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EY commercial-in-confidence — All Rights Reserved GCC Value-Added Tax (VAT) I 1

13 July 2017

Implementation of VAT across the GCC


Agenda

► Outline of the proposed VAT regime for the GCC

► Implications of VAT for Hospitality Industry

► Our VAT Implementation Approach


Background and basic VAT principles


Taxable supplies - what is subject to VAT?

► A broad based VAT regime with one standard rate of 5% ► Minimal exemptions and zero rates ► In principle, every supply of goods and services provided by a business

is subject to VAT (including intercompany supplies), unless:► There is a specific exemption, or ► The transaction is considered falling outside the scope of the VAT system

First supply of new residential

Certain Financial servicesDomestic Transport

Residential Rent

Goods (tangible property), Services,

Real propertyIntellectual property

5% 0%


Input tax and tax recovery

► Input tax:

The VAT incurred by a business on its purchases and expenses

► Basic principles:

► VAT is generally recoverable on any inputs (purchases and expenses) incurred in relation to a taxable business activity provided that the company has received a valid invoice.

► VAT incurred for non-economic or exempt activities cannot be recovered


Output tax

► Output tax:

The VAT charged by a business on its supplies (based on the VAT rate applicable for the supply)

► Basic rules:► The VAT treatment applicable to a supply (standard rate, zero rate, exempt) will depend on:

a) The nature of the supply (e.g., type od service); and,b) The place of supply rules.

► A fully compliant tax invoice must be issued within the time period specified by each Member State.


Place of supply rules - where is VAT due?

► The place of supply rules determine the country in which the VAT is due

Supplies of goods:

► Generally, VAT follows the movement of goods:

a) where the goods are located at the time when the supply takes place.

b) where the goods are located at the time when dispatch or transport of the goods to the customer begins


Place of supply rules - where is VAT due? (cont’d)

Supplies of services:

► Generally, the starting point in assessing the place of supply of services is the customer’s status:

a) B2B supplies of services:

b) B2C supplies of services

c) Hotel related services (e.g. Accommodation, events, catering): VAT is due where the services are actually provided. Hotel Accommodation would be deemed to be real estate – taxable where the property is located.


An illustration of the standard rate of VAT

Short Stay at Hotels

Vendors Hotel Customer

Price: 5,000k+ 250k VAT (5%)

Hotel’s VAT return:VAT on sales: 500kVAT on purchases: - 250kNet VAT payable: 250k

Maintenance costs Hotel charges

Price: 10,000k + 500k VAT (5%)

Tax Authorities

250K (VAT) 250K (VAT)

500K (VAT)


An illustration of a zero rate (0%) supply

First sale of residential property

Vendors Developer Customer

Price: 5,000k+ 250k VAT (5%)

Developer’s VAT return:VAT on sales: 0kVAT on purchases: - 250kNet VAT payable: 250k

Construction costs Sale of residential property

Price: 10,000k + 0k VAT (0%)

Tax Authorities

250K (VAT) 250K (VAT)


An illustration of an exempt supply

Lease of residential property

Vendors Developer Customer

Price: 5,000k+ 250k VAT (5%)

Maintenance costs Lease of residential property

Price: 10,000k (VAT Exempt)

Tax Authorities

250K (VAT)

Domestic VAT Law would define the scope of zero rated and exempt supplies for recoverability of VAT No recovery is allowed for VAT paid on inputs allocated to exempt transactions, referred to as ‘‘blocked’’ input VAT.

No VAT recoveryIncreased cost 250k

[Assuming that developer takes fully exempt supplies]

GCC Value-Added Tax (VAT) I 12EY commercial-in-confidence — All Rights Reserved

Taxable supplies – Import in UAE

Importation of furniture to UAE

Vendors Hotel

Price: 5,000k

Goods

Tax Authorities

250K (VAT)

UAE

250K (VAT)

Hotel VAT return:VAT on import (reverse-charged): 250k

VAT on purchases (reverse-charged): - 250kNet VAT : 0k

Outside GCC


Impact of VAT on Hospitality Industry


POTENTIAL VAT CONSIDERATIONS

Potential VAT considerationsThe introduction of VAT will impact most divisions of businesses in the Hospitality Industry:

o Short Term Accommodation

o Long Term Accommodation, potentially reduced valuation or exemption

o Food & Beverage

o Conference and wedding hire facilities

o Letting to third-parties

o Hotel Management Agreement

o Invoicing


POTENTIAL VAT CONSIDERATIONS (cont’d)

Potential VAT considerations

o No shows

o Advance Payments

o Gift Vouchers (Single Purpose/Multi Purpose)

o Free/ Complimentary Stay (e.g. Staff, Bloggers)

o Arrangements with Travel Agents

o Pricing of products will be critical for the business


Finance & Administration

• Cash Flow

• Transaction

• VAT refunds

• Input Tax Credits

• Tax Payment &

Accounting Period

• Imported Services

Sales & Marketing

• Pricing

• Contracts

• Demand Impact

Compliance

• Group Registration

• Compliance

• Tax authority audits

Human Resources

• Fringe Benefits

• Communication

• Staff Education &

Training

Business

• Business Structure

• Efficiency

• Reputation risk

• Large number of stakeholders

• Multiple transaction types • Vendors Registration• Preferential Treatment

Procurement

Information Technology

• System Changes

• System

Replacement

• Compliance

• Quarterly VAT

declarations

• Auditability

• Tax

engines

• Policy and Procedures

Impact of VAT across the organization

VAT implementation challenges


Indicative VAT implementation project timeline

• Project plan and key issues• Contract or pricing reviews• Management engagement

• Process reviews • VAT process design or review

• Assess corporate structural and financial impacts

• Tax coding and transactional classification/resolution• Re-pricing and new contract terms

• Specific training sessions• Systems implementation — new ERP/Tax engines

• Finance transformation support• M&A: integration of new business

• Internal and external communications• Support with new VAT function & governance model

• First return/payment review• Ongoing compliance and advisory• Efficiency gains — supply chain

management• Continuous audits

• Shared Service Centers

PhaseI

PhaseII

PhaseIII

PhaseIV

*Note: Phase II may be divided into a separate Planning Phase followed by an Implementation Phase

Go liveVAT ready

MilestoneKey

You are here

5 months to go…


QUESTIONS?

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The MENA practice of EY has been operating in the region since 1923. For over 90 years, we have grown to over 5,000 people united across 20 offices and 15 countries, sharing the same values and an unwavering commitment to quality. As an organization, we continue to develop outstanding leaders who deliver exceptional services to our clients and who contribute to our communities. We are proud of our accomplishments over the years, reaffirming our position as the largest and most established professional services organization in the region.

© 2016 EYGM Limited. All Rights Reserved.

ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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