Buying a car to avoid VAT next year? Here’s what you need to know

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New vehicle sales in 2017 are likely to be uplifted by a planned VAT (Value Added Tax) introduction by most GCC states in 2018. Customers previously planning a car purchase in the next two years from now are likely to purchase vehicles before a five per cent tax is levied in 2018.

Attitude of UAE residents towards purchasing cars is also shifting as the implementation of VAT draws near. Customers will most likely have to think twice before buying a new car next year. A basic model of Mercedes-Benz CLS 63 AMG is expected to cost AED518,400 instead of AED 494,000 this year.

Hassan Soukar, a social media influencer about cars, told GulfRetail: “With VAT and possibly even more expenses to follow, surely that will make more people turn to other commuting means such as tram, metro and bikes. Many people are already considering getting rid of their vehicles. It may leave the government with an even bigger financial hole.”

The introduction of VAT is likely to give rise to some significant issues and considerations for the automotive sector businesses.

Asad Abbas, an automobile company executive said: “I don’t feel that the VAT will have a major impact on how people use their cars in the UAE. But if you are considering, I think it is best to buy cars before November.”

So how will VAT implementation in the GCC affect the automotive sector?

Given the complexity of VAT, as it applies to the sector, all parties in the supply chain must carefully consider their positions and understand the impacts, to ensure they are ready to implement the relevant legislative changes.

The VAT Treaty signed by the GCC states establishes the common principles of the VAT system which is to apply in each GCC State and provides a structure on which domestic VAT legislation will be developed.

We are gradually getting clarity over the principles which every State will be required to enact and can start to confirm our understanding of how businesses will be impacted by the introduction of VAT within the region.

The Treaty, however, leaves certain decisions to the discretion of the individual GCC States, so whilst we now have a greater understanding of how the VAT system will operate there remain many ‘grey’ areas which can only be resolved once each of the countries have released their VAT laws.

A report by Deloitte highlights the associated challenges for all parties in the supply chain of the automotive businesses:

VAT will be relatively straightforward conceptually

1. Registered suppliers charge VAT (output tax) in most instances (i.e. typically added to current prices)

2. Registered business customers recover the VAT (input tax) in most instances

3. End consumer suffers the total VAT cost; flows through businesses to a great extent

4. Standard VAT rate will be five per cent across the GCC

What will be the key VAT highlights in the automotive sector?

The diversity of activities undertaken in the automotive sector means that businesses are likely to make supplies with differing VAT treatments:

1. Core activities will be subject to VAT at the standard rate of five per cent e.g. sale of motor vehicles, parts, repair services etc.

2. Financial services may be exempt from VAT as per Article 36 of the Treaty e.g. supplies of finance products to customers BUT it may be difficult to define what qualifies as an exempt financial service

3. Car hire provided to unregistered customers will be subject to VAT in the country where the car is made available to the customer as per Article 17 of the Treaty – could trigger a requirement to register for VAT in other GCC States

4. There are optional special rules for determining the VAT due on second hand goods under Article 37 of the Treaty i.e. second hand vehicles – VAT becomes due on the margin made on the sale of the vehicle

7. Courtesy cars, stock in trade vehicles and demonstrator vehicles will all need to be recognized and careful attention paid to the VAT treatment of their purchase and ultimate sale

6. Export of goods to a place outside the State will be zero-rated under Article 34 of the Treaty – important that documentation is retained to prove the goods have left the country

7. VAT will be due on the import of goods when they enter the territory of the State – use of Free Zones may delay payment of the VAT

8. Repair of goods under warranty will need to be carefully considered

There will be issues…

Where exemption applies, VAT will become a cost on expenditure directly related to those supplies

If zero-rating applies, VAT refunds and cash-flow will be an issue if the business pays more VAT on purchases than it is due to account for on its supplies – this could affect working capital

Many businesses in the sector could be partly exempt as a result of making a mixture of exempt and taxable (zero rated and standard rated) supplies – VAT recovery of overhead costs will be restricted as a result and determining a fair method for this restriction will be key

Editor’s note: GulfRetail will continue to explore VAT and its impact on citizens and businesses. Watch this space for more updates.

Source: Press Release

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