VAT in the UAE - "an inevitability, and an opportunity for commercial negotiation"
Authored by: Victoria Woods and Rachael Ashley
- Considers the potential scope available for businesses to mitigate VAT
- Looks at the necessity of examining contractual terms to ensure that the business is protected, by including relevant drafting in new contracts, or varying existing contracts to address the VAT issue
- Reviews the likely impact on business relationships up and down the supply chain by the act of trying to mitigate, or transfer responsibility for VAT to others.
With the implementation of value added tax (“VAT”) on the horizon for 1 January 2018, now is the time for those conducting business in the UAE to prepare for the changes ahead.
It is expected that VAT will be introduced at the rate of 5%. Whilst no official guidance or publications have been released detailing how the new VAT system will operate and be enforced, the UAE Ministry of Finance has indicated that there will be a number of exclusions and zero rated supplies, including essential food items and those in respect of certain sectors, such as education and healthcare.
VAT is charged at each stage of the supply chain, so businesses should be thinking about ways to mitigate their VAT liabilities in commercial contracts with customers and suppliers. Whilst companies may not be able to avoid their ultimate liability to pay VAT, it is a matter for commercial negotiation as to who should bear that cost.
The UAE Ministry of Finance recently announced that businesses with an annual turnover of between AED1.87million and AED3.75million will have the option to register for VAT, with registration being compulsory for businesses with turnover above the AED3.75million threshold. In anticipation of the increased administration, accounting and management efforts often associated with the introduction of VAT, businesses may start looking to their core operations, technology, bookkeeping and financial management procedures for adjustments that can be made to accommodate the changes, and smooth their transition into the new regime. Modifications to any business practices inevitably take time, and sometimes expense, to facilitate, so it is eminently sensible to get a head start on these strategies by taking action now.
The Government is still considering the details of the UAE’s new VAT structure, including the nature of the fees and penalties which will be applied to those businesses which are not compliant. However, the impact of VAT should nevertheless be in the minds of anyone currently doing, or planning to do, business in the UAE, especially in the context of any commercial contracts with terms applicable beyond the next 12 months. VAT will be relevant not only in respect of contracts which are expressed to continue beyond 1 January 2018, but also in the context of short term agreements on “rolling” terms.
It is important that drafting provisions to deal with VAT, including inter-party co-operation in dealings with the relevant authorities, be included in all new contracts. If existing contracts are silent on the issue of VAT, now would be the time to introduce variations to those contracts, to potentially avoid arguments in the future as to how VAT responsibilities are allocated between the parties.
For example, it may be preferable for a supplier of goods in the UAE to deal with his VAT liability by introducing terms specifying that his prices are exclusive of VAT, and that VAT will be charged to customers in addition to the base price. However, customers, particularly long term buyers, might be resistant to changes in entrenched terms of dealing, and this is where absorbing the cost of VAT through internal adjustments, such as to pricing policies for the goods, could be considered. These steps could accomplish a similar effect for the supplier, but may take some internal focus and marketing efforts to achieve.
The renewal of all manner of commercial agreements should also be carefully considered in the context of VAT. Business leases approaching the time for renewal should be checked to ensure that current terms address the cost and responsibilities associated with VAT. If not, a written variation may be appropriate to adequately deal with the issues on renewal. The same goes for renewals of consultancy agreements, procurement contracts and similar, relating to the day-to-day operation of a business.
Although we do not have this level of clarity presently, it is possible that VAT may also be chargeable on agreements such as licenses of intellectual property rights, so both existing as well as new intellectual property licences (whether in the context of franchising, manufacturing or other transactions) should be reviewed and, if appropriate, varied, to ensure that it is clear who bears the VAT burden.
Whilst liability to pay VAT cannot ultimately be avoided, there are ways in which, with some forethought and planning, UAE businesses can pass the cost of VAT either up or down the supply chain, so that the financial burden can be mitigated.
Hadef & Partners is a full service business law firm with 35 years’ experience in helping our clients navigate the legal waters of doing business in the UAE. Please contact Associate, Rachael Ashley at firstname.lastname@example.org for tailored advice for your business on the UAE’s new VAT regime.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.