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Businesses are increasingly susceptible to cyber-attacks, and Accountants must now consider cyber security as part of their day-to-day work

"Accountants are well placed to advise on the steps a business should take to protect itself – cyber security isn't just about technology and computers: it involves people, information, systems, processes, and culture too" John Berriman – PwC Almost every week, another high-profile cyber security breach affecting firms all around the world is reported. And the number of events is rising: according to a recent global survey performed by PwC, the number of assaults reported by midsize businesses – those with revenues of between £64.5 million ($100 million) and £645.6 million ($1 billion) – increased by 64 percent in 2014 compared to 2013. These attacks cost a lot of money. According to PwC, a single data breach costs US businesses more than $500,000 on average. According to John Berriman, chairman of PwC's cyber security practice, "the average cost of the most severe cyber security breach for a big organization now starts at £1.46 million, although that figure doesn't take into account the impact a breach has on an organization's reputation and relationship with its stakeholders." According to PwC research for the UK's Department for Business, Innovation, and Skills, smaller businesses are just as likely to be harmed, with the cost of a serious breach ranging from £65,000 to £115,000 in the UK. Cybercriminals are particularly interested in accountants and other financial institutions. Financial institutions, according to PwC, are almost 30% more likely to be targeted than other businesses. 'It's because they deal with high-value business data and sensitive financial information on a regular basis,' Frank Morey, CEO of security company Virtues Risk Management, explains. 'There have been a series of targeted attacks against the industry, the most recent of which was the Morgan Stanley breach, which exposed the personal information of 900 of its high-net-worth clients online.' Kaspersky Lab, a Russian security firm, reported the largest organized cyber-attack on financial institutions to date earlier this year. A global gang of cyber hackers entered more than 100 banks and other financial institutions in 30 countries, stealing £645.6 million ($1 billion) in total from the banks rather than their clients. Accountants, both in practice and in industry, must be able to recognize and respond to cyber security threats, rather than ignoring the matter in the mistaken notion that cyber security is the realm of their IT departments or that their company's software would protect them from intrusions. 'While products like SAP and Oracle have built-in cyber security features that can reduce the risk of data breaches, it's still critical that you remain vigilant in your daily job,' says Phil Sheridan, managing director of Robert Half UK. Cyber Attacks 'Hacking and phishing assaults are frequently launched by an employee clicking on a link in an email,' explains Matt White, senior manager in KPMG's cyber security division. Another typical way for malware to enter an organization is through opening suspicious email attachments. 'Word, Excel, and PDF documents all make it simple to embed harmful code that can subsequently be abused,' explains Greg Sim, CEO of security technology firm Glass wall Solutions. In fact, while cyber-attacks are becoming more sophisticated, lax security knowledge among personnel is the leading cause of security breaches. One example is bad password behavior. According to Medium, a password management company, 90 percent of employee passwords are so predictable that they can be broken in six hours. Furthermore, 18% of employees disclose their passwords with coworkers. Many employees have their work emails redirected to their personal email accounts. However, because personal email services do not have the same security protections as corporate email services, hackers frequently hunt for corporate data through personal email, which is easily available to them. Cyber security While no company is immune to cyber-attacks, there is a lot that can be done to prevent them. 'Anything linked to the storage or transfer of data - how it is safeguarded and accessible, or how it is prevented from being accessed,' explains White. 'Different nations have different policies and laws about how information and data are used, with many "internet-related services" crossing several borders, so it's not that clear,' he adds. Accountants can assist their clients in this area. 'Accountants are ideally placed to advise on the steps a firm should take to defend itself - cyber security is about people, information, systems, procedures, and culture as well,' adds Berriman. PwC is attempting to raise awareness and prepare businesses. 'For example, our Breach Aid event response service assists organizations in preparing for and responding to large incidents, as well as the legal and regulatory consequences of a breach,' Berriman notes. 'We can also monitor, analyses, and respond to threats on our clients' networks and systems thanks to our London-based cyber security labs.' Accountants can also take steps to protect themselves and their firms. 'To be prepared for a wide range of risks, accountants must understand their firm's IT security policies, including policies and processes for ensuring safe online practices, as well as procedures for reporting and dealing with breaches,' Brown writes. 'Accountants may also require additional cyber awareness training. As with most things, prevention is far preferable to cure.' You Can Count On Us! HMA Chartered Accountants Office 1106, Burlington Tower, Business Bay, Dubai, UAE

UAE VAT Public Clarification on Zero-Rating of Export of Services

The UAE Federal Tax Authority (FTA) has published a new VAT Public Clarification on the zero-rating of export of services. This follows the publication of an updated version of the Executive Regulations to the Federal Decree-Law No. 8 of 2017 on VAT (“the Regulations”). VATP019 provides an overview of the FTA’s view of the zero-rating conditions in Article 31 of the Regulations. A supply of services may only be zero-rated if (1) the recipient does not have a place of residence in an Implementing State and (2) is outside the UAE at the time the services are performed. The Public Clarification provides further clarity on how the FTA interprets ‘outside the State’ in the context of the recent change in the Regulations. Further details are also provided regarding taxpayers’ obligations to determine the facts and circumstances of a transaction before applying the zero rate. Place of residence A recipient of services is regarded as having a place of residence in the UAE if the recipient has either a place of establishment (where it is legally established) or fixed establishment (any fixed place where business is regularly conducted with sufficient human and technology resources). Where a recipient has establishments in multiple jurisdictions, the establishment most closely related to the supply of services must be determined. UAE suppliers are only entitled to apply the zero rate of VAT on services supplied, if the establishment of its recipient, that is most closely connected to the supply, is outside UAE. The Public Clarification sets out criteria to consider in determining the establishment most closely related to the supply where there is uncertainty regarding whether a supply of services is received by a foreign or UAE establishments of a recipient. These include the following: • Which establishment is the contractual recipient of the supply; • Which establishment is actually benefiting from the supply; • Which establishment will receive the invoice and make payment for the supply; • Which establishment provides instructions to the supplier; and • Whether the services are related to the business being carried on by the recipient through an establishment in a particular country. Location of recipient Following the recent change in the Regulations (Article 31(2)), it is now clear that the zero-rating will not apply when the recipient of a supply is physically located in UAE for one month or more, and that presence is effectively connected to the supply being made. The Public Clarification states that only the physical presence of the recipient during the period of supply and consumption needs to be taken into account; the location of the recipient before and after performance and consumption of the services should not be taken into account. Importantly, VATP019 states that when determining the location of the recipient, only the establishment most closely related to the supply should be considered. This means that if a recipient has both UAE and non-UAE establishments, and the non-UAE establishment is most closely related to the supply, the condition that the recipient is outside the UAE may still be met, despite the recipient having a UAE establishment. However, a non-UAE recipient of services (including one which already has a UAE establishment) may no longer be considered ‘outside the UAE’ if it creates even a temporary presence (i.e. one month or more) in the UAE at the time the services are performed, which relates to the supply being made. In addition, VATP019 provides examples related to the amended Article 31(2) of the Regulations, whereby a person can be considered outside the UAE only where they have only a short-term presence in the UAE of less than a month and the presence is not effectively connected with the supply. The FTA expressly states that where all conditions for the zero-rating of the export of services cannot be ascertained, the supplier must standard rate the supply. Action to take With the release of this Public Clarification, the FTA will expect businesses to carefully consider whether or not the criteria for zero-rating the export of services are satisfied and ensure that appropriate supporting evidence is available. For businesses with high volumes of overseas transactions, this may present a challenge. Some key questions that UAE businesses should consider include: • Do we currently know if our overseas customers have any kind of presence in the UAE, and is that presence greater than one month? • If our overseas customer has a presence in the UAE, could their local presence be connected in any way with the supplies we make? • Do our on-boarding processes identify whether our customers have a UAE presence? • Do our contracts contemplate a situation where VAT could become chargeable now or in the future? Would we be allowed to charge VAT on top of the value of our services and would the customer be obliged to pay it? Businesses that supply services to overseas customers should carefully review their arrangements to ensure that the correct VAT treatment is applied. To this end, businesses should explore expanding customer identification procedures and amending contracts as necessary. We recommend that businesses establish an audit trail where possible in order to establish that steps are taken to ensure that the zero rates are correctly applied to supplies of services. This may require changes to existing processes and procedures. You Can Count On Us! HMA Chartered Accountants Office 1106, Burlington Tower, Business Bay, Dubai, UAE

How Do Islamic Banks Work?

Islamic Banking refers to a system of Banking or Banking activity that is based on the principles of the Shari'ah (Islamic rulings). According to the principles of Shari'ah, the bank is not allowed to enter into or any act that involves (give and take of) interest. The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or by lending to someone else. Hence, a frequently asked question is - how do Islamic banks make money if they cannot charge interests? The principal means of Islamic finance is based on trading, hence, banks can profit from the buying and selling of Shari'ah Compliant goods and services. Islamic financial institutions trade in Shari'ah-compliant investments with the money deposited by customers, sharing the risks and the profits between them. Several structures that help Islamic Banks make a profit are: a) Ijara: Here, the bank buys an asset on behalf of the customer and leases it out to the same customer. Ownership of the asset remains with the bank, which is also responsible for its maintenance. The lease agreement is made for a certain period and after the time period gets over (and all the lease is paid off); the asset is transferred to the customer. b) Murabaha: Here the bank acts as an intermediary and buys an asset like a motor vehicle. This property is then sold to the customer at cost plus profit which is known and agreed upon. The customer pays back the value in deferred payments. c) Wakala: The term wakala is used in Islamic finance to describe a contract of agency or delegated authority pursuant to which the principal (muwakkil) appoints an agent (wakeel) to carry out a specific task on its behalf. Here, the bank works as an individual agent. The bank lends its expertise and manages investments of the customer on behalf of the customer for a particular duration, in order to generate an agreed-upon profit return. d) Salam: As per the Salam structure, the Bank pays a purchase price to the customer for the upfront purchase of a fungible commodity which will be delivered on a deferred basis by the customer. The commodity that is to be delivered to the Bank will be purchased by the customer through a commodity broker and the Bank in turn will assign another commodity broker to sell the commodity. The above-mentioned points help a bank generate revenue through Islamic Banking. These days, more and more people are moving towards Islamic Banking and consumers worldwide are appreciating the principles of Islamic Banking.

Special VAT Refund Schemes in the United Arab Emirates

The UAE government has suggested different special refund schemes under VAT, under which certain designated persons, even if they are not taxable persons in the UAE, are entitled to a refund of VAT paid on purchases made in the UAE. Certain conditions have been set down in each of these schemes that must be met by these individuals in order to receive a VAT refund. Let's look at the specific VAT refund schemes in the UAE. 1: Governments, diplomatic bodies and missions, and international organizations from other countries Foreign governments, diplomatic entities and missions, and certain international organizations are all covered under this arrangement. The tax paid by such individuals on purchases purchased in the UAE would be repaid under this scheme. The following are some of the conditions that must be met under this scheme: • A comparable plan exists in the country where the relevant foreign government, international organization, diplomatic body, or mission is created or has its official seat. • And it exempts similar entities from paying any tax in the UAE. • The items and services should be purchased solely for official purposes. As a result, the UAE Government's various refund programs encourage relevant persons to make purchases from the UAE without incurring VAT. 2: Tourist Visitors Tourists visiting the UAE who are not residents of any of the GCC VAT implementing states are eligible for this refund scheme. These visitors will be able to obtain a VAT refund on purchases purchased while in the UAE. The following are some of the requirements to be qualified for this program: • The visitor must plan to leave the UAE within 90 days of making the transaction. • The visitor must not be a member of the crew of a flight or aircraft departing from a country that has adopted VAT (i.e. currently, Kingdom of Saudi Arabia). 3: Citizens of the United Arab Emirates are building new homes This applies to UAE nationals who own or buy land in the UAE and build or commission the construction of their personal dwelling on such land. These UAE nationals would be able to receive a refund of the VAT they paid on the construction costs of their home. The following are some of the requirements to be qualified for this program: • The claim must be for a freshly constructed building that is only used as the person's or family's primary dwelling. • The claim must be filed within six months of the newly constructed residence's completion date. 4: Visitors from the business world Foreign businesses can claim a return of VAT paid on expenditures spent in the UAE under the business VAT refund scheme. Any business that is registered with a competent government in the jurisdiction where it is established is considered a foreign business. The following are some of the requirements to be qualified for this program: • The company should not be based in a country that has introduced GCC VAT. • The tax claimed should not be for products or services that are not subject to tax recovery. Our article 'Business VAT refund scheme' goes into great detail on the business VAT refund system.

Checklist for Tax Invoice – as per UAE VAT Law

Each and every Tax Invoice issued by the VAT registered businesses must contain certain mandatory details. This checklist will be useful for all registered suppliers to issue accurate and FTA compliant Tax Invoices. This will also be useful for registered recipients of supply to ensure that the Tax Invoices received are competent for the Input Tax recovery.
Checklist as per VAT Law:
The words ‘Tax Invoice’ should be clearly displayed
Name, address, and TRN of the supplier
Name, address, and TRN of the recipient
A sequential Tax Invoice number must be a unique number that enables identification of the Tax Invoice and the order of the Tax Invoice in any sequence of invoices.
Date of issuing the Tax Invoices.
Date of supply, if different from the date of issue of the Tax Invoice.
Description of the goods or services supplied.
For each good or service, the unit price, quantity or volume supplied, rate of tax, and the amount payable in AED should be given.
Amount of discount given, if any.
The gross amount is payable in AED.
Where the currency is converted from a currency other than UAE Dirham, the Tax amount payable in AED along with the rate of exchange applied should be mentioned, and the supply is to another GCC VAT implementing State, the following details are required:
a) The TRN of the recipient in the other state.
b) A statement identifying the supply between UAE and the VAT implementing State.
Where the supply is a wholly Zero-rated supply, a Tax Invoice is not required to be issued, if there are or will be sufficient records to establish the particulars of the supply.
A Tax Invoice can be issued by electronic means provided:
a) The supplier should be capable of securely storing a copy of the electronic Tax Invoice according to the record-keeping requirements.
b) The authenticity of origin and integrity of the content of the electronic Tax Invoice should Be guaranteed.
Legal Disclaimer: The above guideline has been published for information purposes only; for a full overview please refer to www.tax.gov.ae. For a detailed discussion and professional advice, feel free to contact us or visit our website www.hmaa.ae

The scope of Excisable goods has expanded across the Kingdom

The scope of Excise Tax in The Kingdom of Saudi Arabia (KSA) has expanded and the changes will be implemented with effect from 1 December 2019. Is your business ready to go live?

These amendments to the KSA Excise Tax regulations have increased the scope to include the following Excise goods categories:

  • Sweetened drinks;
  • E-cigarettes; and
  • E-cigarettes’ liquids.

If not already registered for Excise Tax, businesses that import, manufacture, or stockpile the above goods in KSA will need to register for Excise Tax before 1 December 2019. 

If already registered for Excise Tax in KSA, businesses will need to determine whether their products, such as sweetened drinks, fall within the definitions of the revised scope – even where no ongoing obligation to register for Excise Tax exists, some businesses with the existing stock of these products may be required to file a one-off return following the 1 December implementation date. 

It is crucial that businesses associated with Excisable goods in KSA understand the new compliance obligations. Procedures should be assessed, and where necessary redesigned to support the accuracy of the reporting requirements and Excise Tax filing.

Legal Disclaimer: The above guideline has been published for information purposes only; for a full overview please refer to www.my.gov.sa. For a detailed discussion and professional advice, feel free to contact us or visit our website www.hmaa.ae

FTA publishes Excise Tax Public Clarification on stockpiling of Excise goods

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published Excise Tax Public Clarification EXTP003 on stockpiling of Excise goods.

Who is this information intended for?

Businesses in the UAE which hold stock of Excise goods or expect to hold stock of Excise goods on 1 December 2019.

Overview

EXTP003 explains the Excise Tax obligations for businesses which expect to hold stock of the following Excise goods for business purposes on 1 December 2019 (the date of expansion of the UAE Excise Tax regime):

  • Sweetened drinks;
  • Electronic smoking devices and tools;
  • Liquids used in electronic smoking devices and tools; and
  • Tobacco products which have been subject to Excise Tax at a price lower than the minimum Excise Price introduced on such products by Cabinet Decision No. 55 of 2019 on the Excise Price for Tobacco Products.

EXTP003 provides guidance that is more detailed than previously available regarding stockpiling of Excise goods. It provides valuable insight into the FTA’s approach and expectations in terms of business’ Excise Tax accounting and reporting obligations.

As the new guidance makes clear, any business which holds stock of the above products could potentially be considered a stockpiler for Excise purposes and be subject to Excise compliance requirements (and penalties for lack of compliance).

Any business holding stock of the above products is required to perform a complex two-stage stock- and sales-based calculation on every individual product type within each category of Excise goods. For example, orange juice under the category of sweetened drinks must be calculated separately from apple juice also under the category of sweetened drinks.

Further, such businesses are required to keep records audited by an external third party which show the quantity of Excise goods for the 12-month period prior to 1 December 2019. The results of the required calculations and audit could result in a liability to register for Excise Tax, even where there are no other ongoing Excise obligations.

Legal Disclaimer: The above guideline has been published for information purposes only; for a full overview please refer to www.eservices.tax.gov.ae. For detailed discussion and professional advice, feel free to contact us or visit our website www.hmaa.ae

Tax Year End adjustments

The deadline for submitting Tax Year-End Input Tax Annual Adjustments and Capital Assets Scheme adjustments is approaching for businesses submitting monthly Value Added Tax (VAT) returns in the United Arab Emirates (UAE). The adjustments must be shown in the tax period covering January 2020, due for submission by 28 February 2020.

Businesses submitting quarterly VAT returns should also start preparing their calculations, for submission in the tax return covering the first tax period following their Tax Year End.

Who Is This Alert For?

Any Business that is making both taxable and exempt supplies in the UAE and any Business that owns a Capital Asset for VAT purposes. More specifically, we would expect this alert will be of particular interest to those Businesses which have a Tax Year-End of 31 December 2019.

  • At the end of its tax year, the Business is required to compute and make the following input tax adjustments for the year
  • Annual Adjustment (wash-up)
  • Adjustment for “Actual-use” (where the standard method was used for apportionment during the tax year)
  • Capital Asset Scheme adjustment

The above adjustments should be reported in the VAT return relating to the first tax period following the Tax Year End.

Input Tax Apportionment

A Business is entitled to recover input tax incurred on goods and services that are used or are intended to be used for making taxable supplies.

Accordingly, where purchases are directly connected to exempt supplies or non-Business activities, then the input tax is not recoverable.

Any Business which incurs input tax for making both taxable and non-taxable supplies (known as “residual input tax”) is required to calculate the proportion of input tax it is eligible for. This is known as Input Tax Apportionment. Provisional Input Tax Apportionment calculations are required to be made during the year, which must then be revised based on annual figures at the Tax Year End. Detailed methodologies are specified for this purpose, and an overview of these rules are provided at the end of this alert.

Businesses that make a mixture of taxable and exempt supplies should ensure they are prepared with the necessary data to complete these detailed calculations in time to include the relevant adjustment in the VAT return for the first tax period following the Tax Year End.

Capital Assets Scheme

Many Businesses fail to note the connection between the input tax apportionment annual adjustment and the requirement to complete a Capital Assets Scheme adjustment. The two are interconnected and due to be made at the same time each year, which applies to assets of a certain value and on which VAT was incurred on purchase.

Given that VAT was introduced on 1 January 2018, many Businesses are facing their first requirement to calculate a Capital Assets Scheme adjustment this year.

When a Business acquires or constructs a capital asset, the input tax is recoverable in the year of acquisition, subject to the input tax apportionment rate mentioned above.

However, given the long useful life of large value assets, Businesses are required to monitor the usage of the capital assets for taxable purposes over time. This results in yearly adjustments to the original input tax recovery being due for the useful life of the asset.

Additional Information

Input Tax Apportionment

i. Provisional Input Tax Apportionment

The amount of residual input tax that is recoverable during the course of the Tax year will be calculated based on either:

  • The prescribed calculation in Article 55 of the VAT Executive Regulations (Standard Method)
  • Where the Federal Tax Authority (FTA) has approved one of the special methods to be used by the business, as provided by the FTA in its ITA Guide VATGIT1 (revised on 31 December 2019), then this method is to be used

The above calculation has to be performed at the end of each VAT period. The input tax recovered will be provisional and subject to an annual adjustment at the Tax Year End.

ii. Annual Adjustment (wash-up)

At the end of the Tax Year, the Business must revise its provisional input tax apportionment calculations and perform the calculation on an annual basis, in order to compute the actual input tax it was eligible to recover during the year. The result of the annual calculation is compared to the provisional input tax recovery made throughout the year – where there is a difference in the input tax recoverable by the Business an adjustment must be made – “the annual adjustment”. This could result in either additional input tax recovery for the Business, or lead to an additional payment of VAT being due back to the FTA.

The annual input tax apportionment method should also be consistent with the method used as per (i).

This practice is also known as the “Annual Wash-up” and there is no threshold for the adjustment.

Any Business that uses an FTA-approved Special Method should also compare the result of the annual recovery rate with the proposed rate at the time of application for the Special Method. Should the difference be more than 10%, the Business must notify the FTA of the difference.

iii. Adjustment For “Actual Use”

Any Business using the Standard Method in (i) should also re-compute its recoverable portion of the residual input tax on an annual basis based on an appropriate “use-based method”, which in practice must be one of the Special Methods outlined in VATGIT1 (revised on 31 December 2019). The method selected for comparison should represent the actual use of the goods or services purchased for either taxable or exempt purposes.

If the comparison to the actual use calculation results in a difference of AED 250,000 in input tax recovery when compared to the result of the annual wash up the calculation, the Business must use the actual use calculation as the basis for calculating the annual adjustment due.

Capital Asset Scheme

i. Definition of Capital Asset

Article 57 of Executive Regulations of VAT defines a Capital Asset as a single item of expenditure of the Business amounting to AED 5,000,000 or more excluding VAT, on which VAT is payable and has estimated useful life equal or longer than:

- 10 years for a building or parts thereof; or
- 5 years for other capital assets.

Notwithstanding the above, expenditure consisting of smaller sums which collectively amount to AED 5,000,000 or can be treated as a single item in certain cases.

ii. Capital Asset Adjustments

Under Article 58 of the VAT Executive Regulations, the Business should monitor the input tax recovered and make adjustments over the relevant adjustment period.

The Capital Asset Adjustment will depend on the extent to the Business used the capital asset for taxable purposes during the tax year. This could result in an adjustment being required in the VAT return of either additional recoverable input tax, or a reduction in the input tax previously claimed.

iii. Record-keeping requirements

Article 60 of the VAT Decree-Law requires any Business to keep a record (i.e. a Capital Asset Register) related to all Capital Assets for VAT purposes for a minimum of 10 years.

This requirement applies to all Businesses owning assets meeting the definition of a Capital Asset for VAT purposes, irrespective of whether the business makes exempt or non-business supplies.

How Can We Help?

HMA Chartered Accountants has dedicated teams of highly experienced VAT specialists in all of the industry sectors affected by Input Tax Apportionment and the Capital Asset Scheme in the UAE.

We can assist with calculating Input Tax Apportionment annual adjustments, assessing the suitability of Special Methods, supporting with Special Method applications, calculating Capital Asset Scheme Adjustments, and reviewing the suitability of Capital Asset Registers. This includes the deployment of specialist proprietary technology for this purpose.