Governments in the GCC have time and again expressed their intention for implementing a VAT system in 2018 to diversify revenue streams, with a planned treaty providing an overarching framework.
When designing a new multi-country VAT model the EU is the first place to turn to for inspiration. That said, the GCC countries have been looking East too, and the VAT system is expected (contrary to the EU model) to be a low rate and wide base system—in common with more modern systems such as those found in Singapore, New Zealand, etc. Most recently, Saudi Arabia has confirmed it has signed the treaty and that it plans to implement VAT in the first quarter of 2018. It is believed the others are not far behind, and both Oman and the U.A.E. have, in particular, confirmed their commitment a number of times.
With the start date for VAT being less than 12 months away and governments making significant steps towards implementation, such as the creation of a federal tax authority in the U.A.E. and hiring people for administering VAT, businesses are being encouraged to start considering the impact of VAT.
A significant issue for GCC businesses is a lack of familiarity with VAT and since VAT is a tax on every business transaction, it impacts all functions in an organization. If impacts are not addressed in a timely fashion, it may compromise competiveness. Contrary to the common perception therefore, VAT implementation is not a finance project and cannot be managed solely from the CFO’s office. It needs the participation of the entire organization.
Significant issues in the GCC will be lack of resources and familiarity with VAT on the part of some of the smaller local businesses in even relatively basic accounting. Some small businesses do not keep any formal business records (the absence of formal structured tax systems has often meant those are not needed), and thus the transition to the transactional accounting required by VAT may be traumatic for some of those entities.
As a first step, it is essential to understand the overall impact of VAT on business. Once the business is aware of the likely consequences, it will be much easier to identify the changes required and develop a roadmap to execute these changes. At this stage, it is important to map the transactions of a business to understand the possible VAT treatment and understand if VAT is becoming a cost in the supply chain. By doing this, businesses can proactively explore options to optimize tax efficiency.
In the last phase, the business should start putting the response strategy in place and all the desired changes to the ERP systems and business processes. During this phase the businesses should develop standard operating procedures for all activities that have undergone change.
It is essential that the people carrying out the VAT functions are fully aware about their role in achieving this objective. Regular VAT training and conducting acceptance tests before going live for VAT will enhance users’ understanding of the new systems and encourage better compliance.
The risks of getting the VAT implementation wrong are high: usually there are harsh penalties and interest charges payable. Other than that, there can be operational challenges in terms of being unable to import or sell goods or services, which can bring a business to a standstill.
Ideally, VAT impact assessment and developing an action plan should be carried out in early 2017. Even in the absence of implementing regulations, a lot of preparation can be done. Local businesses would do well to remember how quickly Egypt expected businesses to be ready for VAT, and that even Malaysia only issued the law about eight months prior to going live. Starting now will give sufficient time to implement changes as some of them can be time consuming, especially revising contractual terms and IT configuration. Businesses in the GCC need to realize that VAT is certain, and the sooner they start understanding the impact, the better prepared they will be by 2018.
JUSTIN WHITEHOUSE, DELOITTE MIDDLE EAST VAT LEADER.