VAT in the UAE – The freezone update

Executive Regulations
The final VAT legislation, the Executive Regulations, has been published and all the uncertainty has been cleared up. One of the specific areas covered by the Executive Regulations is the area of freezones. Freezones are one of “designated areas” that are essentially the “fenced” areas that have security and customs controls in place that manage the entry and exit of people and goods to and from the area. It was highly anticipated that the fenced freezones would fall outside the scope of VAT and that the unfenced freezone would come into the scope of VAT. However, it is quite clear now that all free zones will be directly impacted by VAT.

Freezone companies are now treated as follows:
 Non-designated zone companies will be treated the same as any onshore company.
 Designated zone companies will for the most part also be in scope for VAT except for transactions between designated zones.

This was a surprise to many who operate in the freezone areas and particularly those who operate in the designated or fenced freezone areas.

So, what does this mean for companies?
This means that companies that up to now have been hoping to avoid VAT have been awakened to the complexities of VAT and will now need to very quickly get their house in order. Here’s what you need to do:

Step 1: Get VAT registered immediately
 This is not a particularly difficult process to complete, but you will need to take the time to put all the various documentation together to allow you to get registered properly. You will also need to get some Arabic translation done.

Step 2: Get a VAT compliant solution in place before December 31, 2017
 This is the difficult part of the plan. Depending on the size and complexity of your business, you will need to perform a detailed due diligence review and identification of risk within your company so that a bespoke VAT solution can be designed and implemented in your business.
 This review will look at the nine key areas that may be impacted by VAT including Legal, Supply Chain, IT, HR, Finance, Procurement, Strategy, Projects and Company Structure.
 Ultimately, this VAT compliance solution needs to satisfy the Federal Tax Authority requirements for the forthcoming launch of VAT in the UAE.

Step 3: Implement a VAT compliant accounting system before December 31, 2017
 This involves designing and implementing an accounting system which is VAT compliant and is capable of report turnover by Emirate. The setup and testing must be done before your company goes live with VAT in January 2018 and failure to do so will result in potentially large penalties ranging from AED10,000 to AED50,000.

It is vitally important that your business gets this work done by a bona fide VAT qualified and experienced expert. How do you know if your adviser is an expert in VAT? Ask some questions:
 Where did you get your VAT experience?
 Have you worked as a VAT expert in Europe or South Africa?
 Have you implemented VAT or just processed VAT invoices?
 What exactly was your role?

Unfortunately, many of the so-called VAT experts have never actually worked in a VAT implementation project or even a VAT environment. There is a cost in getting VAT compliant, but even greater is the opportunity cost of not getting VAT compliant including fines, penalties, suspension of trading and even jail.

Benefits: What are they?
If you get your business VAT compliant and implement the right VAT complaint accounting system then you will reap the rewards of having better information and financial management systems in place which will lead to better and quicker decisions, more information on the dynamics of your company, faster invoices and better cash management. These improvements will allow your company to grow quicker and make you more competitive than your peers. If your business is more systemised it will be easier to manage and ultimately easier to sell to an interested third party.

Funding and credit quality
In an environment where it is difficult to acquire funding or credit from investors or banks, having a sound financial accounting system in place will make it easier to show potential investors or lenders that you are a good operator and as such present a lower risk to them and their investment. This will, in turn, secure better rates and improve your credit scoring.

Transparency and implications: The good, bad and ugly
One of the outcomes of this new transparent operating environment is that for probably the first time ever, many firms will now be submitting their financial information to the authorities and complying with international accounting standards. This will force companies to start looking at how they have set up their company structures and how their trade licences may or may not cover their activities. This will lead to the restructuring of companies, which will be a good thing in the overall scheme of things. Companies will be made fit for purpose and many of the redundant structures will be replaced with new, more efficient ones. There will be a culture of change and openness in an environment where privacy is highly valued however this should lead to better corporate governance for many of the companies operating in the region. For many companies, automated and quicker reporting will highlight operating inefficiencies. This can help flush out unsavoury and fraudulent practices in areas including procurement, finance and operations. This will benefit the owners of businesses in a big way and will ensure that the likelihood of fraud and theft is significantly reduced.

While some may moan about the cost, the time and the challenges of this new regime, in most cases this will lead to better, more transparent and more profitable companies. For the UAE, it will lead to more promising opportunities for Foreign Direct Investment as international companies see the rise of a new and more adaptable Emirati business operating environment. It is a sign of the evolution of the UAE business model.

For family businesses, it will bring the opportunity of better succession planning without all the usual drudgery, with the financials being managed by the accounting systems and more use of dynamic dashboards and exception reports being delivered daily to the mobile phones of the CEOs and CFOs. This will help the younger generation to step into the shoes of the previous generation in a more structured and integrated manner than was previously possible. As we know the younger generation loves technology and spend hours looking into their phone screens but now instead of ‘Snapchat-ing’, they’ll be checking the latest numbers and sales figures of their family businesses.