GCC Indirect Tax Weekly Digest

UAE developments

VAT refund for foreign businesses refund window now open

The reclaim window is now open for non-United Arab Emirates (UAE) established businesses to submit Value Added Tax (VAT) refund requests to the Federal Tax Authority (FTA) for the calendar year 2019.

The FTA will only accept refund applications until 31 August 2020, meaning eligible businesses should assess whether they qualify for a refund and start calculating the amount of UAE VAT they can reclaim as soon as possible.

For an overview of eligibility criteria and the list of eligible countries, please refer to Deloitte’s recent alert.

Excise Tax period commencing 1 March 2020 extended for one month

As part of its package of measures to support taxpayers impacted by COVID-19, we are aware that the FTA has notified registered Excise Tax payers that the tax period commencing 1 March 2020 has been extended for one month on an exceptional basis.

The tax period shall now cover the months of March 2020 and April 2020.  This is to allow excise-registered businesses additional time to fulfil their Excise Tax
obligations within this period before the deadline.

According to the notification from the FTA, Excise Tax Registrants must fulfil the following obligations:

• File two separate tax returns, one for March 2020 and one for April 2020, no later than Sunday, 17 May 2020; and
• Ensure that the FTA has received the tax payable for the tax period as reported in the March 2020 and April 2020 tax returns no later than Sunday, 17 May 2020.

Oman developments

COVID-19 indirect tax measures

The Oman Ministry of Commerce and Industry (MoCI) in Decision 57/2020 announced on 2 April 2020 the temporary relaxation on Customs clearance criteria on certain essential food products, health items, and goods imported into the Sultanate to “ensure their continued availability in the market”.

The ministerial decision specifies that temporary permission is given for the import of selected food products, health items, and goods without having product information printed in Arabic. This is subject to conditions that include ensuring all explanatory data is written in English (with an option of having information in another language). At the same time the decision does make it clear that other requirements and processes continue: importers who violate other approved standard specifications on imports of food products, health materials, and goods “will face a fine of up to OMR 1,000, with the penalty doubled for repeated offences”. This decision came into effect from the second day of its publication (i.e. from 3 April 2020). 

COVID-19 Indirect Tax Management 

Cash Generation: Discounts, cancellations, and compensation

Maarten Schreuder
Partner, Indirect Tax, Kingdom of Saudi Arabia

In these COVID-19 days, we see that businesses anticipate delays in supplies, delays in collecting invoices, discounts or even cancellations. Besides the impact on the topline performance, these events can have a VAT impact as well. Generally both the supplier and the customer are impacted. The impact can be on the sales (accounts receivable) as well as procurement (accounts payable).

As an outline, where you make VAT taxable supplies, you generally must invoice VAT, collect this VAT from your customers and remit this VAT to the relevant tax authority. To the extent that you face VAT due on costs incurred, this VAT is deductible if the costs are attributable to VAT taxable activities. To the extent that you are making VAT exempt supplies (or out of scope), no VAT must be collected from the customers and remitted to the tax authority. Performing activities that are VAT exempt (or out of scope) in general restricts the recovery of the VAT due on costs incurred.

Discounts and cancellations of supplies in general result in a reduction of the taxable base. If VAT has been charged and remitted on the original (higher) sales price, the discount or cancellation can give entitlement to a refund to the supplier of the earlier remitted VAT. Consequently, where the customer has reclaimed VAT on the higher original purchase price, this recovery of VAT also has to be revised (partially). The right timing of tax credit notes can make a serious impact on the VAT cash flow.

Businesses with a partial right to recover VAT that grant discounts or cancel transactions as a whole will have to consider the impact on their VAT recovery right depending on whether the VAT taxable or VAT exempt/out of scope activities are discounted or cancelled. This impacts the VAT recovery on current costs as well as capital assets. We have experienced that making use of alternative methods for determining the VAT recovery right can be a solution here.

Cancellations of supplies require businesses to repay to their customers the earlier invoiced fees. The issue of vouchers in such cases is driven by commercial rationale, but should also be reviewed to ensure an optimal VAT position. We would be pleased to share our insights on this in more detail.

Focus On: The Education Industry

Kate Bacon
Director, Indirect Tax
GCC Indirect Tax Education industry leader

Education is one of the sectors most immediately impacted by the COVID-19 outbreak. Nurseries, schools, and universities were among the first businesses to close and will remain so until at least the beginning of the next academic year. Education providers across the GCC are currently putting in place emergency measures to ensure continuity of business until the next academic year begins in August/September. However, the global situation remains uncertain and there is a significant risk of resurgence or continuation of the COVID-19 epidemic well into the next academic year. Education providers must be prepared for a potential long-term impact on their businesses. Much of the challenge in the sector will come by way of reduced revenue and cash flow pressure, with a risk of foreign student numbers falling and current student revenue declining, and it is vital that finance teams begin work now to ensure that their business is resilient and could withstand such extraordinary pressures.

From an indirect tax perspective, now is the time for education businesses to think strategically about how they can use indirect tax management to strengthen their cashflow position and support efforts towards business continuity. As an industry which often finds itself in a repayment position for VAT purposes -  awaiting cash refunds of VAT from the tax authority in their country of operation - effective management of VAT refunds during this time is essential. If the pre-COVID period was a time where businesses tended to roll forward VAT credits until requesting a large refund covering a longer period, the current time should be focused on requesting refunds for each and every tax period quickly and efficiently. This will increase the chance of the business being able to secure more frequent, smaller refunds which are likely to take less time to clear through the tax authorities’ approval processes.   

This is also an opportunity for businesses to consider how best to manage their VAT recovery position generally, both in terms of seeking to reduce the payment of VAT on costs incurred where possible, but also to maximize VAT recovery. Many education businesses find themselves not entitled to recover all of their input tax as a result of providing exempt student accommodation or exempt student transport. Those businesses will calculate how much of their ‘overhead’ or ‘residual’ input tax they’re entitled to recover by using the standard method of input tax apportionment, but there is an opportunity to explore whether applying to the tax authority to use a special method might produce a more fair and reasonable result. This could be especially relevant where a revenue-based method is selected, given that the revenue received from accommodation or transport in the current period is likely to reduce, thereby increasing the recovery percentage which could be achieved under a revenue-based method. 

This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.