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VAT impact on manufacturingAugust 2017
VAT impact on manufacturing industries
Manufacturing involves acquisition of goods and services for manufacturing finished or semi-finished products. A manufacturer, who is a taxable person, is required to charge VAT on taxable supplies made by him when they are sold to their customers. At the same time, the manufacturer is allowed to claim input tax credits on any purchases made for the purpose of his business. Customers who are also VAT registered persons, are allowed to set off VAT incurred on their acquisition against their output tax.
The supplies and purchase made are classified under three categories as per the new GCC VAT regime:
• Standard rate (5%)
• Zero rate
• Exempt
Implication of VATImpact on operations sales/purchase• Transfer of material temporarily within GCC: Transfer of
material from one member state to another member state within GCC for temporary reason will not be subject to VAT. However if the supply is part of the supply which is subject to VAT then it will not be considered as a temporary supply.
• Payment of royalties and production sharing/cost recovery agreements: Companies import services from outside the GCC for service received such as IT, Royalty, Consultancy, Technical advice and Cost sharing — for these transactions the importer of the service needs to account for VAT under the reverse charge mechanism — i.e., accounting for the VAT liability and VAT credit at the same time for the same transaction.
• Capital asset purchase: Companies buying capital assets can recover the Input VAT credit during the period in which such capital item is purchased, provided they have a valid Tax Invoice issued by the supplier. However, if the use of capital asset is changed at a later date — perhaps to provide exempt supplies, then such Input VAT already claimed needs to be reversed proportionately.
• Levy of VAT on deposits received: Advances received from customers for supply of goods and services is a taxable supply and the VAT liability needs to be accounted on the receipt of the advance payment. Later when the supply or services or the delivery of goods takes place the advances can be adjusted on the final Tax Invoice.
• Determining extent of input tax credit: Companies providing both taxable and exempt supplies may not be in a position to avail full VAT credit on the purchases. They need to adjust the VAT credit in proportion to the amount of exempt supplies made.
• Input tax claim on acquisitions of goods (including capital assets) and services incurred for the purposes of making exempt supplies are not allowed.
• Imported production samples: If Company receives production samples from outside GCC then the company would be liable to pay VAT at point of importation, even though the samples are provided free of charge.
• Consignment sales: Under the consignment sales model, supply of goods on a sales or return basis or similar terms would for VAT purposes deem that no supply takes place when the consignor delivers the goods to the consignee, and ownership of the goods still remains with the consignor. Supply is determined to have been made only at the time the consigned goods are onsold or deemed to be bought by the consignee. Tax Invoices would then have to issued at that later date. Tracking of such sales would then be of utmost importance.
• Subcontract activity: Subcontractors normally do work that are given by another company known as a principal. The Principal supplies materials to the subcontractor for further work to be done. In this matter, no taxable supply is made by the principal when the materials are delivered to the subcontractor because there is no transfer of ownership of the goods to the subcontractor. Therefore, VAT is not applicable.
• VAT would only be applicable when the finished goods are furnished back to the Principal by the subcontractor — perhaps for services rendered and any additional materials added on by him.
VAT impact on manufacturing
VAT impact on manufacturing
Impact on human resources• Accommodation of employees: The lease or licensing of
residential property would be an exempt supply. Should employers lease such properties and then provide them to employees — perhaps in return for some contribution from said employees — this would similarly be considered an exempt supply. The provision of such services by companies would render them to be exempt or mixed suppliers, with the requirement to then apportion all input taxes that they incur.
• Gifts: Taxable Person supplying gifts or samples to promote its Economic Activities, would be free of attract VAT provided the Fair Market Value of each gift or sample supplied without Consideration does not exceed SAR200, exclusive of VAT, per recipient per calendar year.
• The maximum annual value of supplies of gifts, samples, or Goods to employees is SAR50,000 in any calendar year, based on the Fair Market Value of those Goods.
• If the value of such gifts or samples exceeds the stated amounts, VAT would have to be accounted for.
• Employee reimbursement: Companies can introduce a travel policy on business expenses claimed by employees, such as accommodation and travel. The input VAT credit for such reimbursements can be availed only if the Tax Invoices are addressed to the company.
Impact on IT systems• Transition period: Treatment of open purchase orders and sales
orders in the system should be updated before the go live date of VAT. This is to take into account of the increase in purchase prices expected post 1 January 2018.
• Tax invoices: All Tax Invoices should be issued in the Arabic language. Any other language may be added on the Tax Invoice, but Arabic language as a base is mandatory.
• IT systems would need to be reconfigured to comply with this requirement.
• Master data update: Customer and vendor master databases should be updated accurately with name, address and TIN number of the customers and suppliers. This activity would play a vital role in accurately claiming and charging VAT post go-live date.
Key contactsEY contacts for VAT inquiries
Finbarr SextonMENA Indirect Tax Services Leader + 974 4457 4200 [email protected]
David StevensMENA VAT Implementation Leader + 971 4 312 9442 [email protected]
Asim J. SheikhKSA Tax Leader +966 11 2159 876 [email protected]
KSA VAT Services Leaders
Michael Hendroff +971 4 332 4000 [email protected]
Rolf Winand+966 12 221 8501 [email protected]
KSA VAT Coordination Desk
Mohammed Bilal Akram+966 11 215 9898 [email protected]
Ahmed A Hassanin+966 11 273 4740 [email protected]
Nazar Hussain Khan+966 11 215 9898 [email protected]
Sujit Narayanan+ 966 11 215 9898 [email protected]
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