Vat Impact On Company Profit in Dubai, UAE
Since the introduction of Value Added Tax (VAT) on January 1, 2018, in the UAE, a rate of 5% VAT came into effect. Businesses need to register for VAT to abide by the UAE VAT law. VAT is a form of indirect tax that infuses business operations and profit. Being registered under the VAT law requires you to prepare and maintain a range of accounts, business and tax records so the government can monitor that your things are going right. The expert auditors, tax specialists, and accounting professionals observe that the implementation of VAT in UAE will instil hugely impact on the growth of the UAE economy and businesses in the long run
VAT’s Influence on Company Profitability
- VAT as a Pass-Through Tax: VAT is typically not a direct cost to businesses. Companies act as intermediaries, collecting VAT from customers and remitting it to the government. However, this role requires diligent record-keeping and compliance to avoid potential penalties.
- Administrative and Compliance Costs: Implementing VAT systems necessitates investments in accounting software, staff training, and possibly hiring tax professionals. These additional expenses can affect a company’s net profit, especially during the initial stages of VAT adoption.
- Cash Flow Management: Businesses must manage the timing of VAT payments and refunds. Delays in VAT refunds or misalignment between VAT collection and payment schedules can strain cash flow, indirectly impacting profitability.
- Pricing Strategies: Companies may need to adjust their pricing to account for VAT, which can influence demand and sales volumes. Strategic pricing is essential to maintain competitiveness while ensuring profitability.
- Enhanced Financial Discipline: The requirement for detailed financial records under VAT regulations can lead to improved financial management practices. Over time, this enhanced discipline can contribute to better decision-making and profitability.
F A Q
Frequently Asked Questions on Vat Impact On Company Profit
Is input VAT a cost for the company?
No, input VAT cannot be considered a cost. This is because, in order to arrive at the returns for the particular tax period, the input VAT is netted off against the output VAT. The net figure is payable to the authority. While, if it is refundable for the tax period, the input VAT can be claimed back from the authority.
How is a discount on sales treated and what is the tax effect?
If discounts are given before or after the date of supply or if subsidies are provided by the State to the supplier, the value of the supply reduces in line with the discounts or subsidies. Tax will be calculated on the discounted price if the discount fulfils two conditions (1) customer must benefit from the discount, (2) supplier funds the discount.
What is the tax treatment for gift vouchers issued and its application in tax accounting?
The value of a gift voucher would be the difference between the consideration received by the supplier of the gift voucher and the Advertised value of the gift voucher. This will not be considered a supply (not taxable) if the consideration does not exceed the advertised value.
Can I recover the tax paid on expenses related to hotel accommodation for a newly recruited employee?
Yes, you can recover the tax paid. This will not be considered an entertainment expense as this expense is necessary for the employee to perform his/her role, provided, this accommodation is for a limited period as initial support to the employee.
Is input tax recoverable for expenses on tea or coffee?
The expenses eligible for input tax recovery are (1) tea, coffee, dates, chocolates and other similar snacks for office use or during meetings provided to employees and visitors for no charge, (2) flowers purchased for display in receptions or offices or special occasions.
Is it possible to reclaim the input VAT, that has been missed to be included in the respective tax period?
Yes, you can recover the input VAT in the subsequent tax period. Also, if input VAT has not been claimed in the first two consecutive tax periods, voluntary disclosure would need to be submitted by amending the input tax in either of the tax periods.