Are You Ready? 23 August 2017 - ISACA UAE CHAPTERisacauae.org/CPEs/VAT Presentation.pdf · Are You Ready? 23 August 2017 . AGENDA . 1. Understanding of VAT 2. VAT – How it Works

0 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 (VAT) Are You Ready? 23 August 2017

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


UNDERSTANDING OF VAT – GLOBAL PERSPECTIVE

B A S I C F R A M E W O R K Following is brief on VAT and the global framework adopted.

Indirect tax applicable on

consumption of goods or services

Businesses will have to charge VAT on supplies

made

VAT shall be charged with

eligibility to claim off-set of input

taxes paid

One of the most common types of consumption tax found around the

world

Deductions of VAT would be

with some exceptions

Concept of Zero Rate Supply & Exempt Supply

relevant to examine

Charged at each step of the ‘supply

chain’

May apply on imports in addition to

existing Customs duty

Currently present in more than

150 countries


VAT – HOW IT WORKS


VAT – HOW IT WORKS

#1 : Collects AED 1 as VAT Net VAT to Government = AED 1

HOW VAT WORKS?

GOVERNMENT

#4 CUSTOMER

#2 Supplier of services

VAT Deposited to Govt. AED 1

VAT Deposited to Govt. AED 2.5

#1 Supplier of goods

#2 : Collects AED 2.5 VAT Net VAT to Government = AED 2.5

#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 of VAT # 1+2+3 (to the extent of AED 0.5]


VAT BASICS & TERMINOLOGIES


VAT IMPACT – TAXABLE SUPPLY

Value: 150 Input VAT: 7.5

Synopsis

Illustration:

Procurement • Value: 200 • Output VAT: 10 Output services

Cash outflow / refund Amount

Total Output Liability 10

Input VAT (creditable) 7.5

VAT outflow in cash 2.5

Cost of procurement Amount

Value of procurement 150

Add: Non-creditable VAT 0

Total cost 150

Cost to Customer Amount

Value of service 200

Add: Output VAT @ 5% 10

Total cost to customer 210

Analysis:

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

Customers An Organization


VAT IMPACT – ZERO/ NIL RATED SUPPLY


Synopsis

Illustration:




Add: Non-creditable VAT 0

Total cost 150


Value of service 200


Total cost to customer 200

Analysis:



Input VAT (creditable) 7.5

VAT Refund 7.5

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

Customers An Organization


VAT IMPACT – EXEMPT SUPPLY


Synopsis

Customers




Add: Non-creditable VAT 7.5

Total cost 157.5


Value of service 207.5


Total cost to customer 207.5

Analysis:



Input VAT (creditable) 0

Cash outflow / Refund 0

An Organization

Illustration:

Output VAT – No VAT chargeable

Input VAT – Non-creditable

Net impact – Blocked credit


• Common VAT framework will form the basis for the introduction of domestic VAT Law by each member State;

• VAT would have a direct impact on nearly all business operations;

• it would also have an significant bearing on the support and administrative functions which are as follows:

VAT OVERVIEW & IMPACT ON BUSINESS FUNCTIONS

Tax charged at each step of supply chain and paid by the customer.

Charged as a (%) on price of goods & services.

VAT zero rate / exemption include health, education, basic foods, etc.

5% VAT GCC

OVERVIEW

01 January 2018 Anticipated Implementation Date

VAT Impact on various

business domains

Financial Accounting &

Reporting

Procurement and

Manufacturing

Inventory Management &

Logistics

Legal & compliance

IT systems

Sales & Distribution


PROGRESS SO FAR


VALUE ADDED TAX

P r o g r e s s s o f a r P r o g r e s s s o f a r

March - May 2017 Ministry of Finance (MoF), UAE conducted workshops and awareness sessions

VAT Awareness session for business sector and relevant stake holders Participation of around 15000 Companies

May 2017

KSA – VAT Law

KSA released its draft VAT Law for public consultation

Nov 2016 GCC member countries ratify the VAT Framework for the whole GCC region

VAT Framework

Updated FAQ; UAE – Federal Law No. (7) of 2017 on Tax Procedures

July 2017 MoF, UAE released updated FAQs in the public domain; MoF, UAE issues Tax Procedure Law as foundation for planned UAE taxation

July 2017

KSA – VAT Regulations

KSA issues its draft VAT Implementing Regulations for public consultation

August 2017 The FTA, UAE and MoF in cooperation with institutions and government authorities such as ‘Chamber of Commerce launched second phase of awareness workshop on VAT and excise tax treatment

Awareness Workshop – Phase II


He also said the law regarding the new value-added tax (VAT) will also be signed in the third quarter and its regulatory framework will be released in the fourth quarter. "We are starting with Saudi Arabia and the UAE in January and the rest could implement until the end of 2018," he said.

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.

EXPECTED NEXT STEPS

1

Draft VAT Law – Q3

2

Registration – Mid September

2017 350,000 firms expected to

register

3

Implementing Regulation to

follow the Draft VAT Law

4

Excise Tax Implementat

ion by Q4

5

VAT Roll Out 01 January

2018

Source : https://www.zawya.com/mena/en/story/Excise_Tax_UAE_to_implement_tax_on_tobacco_and_energy_drinks_this_year-ZAWYA20170816052646/


COMPLIANCE REQUIREMENT


COMPLIANCE REQUIREMENTS CHECKLIST

VAT – LIKELY COMPLIANCE REQUIREMENTS – UAE

One Registration for one entity within Member state

Threshold limit likely to set at AED 375,000

Registration likely to begin from End of September 2017

Option for Voluntary Registration Available

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6

5

4 2

1 3

Group Registration likely to be permissible

Penal Consequences if liable to register but not registered

Every person exceeding Threshold Turnover limit to Compulsory Register


PAYMENT OF TAXES & FILING OF RETURNS


Likely Tax period to be 3 months or less

There could be refund scenario as well

Filing of Return also mandatory for disclosure of procurement and Supply transactions, Emirate-wise

Payment of Tax is net of output less input

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6

5

4 2

1 3

Non-compliance may lead to Penal implications

Payment & Return Filing likely to be on E-Platform (Arabic ?)

Every taxable person liable to pay taxes due at end of Tax period



INVOICE & RECORD KEEPING

Invoice to be valid document for claim of credit by Buyer

Books of Accounts and Records to be maintained are prescribed in framework

Prescribed particulars to be printed on invoice

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5

4 2

1 3

To be preserved for 5 years

Additional Records may be suggested

Every taxable supply has to be supported by invoice


GENERIC IMPACT AREAS AND CHALLENGES


IMPACT OF VAT ON YOUR BUSINESSES

Accounting and Reporting Technology Supply Chain Program

Management Advocacy Compliance Indirect Tax Assessment

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

• 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.

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


Classification • Classifying the supply into taxable,

zero-rated and exempt supply • Treatment for Government & Non-

Government entities • Treatment for Education & Medical

sector • Not for profit organisation

Transitional Impact • Understanding impact on cut-over

transaction; • Changes to be considered in the

contracts/ IT system from cut-over perspective

Compliance Requirement • Serial number invoicing; • Compliance burden i.e. filing of

Returns, making timely Payments, Records maintenance, etc.

• Electronic Records • Reporting in English or dual language

Information System • Integrating various systems on

which the organization operates; • Configuring various formats for

complying with the prescribed requirements

• Configuring requisite fields to generate reports in desired formats

Key VAT issues • Valuation on related part transaction; • Inter Co. transaction & Cross Charge

between Group Co. • Group reg vis-à-vis single reg; • Availment of correct Input Credit; • Leakage of tax due to dealing in multi

tax structure products;

Functional Impact • Government Grants & Subsidy • Treatment of free supplies and

discount • Supply Chain Re-engineering and

mapping the same through system • Location of server ? • Aligning chart of accounts

BUSINESS IMPACT & IT CHALLENGES


VAT IMPACT ON ERP SYSTEMS

22 CONFIDENTIAL – This document is for your organization’s internal use only and should not be copied or distributed to any third party. 22

VAT IMPACT ON ERP SYSTEMS

TAX STRUCTURES

• Invoices • Reports • Payments

• Codes and Rates • Classification • Logics & Rules

• Customer Master • Product Master • Vendor Master

• Legal Entities • VAT Groups • Locations

• Inter / Intra company Ops • Supply Chain • Sales processing • Petty Cash and Expenses • Service contracts • Projects

• Chart of Accounts (Tax) • Fixed Assets • Payables Management • Receivables Management

ERP SYSTEM


ILLUSTRATIVE ERP SYSTEM CONSIDERATIONS FOR VAT

Business Transaction

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

Master Data

• Various master data such as chart of accounts, vendor master, customer master, price master, material master etc.. need to be updated

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

Tax Invoice Formats

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

Data .M.. iigration

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

Tax Calculation and Credit

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

Accounting Aspects

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


TYPICAL IT IMPLEMENTATION ISSUES


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

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READINESS REQUIREMENT


28

Post Roll Out

• Mapping on weekly

basis the system

performance;

• Monthly

reconciliation of

VAT liability and

VAT input tax;

• Maintaining records

01 Jan to 28 Apr 2018

READINESS REQUIREMENTS

START

• Formation of VAT

task force;

• Planning and

initiation

ANALAYZE

• Conducting impact

assessment

• Including all

functions;

• IT systems Gap

analysis

Implementation & Training

• VAT Registration;

• Implementing the

recommendations

of Impact report;

• Conducting

functional and

compliance

training

01 Sept to 31 Oct 2017

• Coding the tax

masters;

• Configuring

formats;

• Coding tax logics

IT Implementation TEST

• Performing user

acceptance test;

• Verifying the tax

logics;

• Extracting sample

reports and

documents

01 Nov to 15 Dec 2017


Questions ?


THANK YOU!!

Documents

Are You Ready? 23 August 2017 - ISACA UAE CHAPTERisacauae.org/CPEs/VAT Presentation.pdf · Are You Ready? 23 August 2017 . AGENDA . 1. Understanding of VAT 2. VAT – How it Works