Operating From a Freezone?- VAT Obligations & Opportunities

During the introduction of VAT, impacts to FreeZones were opaque and some confusion persisted across many companies. However, a year later and with precedent and clarifications, the implications are clearer and it may be timely to reassess your company’s obligations for VAT.

FreeZone companies enjoy a special position in the UAE economy and considerations were made to for VAT compliance and reporting obligations. Therefore, the notion of Designated FreeZones (where VAT is not due on the transfer of goods from one Designated Zone to another, or when importing goods into Designated Zones from outside the UAE) were specifically defined.

Such zones are defined as specific fenced geographic areas which conform to greater security procedures with customs controls in place to monitor movements of individuals and goods to and from the areas. Additionally, they have internal procedures regarding the method of keeping, storing and processing of goods.

There are over 45 Free Zones in the UAE, however only 20 were named as Designated Zones. Therefore, for VAT purposes, the rest of the free zones are considered in the UAE mainland.

Are You Still Obliged To Comply?

Many companies registered and received their TRN for the introduction of VAT. This prudent measure was taken to comply before the actual understanding of VAT and its implications to the business became clear. Now that specific categorization of your supplies is better understood, you may not be eligible for VAT and may be compelled to deregister.

Under the provisions stated in Violations and Administrative Penalties related to the Implementation of the Federal Law No. (7) of 2017 on Tax Procedures, this can carry an AED10,000 penalty.

The primary question is assessing whether your business qualifies at the required threshold for taxable supplies. Taxable supplies are defined all forms of supply of goods or services supplied by a registered taxable person in the State of UAE for a consideration and in the course of conducting a business.

In the UAE, companies have to consider the VAT treatment of transactions with Designated Zones and assess their eligibility to comply.

If your taxable supplies may fall below the mandatory threshold, you should deregister.

To assure the FTA your deregistration request is valid, you will need thorough preparation of the necessary documentation to present a clear case. This should set out the taxable supplies may require a range of supporting documents from invoices to financial and bank statements.

Failing to accurately record and present the supporting documentation to justify your taxable supplies can lead to issues and delays. Naturally once your TRN is cancelled, you become ineligible to reclaim VAT in expenses.

What if You Still Need To Comply and Want to Reduce Costs and Risks?

In the event your taxable supplies still exceed the mandatory threshold, you must continue to comply to the Legislation.

It is advisable to assess your compliance model to ensure risks are reviewed, corrective actions are taken, and costs are optimized. This assessment should include:

• Accurately recording transactions
• Adherence to contractual terms
• Recovery processes and policies
• Review and reporting processes
• Supporting documentation requirements
• IT platform, automating and support FTA Audit File (FAF) functionality

These are not an exhaustive list and further considerations based on the nature of your business should be taken into account. Under your VAT health check, improving your compliance model and processes will present opportunities for cost and risk reduction through process efficiencies and IT automation.

Summary

From our experience, these discussion points can improve the success of your VAT model, managing costs and risks. You may be faced with other challenges from a technical or business standpoint. However, in our experience these factors represent the main areas for risk and cost improvement which can be better managed by:

• Reviewing your challenges in 2018
• Implementing better controls and reviews
• Filling capability gaps and resourcing appropriately
• On-going training and development
• IT automation and reporting

As your business assesses its performance or issues from 2018, these suggestions do not necessarily lead to major demands on your resources or investments. They may in reality be targeted changes to yield major benefits.

If you require a validation of your compliance model and reduce costs, we can support you to operate with greater confidence.