VAT could hurt cash-flows of some UAE construction firms: tax expert - Zawya Projects

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VAT could hurt cash-flows of some UAE construction firms: tax expert

VAT could hurt cash-flows of some UAE construction firms: tax expert Photo Credit:shutterstock
Zero-rating is good news for developers, but contractors likely to struggle with credit payment schedules.
28 March 2017

The sale of new real estate units in the United Arab Emirates (UAE) will not be subject to value-added tax (VAT) when the new tax system is implemented, but it could impact cash flows and credit agreements for some construction firms, a tax expert said.

A 5 percent VAT is expected to be implemented simultaneously across the six members of the Gulf Cooperation Council (GCC) from January 1, 2018, Younis Al Khouri, under-secretary at the UAE’s finance ministry, had told Zawya in an interview last month.

The finance ministry held its first workshop this month to educate UAE businesses on the proposed new tax law.

Gurdeep Randhay, head of tax at international accountancy firm Grant Thornton and who was present at the workshop, told Zawya Projects that according to the ministry, the first sale of a residential property unit will be subject to a VAT rate of zero percent, while subsequent sales are likely to be exempt.

“For new construction, it is quite clear there will be no burden on the developer because the first sale of residential property is zero-rated,” Randhay said in an interview on Sunday.

A zero rating on the first sale of residential property will be good for the developer, according to Randhay, because it means all the input tax a developer incurs on purchases, including construction, are recoverable. This also means developers will not need to pass the extra costs on to the end users in order to maintain their margins.

The main difference between zero-rated and exempt supplies is that suppliers of zero-rated goods and services can reclaim their input VAT on their own costs and services, but suppliers of exempt goods will be either not registered for VAT or, if they are, will not be able to reclaim their input VAT.

There had been concern amongst industry players in the UAE that the entire real estate sector would be brought under VAT, or be treated as an exempt supply.

Some even feared that a tax on property could lead to a market crash, similar to the one the UAE saw in 2009, when property prices plunged by more than 50 percent in some areas.

Cash flow concerns

Contractors and some construction firms would need to factor in the potential negative impact of VAT on their cash flow system.

“For contractors and (some) construction firms, VAT will impact cash flow because VAT is payable within 30 days of the end of the quarter, during the filing,” Randhay said.

Businesses would need to factor in the cost of long-dated payment terms on cash flow and the cost of funding the VAT, he said, adding that each firm would have its own unique requirements and internal credit payment policies so tax experts can only advise on a case-by-case basis.

Contractors, project consultants, and suppliers in the UAE and other Gulf states have been struggling with late payments amid a liquidity crunch following the sharp drop in oil prices that began in mid-2014.

Credit insurer Coface told Reuters last month that the rate of payment delays in the UAE had increased between the first quarter of 2015 and the third quarter of 2016, due to tight liquidity conditions and a lack of funding from banks.

“They (construction companies) would have to change the way they collect money, (and also) improve their cash flow collections,” Randhay said. “Credit terms are likely to be impacted.”

“What they have to do is either renegotiate the terms or start being prepared to fund the VAT.”

In such cases, Randhay said, companies could apply to the government under the bad debt provisions and apply for a refund of the VAT at a later date.

“It delays the process because you have to go through the motions to recover the VAT. Recovery will be a bit more tedious and cumbersome.”

The UAE’s Federal National Council approved a draft federal law regarding the introduction of taxation procedures at a meeting on March 15 – indicating that the state is in advanced stages of preparations to put its taxation system in place.

A source told Zawya earlier this month that UAE President Sheikh Khalifa bin Zayed Al Nahyan is expected to issue a law to introduce VAT on goods and services in the country within the next four months.

Randhay said businesses have adequate time to prepare, even if the law has not yet been issued, because 80 to 90 percent of VAT laws are the same worldwide.

© Zawya Projects News 2017