Series 2 - Episode 5: VAT Auditing & Systems

What is Spotlight on Financial Services Tax Series 2?

In our Spotlight on Financial Services Tax series, Tax Partner - Peter Maybrey and Middle East Information Reporting Leader - Bilal Abba, look at the key issues Middle East based businesses need to be aware of and how they apply to the financial services sector.

Bilal: Welcome to series 2 episode 5 of the spotlight on Financial Services Tax series. Today we will be discussing VAT audits in the UAE and the importance of systems before, during and after the audit process.

I am joined by my colleagues Kirti Joshi who is a Director leading our FS VAT practice in the UAE and Abhinav Mangla who is a Senior Manager in our Tax Strategy and Transformation Team.

Bilal: It will be 5 years since VAT has been implemented in the UAE. Kirti, what are the key aspects to be kept in mind by financial institutions?

Kirti: Thanks Bilal. This is indeed an interesting time for all taxpayers and specifically financial institutions. Considering that next year is potentially the last year for the FTA to audit 2018, we have seen quite a lot of taxpayers being issued with notices for audits. This initially starts with data requests and will then involve physical visits by the tax authorities, assessment of the returns filed and detailed investigation of the underlying working of the returns.

Bilal: What would you say are the key challenges for large financial institutions during the course of an audit?

Kirti: I would say challenges are not only during the audit, but there are a lot of hurdles that need to be crossed before the actual audit is initiated by the tax authority. Large financial institutions such as banks and insurance companies deal with a very large number of transactions and hence the backup data is quite significant. To be able to extract the data from the systems as per the requirements for audit and making it available in time is a big task. Hence, assessing whether the taxpayer is ready for an audit is very important.

In addition to the above reconciliations between the financial statements and the VAT returns are a key set of data requested by the tax authority. It is therefore important that your systems can generate the right data which has been reconciled with the financial statements and justifications available to substantiate any irreconcilable items.

Bilal: As Kirti mentions systems, Abhinav how important are systems in the VAT environment and what would be the key challenges the financial institutions face.

Abhi: Thanks Bilal. IT systems are super important as they support in managing the critical financial processes of procure to pay, order to cash and record to report in an organization. This means that the IT systems are expected to ensure that VAT is appropriately charged on sales transactions and is deducted on the purchase transactions. It also needs to ensure that these transactions are appropriately captured in the GL to ensure generation of correct reports for filing your VAT returns.

Typically financial institutions have a large number of IT systems, ranging between 20 - 50 for a medium sized bank. These transaction systems are expected to feed data into the main accounting systems and/ or the tax engines. In our experience, we have observed that some of these systems are not seamlessly integrated with the main accounting systems or the tax engine. This leads to a lot of manual intervention which leads to errors in tax determination for certain sets of transactions, sometimes completely missing accounting for certain transactions which further leads to incorrect reporting to tax authority.

Bilal: Do you think there is a separate assessment required for audit, specifically around systems.

Abhi: For sure. When conducting an audit, the tax authority asks for a large set of data fields which are generally not available in standard reports generated by the system. Also, considering transactions are captured in various systems with or without integration with the main ERP system or tax engine, generally with different tax rates, different business logics & tax determination rules, it is sometimes very challenging to determine where we had gone wrong in reporting for VAT purposes.

Hence, it is important to take an opinion from a third party to assess the master data setup for vendors, customers, items & tax codes, review the tax determination and posting logic in the systems, conduct periodic review of the invoicing & VAT related capabilities of the ERP systems and also review the structure & content of the existing reports generated by the system.

[Bilal] - “Thank you Kirti and Abhinav for giving us insights into this important topic. Please stay tuned for our further podcasts as a part of this Financial Services Tax Series.”