The Value Added Tax (VAT) system is all set to be implemented in the UAE from the beginning of the next year. While the government and many private accounting firms are regularly providing new information to help businesses understand the VAT system, the questions and doubts are still lingering. In this article, we will discuss the VAT rules and registration provision for businesses having multiple trade licenses.
As per the latest information, it is still not clear how UAE companies with multiple trade licenses will be treated under VAT.
What are multi-trade license holder organizations?
Any organization that runs multiple businesses or has multiple trade registrations under one name, comes into this category. These might include self-standing companies, organizations with multiple branches, different parts of the same business owned by different people, partnership businesses with multiple trades, businesses with multiple investors, and/or family businesses divided among family members.
VAT liability of organizations with multi-trade licenses
One way for such organizations to deal with VAT is to register themselves as a VAT group. Companies with a common control will be required to file a single periodic VAT return and will not have to pay VAT on transactions between different legal entities of the same business, irrespective of the number of entities. VAT grouping, although, solves the issue, it has both positive and negative effects.
It is easy to register a VAT group and it can be done by any eligible business. The application for VAT grouping will be filed to the Federal Tax Authority that can reject or accept the application based on the following things:
- Whether the criteria for creating a VAT group is met or not
- Whether the creation of it may have a significant change in the VAT liability value.
- If it is suspected that the VAT group is being created for the purpose of avoiding tax, then the application may be rejected by the FTA.
It is also possible that the FTA might decide to place a limit or further restrictions on the registration of VAT groups at the time of its launch in 2018. This may include a restriction on the large business entities dealing in multiple sectors. Large organizations will likely to have to report monthly VAT returns. VAT groups will have to report individual returns for each of the participating entity.
VAT should be able to bring an effective tax system, in which it will be cheaper and convenient for organizations to manage multiple business returns under a single control. It should not be difficult or time-consuming for businesses to include monthly VAT status reviews of each of their entities, as part of their regular monthly reporting process. The FTA will treat these multiple entities as a single business if they ever decide to audit such an organization. This might complicate the process if the VAT compliance is different for different industries in the same group.
One thing that goes into the favor is that the VAT group members will be allowed only for entities having registration in the same country.
Organizations have been preparing themselves to deal with the VAT system. Grouping facility brings a lot of advantages for large organizations. One such benefit is no VAT on intra group transactions and invoicing. This simplifies the asset shifting process when the smaller parts of a larger commodity need to be moved within different entities of the same group.
The membership of a VAT group can also be shifted, that means an entity can be a part of different groups or an organization might choose to apply for multiple VAT groups.
Since the entities in the same group do not have to levy/pay tax on intra group transactions, they are also not liable to pay any fine that may result due to non-adherence to VAT policies and rules. But that doesn’t mean that they are not required to follow the rules. It will also be necessary that the VAT reporting periods of the individual entities align with their cash transactions and revenues, or the FTA may decide to penalize such entities.
The FTA will have the power to order the closing of any guilty entity or even collapsing the entire VAT group structure of the particular organization in case of any non-compliance. The suitable reason and warnings will be provided for the same.
One of the risks of this group mechanism is that all the group entities would be liable for the VAT liabilities of each other. Even the disaffiliated entities might be held responsible for any fraudulent activity that took place in the organization during their time there.
Conclusively, VAT is a rather complex tax structure, so businesses should prepare themselves for the worst-case scenarios.