Overview
- On 27 November 2016, all Member States of the Gulf Cooperation Council (GCC) agreed to sign the Common VAT Agreement of the States of the Gulf Cooperation Council[1] , a multilateral treaty that introduces a legislative framework for the implementation of VAT in the GCC region.
- The GCC VAT system is a traditional VAT system, which draws inspiration from the European VAT directive. The Common VAT Agreement contains the basic principles to which all-Member States are held, whilst at the same time leaving room for the Member States to tailor their domestic legislation with regard to specific issues.
- According to the treaty, all GCC countries are expected to implement VAT in their domestic legislation by 1 January 2019. The United Arab Emirates and the Saudi Arabia have emerged as frontrunners by opting to introduce VAT as soon as 1 January 2018. In the meantime Bahrain (on 1 January 2019) and Oman (16 April 2021) have also introduced VAT.
- Following the introduction of VAT, companies will have to comply with a large number of obligations imposed by VAT and tax procedure laws.
- This Practice Note discusses the impact of the VAT implementation on the directors responsible for the operations of these businesses and whether or not these directors can be held liable.
- VAT: Value Added Tax levied on the sales of goods and services, and on imports.
- FTA: Federal Tax Authority
- GCC: Gulf Cooperation Council, the international organisation consisting of six members, the United Arab Emirates, Oman, Saudi Arabia, Kuwait, Bahrain and Qatar.
- Tax return: The periodical report a taxable person needs to file which includes its output VAT liability on sales and its input VAT deducted on purchases
- Tax assessment : The report sent by the tax authority after conducting an audit that details the additional VAT due by the taxable person after the audit.
- Supply of Services: every supply that is not considered a supply of goods.
- Ministry of Finance: Ministry of Finance
VAT obligations for registered businesses
The introduction of VAT will have a significant impact on businesses both in the UAE and Saudi Arabia. Companies that were previously operating in a virtually non-tax environment will now have to comply with various obligations imposed by the VAT legislation such as:
- get registered with the UAE’s Federal Tax Authority (FTA),
- charge VAT to their customers where applicable,
- prepare and submit periodic VAT returns,
- pay VAT to the competent tax authorities,
- issue tax invoices compliant with Title Thirteen -Executive regulations of Federal Decree-Law No. 8 of 2017, and
- comply with extensive accounting obligations.
With the VAT law, FTA have the power to impose administrative fines and other penalties to ensure compliance with these extensive obligations.
From VAT implementation date till 31st December 2022, the general rule is that services provided by Company Directors whether natural person or Legal persons are considered to as supply of services and therefore subject to 5% VAT when a persons conducts business activities. This approach to company directors’ services aligns with the general VAT concept of economic activity and the taxable person definition in the GCC United VAT Council Agreement.
Effective 1st January 2023, MOF has announced that director services undertaken by the natural person serving as a member of boards at entities and institutions (Govt. as well as private) across the UAE will not be subject to VAT this is stated under Article 3 clause 2 of the Executive regulations of Federal Decree-Law No. 8 of 2017. However, it is to be noted that VAT will still be applicable for Director’s services for Legal persons serving as Board members who delegate a natural person to act under the name of the legal person as a member of the board of directors. Federal Tax Authority (FTA) has published a detailed clarification (VATP031) that provide guidance on how to apply the new provision and determine the resulting VAT liabilities prior to and post the date of 1 January 2023 on concerned natural persons.
Serious penalties for infringements of the VAT law
To ensure that all taxpayers comply with these extensive obligations, the competent tax authorities in each Member State: The Federal Tax Authority (FTA) in the UAE, have been granted the power to impose substantial administrative fines, certain fines amendment has been effected since VAT Implementation date, significant changes specified on table below compares the VAT fine based on old and new resolutions:
| Penalty Description | Old | New |
| Late Registration Fine | AED 20,000 | AED 10,000 |
| Failure to maintains books of accounts | AED 10,000 for the first time and AED 50,000 in case of repetition | AED 10,000 for the first time and AED 20,000 in case of repetition |
| Late VAT De-registration fine | AED 10,000 | AED 1,000 in case of delay, and on the same date monthly thereafter, up to a maximum of 10,000. |
| Failure to inform the Authority of any circumstance that requires the amendment of the information pertaining to its Tax record kept by Authority | AED 5,000 for the first time and AED 15,000 in case of repetitio | AED 5,000 for the first time and AED 10,000 in case of repetition |
| Failure of the Legal Representative of the Taxable Person to inform the Authority of its appointment as Legal Representative within the specified timeframe, in which case the Penalties will be due from the Legal Representative’s own funds | AED 20,000 | AED 10,000 |
| Failure of the Legal Representative for the Taxable Person to file a Tax Return within the specified timeframe | AED 1,000 for the first time and AED 2,000 in case of repetition within 24 months | AED 1,000 for the first time and AED 2,000 in case of repetition within 24 months. (Not amended) |
| Late VAT payment penalty | 2% of the unpaid tax is due immediately. | 2% of the unpaid tax is due immediately. |
| 4% is due on the seventh day following the deadline for payment. | 4% monthly penalty is due after one month from the due date of payment, and on the same date monthly thereafter, on the unsettled Tax amount to date. | |
| 1% daily penalty will be charged on any amount that is still unpaid one calendar month after the deadline for payment, up to a maximum of 300 | ||
| Submission of Incorrect tax return by the registrant | AED 3,000 for the first time and AED 5,000 in case of repetition | AED 1,000 for the first time and AED 2,000 in case of repetition |
| Submission of a VAT Voluntary Disclosure by the Person/Taxpayer on errors in the Tax Return, Tax Assessment or refund application | AED 3,000 for the first time and AED 5,000 in case of repetition | AED 1,000 for the first time and AED 2,000 in case of repetition |
Who is liable for penalties?
- Businesses will be facing a high risk of financial exposure in case of non-compliance with their VAT obligations since they will be liable for any VAT debts or penalties vis-à-vis the tax authorities.
- For example, if a business is exporting goods from the UAE and claiming a zero rate (an exemption with the right to recover input VAT), but fails to keep the appropriate export documentation, the FTA will claim VAT on these exports. That business will be held liable for VAT on these supplies, together with penalties.
- The ability for tax authorities to pursue company executives provides them with an additional opportunity to collect VAT in case of company insolvency and puts additional direct pressure on company directors.
Based on the VAT obligations mentioned above, Individual Directors will not be subjected to VAT however legal persons will still be subject to 5% UAE VAT. It is crucial to note that the update will likely also result in VAT Registered Directors having to (re-)assess their VAT registration position and possibly de-register for VAT where they have “ceased” making taxable supplies as a whole.
Legislation
- Common VAT Agreement of the States of the Gulf Cooperation Council[1] (27 November 2016)
- Federal Decree No. 31/2017 on the Ratification of the Unified Value Added Tax (VAT) Agreement for GCC
- Federal Decree-Law No. 8/2017 on Value Added Tax
- Federal Cabinet Decision No. 40/2017 on Administrative Fines
- Executive Regulations of Federal Law No. 8 of 2017
- Ministerial Resolution 49 of 2021
Daisy Cureg, CPA
Financial Controller and Tax Advisor
Elnaggar & Partners