Value-Added Tax (VAT) is expected to be introduced in GCC starting January 2018. The indirect tax levied on the supply of goods and services, will impact any business that supplies goods or services.
Looking at the effects of tax on law firms and in-house counsels in UAE, Prarthna Chaddha from Clyde & Co argues that it is all based on the parameters set out in the VAT Regulations – which are expected to be finalized after the GCC Financial and Economic Cooperation Committee.
Here, we briefly discuss VAT and its impact on legal firms with Prarthna (Partner) and why it is crucial for all businesses including the legal community to be compliant to the applicable laws and regulations.
Thomson Reuters: We hear a lot of talks about VAT and its introduction in UAE starting 2018. What can you tell us about VAT?
Chaddha: VAT refers to Value Added Tax. It is an indirect consumption-based tax, levied on the supply of goods and services, by a business. It is expected that VAT will be introduced in the GCC on 1st January 2018.
We have not yet reviewed the GCC VAT Framework Agreement, which is expected to be finalised shortly by the GCC Financial and Economic Cooperation Committee. Once the Agreement has been finalized, the countries that form part of the GCC will be able to take measures to adopt laws which apply the GCC VAT scheme. We are therefore currently awaiting the laws pursued to which VAT will be applied in the UAE (the VAT Regulations). Our comments made on this topic now are subject to our review of the GCC VAT Framework Agreement and VAT Regulations, and are made from the perspective of businesses operating in the UAE only.
Thomson Reuters: Are there fixed rates for VAT? How do you see its impact on the market?
Chaddha: The rate of VAT in the GCC is expected to be 5%. Certain items may be subject to VAT at 0% (such as food), where no VAT applies but the related VAT incurred on purchases may be deducted. Other areas such as healthcare and education may be exempt from VAT, where VAT will not apply and the related VAT on purchases may not be deducted, and VAT would therefore be a cost to such businesses.
The introduction of VAT will impact any business that supplies goods or services, and that falls above the applicable annual turnover thresholds that are expected to be set out in the VAT Regulations. Those subject to VAT would have to ensure compliance with the VAT Regulations and this would imply a change in business systems and processes as the business would have to calculate VAT, file a VAT return and pay VAT to the government, in addition to also maintaining proper records of VAT-related documentation. The impact of VAT on free zones in the UAE will also need to be considered.
The expectation is that prices of goods and services that are subject to VAT will increase. However, a supplier will determine whether the price charged to the ultimate consumer will include the cost of VAT or not.
Thomson Reuters: Ernst & Young (EY) claims VAT will affect ‘all functions” within a business. How do you see VAT affecting Law Firms in UAE?
Chaddha: A business that supplies services and is subject to the VAT Regulations will have to charge VAT to its customers. However, such business (assuming it is not exempt) would be entitled to reclaim VAT on costs.
If law firms in the UAE fall within the parameters set out in the VAT Regulations, then such firms will also need to charge VAT on the fees and costs charged to clients. To do so, in principle, law firms and individual lawyers will need to register for VAT and set up an appropriate VAT accounting system.
A law firm, as a buyer of goods and services, would also be exposed to the payment of VAT on such goods and services.
“If law firms in the UAE fall within the parameters set out in the VAT Regulations, then such firms will also need to charge VAT on the fees and costs charged to clients.”
Thomson Reuters: Will it also include In-house counsels?
Chaddha: In fact it would. However, we need to differentiate between three positions:
· First position is where in-house counsels are advisors to their internal clients. Then, they would need to make the business aware of the manner in which VAT will be levied and discuss the manner in which the administrative, legal and accounting systems would need to be changed, in order to account for and pay VAT;
· Second position is where in-house counsels are buyers of services (such as legal services). Then, they would need to be aware of the cost of VAT on such services; and
· Third and final position is looking at the personal status of in-house counsels. As other people, they would be impacted personally like any other individual buyer of goods or services in the market where, for goods and services that are subject to VAT, they will have to pay an additional cost to purchase such goods and services.
Thomson Reuters: What happens if a company or person is non-compliant to VAT regulations?
Chaddha: As we have not reviewed a copy of the VAT Regulations as at the date of this article, we cannot comment, definitely, on the consequences of non-compliance.
We expect that the VAT Regulations will impose penalties for various non-compliance acts, such as failure to pay VAT and failing to meet reporting obligations. In addition, such non-compliance may also result in a breach of various provisions of the UAE Commercial Companies Law and lead to fines and penalties arising from, for example, failing to keep accounting registers that clarify its dealings or mismanagement by the directors of the business.
Thomson Reuters: Any tips or insights to share with fellow legal professionals on VAT?
Chaddha: We believe it is essential that awareness is spread in the market that VAT is expected to be applied in 2018 in the UAE, and legal professionals are well placed to support this endeavour.
Some areas which we believe legal professionals should give particular consideration to, in the context of VAT, include the following:
- existing and new contractual arrangements;
- structuring of new joint venture/M&A deals;
- formation of new companies and use of holding companies;
- asset sales versus a transfer of a going concern;
- arrangements between a 49% shareholder and 51% shareholder in a limited liability company that is incorporated in the UAE;
- secondment arrangements; and
- ownership/use of property.
Author: Prarthna Chaddha, Partner, Clyde & Co
Bio: Prarthna is a corporate lawyer, specialising in cross border M&A, joint ventures, collaborative arrangements and general corporate work, including matters relating to corporate governance. Her clients include international and regional firms, in a broad range of industries, and a number of government entities.
In addition, she also focuses on succession planning for family businesses in the Middle East. She has advised a number of family owned/controlled businesses on implementing effective plans to assist such businesses face market and generational challenges.
Prarthna has been based in the Dubai office of Clyde & Co since 2004.