partners by vendors/suppliers

► Net amount payable/refundable► Details of goods or services supplied to

other GCC Member States► Details of goods or services acquired from

other GCC Member States

4.2 VAT Compliance Obligations


Compliance

Classificationof goods and

services

Migration ofregistrations- PAN based

taxpayeridentification

number

Statutoryforms

– likely to bediscontinued

Redesign ITSystems

Reporting ofaccumulated

credits

New formatsof invoices,

waybills,returns/

challans etc.

Periodicalreturns

Manner ofcomputationand payment

Rate changeto be

implemented

Key compliance requirements on introduction of VAT

Design of VAT complianceframework and standard operatingprocedures covering variousaspects such as:► Registrations► Invoicing► Computation of tax credits/set offs► Filing of returns,► Payment of taxes► Maintenance of statutory records► Work programme for verification of

compliance

Delivery considerations► What controls or checks should be

taken to drive accuracy of VATreturns?

► How should the relationships withIT, Finance and other businessunits be managed?

► What framework should be put inplace to facilitate training of staff tohandle VAT related roles?

► Who should own the responsibilityfor updating process documents/manuals?

4.3 Impact of VAT on compliance


Administrative burden

Working capital

Cost base for exemptservices

Market position due toconsumer priceincrease

4.4 Areas of VAT impact

5. Potential VAT issues


• Taxable person definition• Place of business definition• Single standard VAT rate

(5%)• Mandatory exemptions• Place of supply of goods• Place of supply of services• Definition of imports (5%)• Definition of exports (0%)• Intra-GCC supplies

(destination principle)• Input VAT deduction

principles• VAT grouping definition

• Free Zone VAT treatment• VAT zero-rating & exemption

clarifications• Collection methods• Deferment possibilities• Responsible VAT authority• VAT representation• VAT compliance details, e.g.:

– VAT return format andfrequency

– IT connection/requirements

– Registration thresholds (ifany)

– Document/invoicerequirements

– Non-compliance penalties

Expected to be included inthe overarching GCC VATframework

Expected to be included inthe local VAT laws

• Product definition• Consignment/call-off

stock• Ownership/invoicing

deviations• PE considerations• Chain liabilities• Litigation options• Anti-abuse regulations• Recordkeeping and

evidence• Statute of limitations• Treatment of joint

ventures (unincorporated)• Customs bonded

warehouse

Expected grey areas(based on regionalexperience)

5.1 GCC VAT regime


5.2 Potential industry-specific issues

Issues

► Energy and utilities► Upstream, midstream, downstream► Infrastructure, ancillary services, concession

agreements► Time and place of supply► Grandfathering of contracts► Domestic supplies in the supply chain

► Financial services► Treatment for VAT purposes► Implicit and explicit fees► Classifications and appropriate system

coding► Impact on pricing► Cross-border supply► Difficulty in attribution of input VAT► Other VAT treatment models


5. Industry-specific issues (Contd.)

Issues

► Retail► VAT treatment of supplies► Coding of products – Zero rating –v- 5% VAT► Impact on sales and pricing► Retail schemes► Tills► Documentation► Small retailers – non-recovery of VAT► Price controls► Rounding up – inflationary impact

► Real estate► Residential vs. Commercial► Supply of land► Input VAT deduction and pro-rata method► Long-term projects► Different tax on certain supplies


5. Industry-specific issues (Contd.)

Issues

► Airline and travel agency► Intra-GCC and international passenger

transport► Domestic transport► Purchase of assets► Aviation fuel► Handling services and repair/maintenance of

aircrafts► Goods and services sold on board flights► Goods sold/consumed in duty free

lounges/airside► Travel agents – VAT on margin basis


► Rapid Discovery impact & risk assessmentperformed centrally within the company

► Map the main impacts and top down risks onthe company’s operations & projects

► Summarize the key impacts► Plan next steps

A four-step methodology for VAT implementationis based on EYs experience with VATimplementation across the world. We wouldtypically recommend this approach to enable youto fully prepare for the VAT and identifyopportunities ahead of your competitors.

RapidDiscovery

Impactreview

4 step

5.3 How you can prepare for VAT readiness andimplementation


► EY offers end-to-end comprehensive services to support client readiness forthe rollout of new taxes

Readiness area Reforms / New Taxes Modernization / Improvement

Technology readiness forVAT

u IT Solution Design & Transformationu IT Enablementu IT Program Advisory

u Enhanced Analyticsu Integrated Intelligence exchange

Business readiness - Process&

Operations

u Process review & transformationu Operating Model Design

u Data Quality Assessmentu Analytics focused reengineeringu Economic Intelligence Advisory

Business readiness - People& Organization

u Organization re-structuringu Training, Capability & Capacity Buildingu Change Managementu Communication & stakeholder mgmt.

u Training and Capacity Buildingu Center of Excellence

Risku Policy and procedure developmentu Implementation of policies, standards and certification handholdingu Post certification audit and support

5.3 EY’s Services

Questions

Thank you!

GCC Value Added Tax (VAT) industry sessionIndia 2017: proposed introduction of new indirect tax...

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