Uber/Careem is facing a combined $100 million VAT bill in Saudi Arabia, according to Bloomberg Middle East. The number one problem for most companies is the failure to understand taxes. These mistakes are leading to huge fines and penalties that can range from 5% to 500% of unpaid taxes. The purpose of this article is to help you understand the mistake made by Uber/Careem so you can avoid the same mistake and save yourself from paying huge fines and penalties. The goal is to simplify tax so you can get your taxes right.
What is VAT?
VAT also called a value-added tax is a type of indirect tax on companies. It’s a tax on goods and services that is passed on to consumers. VAT has two components – input and output VAT. The Output VAT is the tax on the selling of goods and services while Input VAT is the tax on the purchase of goods and services. Most countries have Value Added Tax and here are the rates per country based on the Global VAT Compliance website, as of 04/05/2022.
| Country | Standard VAT Rate | Other Rates |
| Algeria | 19%. | 9% to certain industries |
| Andorra | 4.5%, | 1%, a special rate2.5% and a supplementary rate9.5% to banking and financial services. |
| Argentina | 21%. | Reduced rate of 10.5%Enhanced rate of 27% for several metered utilities |
| Armenia | 20%. | |
| Azerbaijan | 18%. | |
| Bahamas | 10% | |
| Bahrain | 10%. | |
| Bangladesh | 15%. | 10%, 7.5%, 5%, 2,4%, 2% |
| Barbados | 17.50% | A reduced rate of 7.5% applies to the provision of hotel accommodation. Super rate of 22% mobile voice & text services) |
| Bolivia | 13% | |
| Botswana | 14% | |
| Brazil | 7% to 25% | 12% rate on B2C interstate transaction |
| Bulgaria | 20% | 9% a to hotel accommodation and the tourism sector |
| Chile | 19% | |
| China | 13%, 9%, 6% | Reduced rates of 5%, 2%, 1.5% and 0.5%. |
| Colombia | 9% | 5% |
| Cook Islands | 15%, | |
| Costa Rica | 13%, the same rate as the sales tax. | 4%, 2%, 1% |
| UAE | 5% | |
| Ecuador | 12% | |
| Egypt | 14% | 5% |
| El Salvador | 13% | |
| Equatorial Guinea | 15% | 6% |
| Ethiopia | 15% | |
| Faroe Islands | 25% | |
| Georgia | 18% | |
| Guatemala | 12% | |
| India | 0.25%, 1%, 3%, 5%, 12%, 18% and 28% (GST) | |
| Indonesia | 11% | |
| Isle of Man | 20% | 5% |
| Israel | 17% | |
| Japan | 10% | 8% |
| Kazakhstan | 12% | |
| South Korea | 10% | |
| Malaysia | 10% Sales Tax and a 6% Service Tax. | 5% (Sales Tax) |
| Mauritania | 16% | |
| Mauritius | 15% | |
| Mexico | 16% | 8% |
| Morocco | 20% | 7% 10% 14% |
| Nigeria | 7.50% | |
| Oman | 5% | |
| Pakistan | The sales tax rate is 17% | Pakistan has a large number of reduced sales tax rates, including 1%, 1.5%, 2%, 5%, 7%, 7.5%, 8%, 10% and 16% (among others). |
| Panama | 7%, 10% and 15% | |
| Peru | 18% | |
| Philippines | 12% | |
| Russia | 20% | 10% |
| Saudi Arabia | 15% | |
| Singapore | 7% | |
| Taiwan | 5% | |
| Tanzania | 18% | |
| Thailand | 7%, 10% until 30 Sep 2023 | |
| Tunisia | 19% | 7%, 13% |
| Turkey | 18% | 1%, 8% |
| Ukraine | 20% | 7%, 14% |
| United Kingdom | 20% | 5% |
| Uruguay | 22% | 10% |
| Uzbekistan | 15% | |
| Vanuatu | 15% | |
| Venezuela | 16% | 8% |
| Vietnam | 10% | 5%, 8% |
What are the guidelines on VAT?
In general, tax authorities provide guidelines on:
- How to compute the VAT
- Types of companies and transactions that are subject to VAT
- VAT rates applicable for companies
- VAT rates are based on types of goods and services
- Deadlines for filing and payment of taxes
- Penalties for non-compliance
Who are subject to VAT?
Tax authorities provide guidelines on companies that are subject to VAT. In general, there are 3 classifications of companies based on VAT guidelines:
Exempt. These are companies that are fully excluded from VAT, both output and input VAT. These are typically government-owned companies.
Zero-rated. These are companies who are subject to 0% VAT on their sales (0% output VAT) and subject to the regular VAT rates on their purchases. These companies are generally companies in economic zones that enjoy tax benefits.
VATable. These are companies who are subject to VAT both on their sales and purchases.
Here is a table to help you understand the different types of classification of companies based on VAT guidelines.
| Company VAT Classification | Output VAT(Tax on sale) | Input VAT(Tax on purchases) |
| Exempt | No | No |
| Zero-rated | Yes, at zero % | Yes, at a regular rate |
| VATable | Yes, at a regular rate | Yes, at a regular rate |
Some companies have both zero-rated and VATable transactions. This is why in some cases, companies need to pay or claim VAT refunds based on their transactions.
How is VAT computed?
The VAT that you need to pay to tax authorities is the difference between the output (VAT on sale) and input VAT (VAT on purchases). If the output VAT is less than the input VAT, then companies can claim a VAT refund from tax authorities.
| Tax Due(Output >Input VAT) | Tax Refund(Output <Input VAT) |
Why Uber/Careem is facing a $100M tax bill?
Based on the article published by Bloomberg Middle East last October 17, 2021, the penalty is due to:
- How Uber/Careem calculated the VAT
- Huge penalties for late payment
How should tax be computed?
Uber/Careem calculated VAT only on the commission to the drivers. However, VAT on Uber/Careeem should be calculated on the total amount of fare collected from the passengers and not on the commission to the drivers only. Here is a sample computation of how Uber/Careem computed the VAT and how it should be computed. The below computation is based on the following assumptions:
- The commission received by the drivers is 20% of the total fare paid by the passengers
- The Output VAT rate is 15%.
| Total Fare PaidOutput VAT as per Tax Law | 20% CommissionOutput VAT computed by Careem/Uber | Difference | |
| Amount | 100 | 20 | 80 |
| Output VAT (15%) | 15 | 3 | 12 (Short payment) |
In the table above, Uber/Careem paid the government short by 12.
What are the penalties for incorrect VAT?
Tax Authorities can impose different kinds of fines and penalties for VAT, but in general, there are:
- Penalties for short payment of taxes -> In the above example, Uber/Careem paid 12 short to the tax authorities.
- Penalties for late filing and payment of taxes -> In the above example, the government will impose a penalty for late payment of tax since the correct tax of 15 should have been paid.
- Interest for short payment of taxes -> Other than the penalty for short payment, some authorities impose interest too on any short payment.
In the United Arab Emirates (UAE), short payment of taxes has penalties ranging from 1% up to a ceiling of 300% of the unpaid VAT.
How can you avoid penalties for VAT?
To get your VAT right, you need to make sure to:
- Get your company registered for VAT following government requirements. In the United Arab Emirates, a business needs to register for VAT if the taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. A business can also register for VAT voluntarily where the total value of its taxable supplies and imports (or taxable expenses) is in excess of the voluntary registration threshold of AED 187,500.
- Organize your books of accounts and financial records. n the United Arab Emirates, there is a penalty between AED10,000 to 20,000 for failure to keep the required records.
- Understand how tax should be computed as defined by tax authorities. In the UAE, there is a penalty of up to a maximum of 300% for unpaid taxes.
- Collect the right amount of tax (output VAT) from your customers.
- Claim the input VAT from your purchases.
- Keep documents of your input and output VAT transactions aligned with government requirements.
- File your tax returns and pay your taxes on time.
- Claim VAT refunds from the government.
- Get your transactions reviewed by independent consultants to make sure that you are complying with tax laws.
According to the Bloomberg article, Uber/Careem is considering filing for liquidation after becoming “insolvent” due to this $100 million tax bill in Saudi Arabia. Tax is complex and tax is a burden. The failure of Uber/Careem to compute the right amount of output VAT led to a $100Million VAT bill in Saudi Arabia. The good news for taxpayers is that Saudi Arabia and the UAE have tax amnesty this 2022. This means there are lower penalties for any unpaid taxes.
My best advice to get your taxes right is to review your VAT computation or get an independent consultant to review your compliance with tax law. Make sure to avail of these amnesties in your country for any short payment so you can save from huge fines and penalties.
Watch out for my next article where I will share the mistake of why Uber paid P41.15 million in another country.