With VAT soon to be introduced across the Gulf states there is a lot to do for businesses to be ready, but many are not prepared.
In 2015 the six Gulf Co-operation Council (GCC) states – Saudi Arabia, Bahrain, Qatar, Oman, UAE and Kuwait – have agreed to simultaneously introduce a harmonised VAT from 1st January 2018.
“Whilst no legislation has been published so far, it is likely that the proposed indirect tax will mirror the global OECD-model with similar features and simplifications to the EU’s single-market regime,” says Richard Asquith, VP Global VAT at automated tax software company Avalara.
Gulf VAT: key features
- 5% standard VAT rate.
- Exemptions for health, education, certain financial services, public transport and transport.
- Zero-rating for some foodstuffs and oil-related supplies.
- Zero-rating on B2B supplies of goods and services within the GCC region.
- Imports will be subject to 5% import VAT; exports from the GCC will be VAT exempt.
- Group registration option for connected companies within each state – although doubtful across the GCC region.
- The VAT registration threshold will be approximately $100,000 per annum, with an option to voluntarily register for small businesses.
“Taking each of these factors into consideration can initially appear overwhelming for local companies which have never had to deal with VAT calculations and reporting,” says Asquith. “Even companies that operate in Europe and are familiar with VAT will have to study the requirements carefully as there is no guarantee this will be in line with existing standard VAT models.”
Uncertainty and risk
According to Asquith a concerning majority of businesses trading in the GCC zone remain unprepared for the implementation of VAT. “This is largely due to the lack of guidance and clear legislation provided to-date,” he says. “This puts them at risk of delays in product deliveries, invoicing sales, settling payments and leaves them vulnerable to potential audits and fines.”
The delay in the publication of legislation or guidance is also adding uncertainty and risk to any required overhaul of ERP, stocks, purchasing and sales and IT systems. In fear of investing in the necessary modifications and getting it wrong, many companies are simply ignoring the changes for the time being – but time is running out.
Areas of impact
Companies impacted by the new tax will be faced with a plethora of decisions to make before full implementation in 2018. For Asquith some of the most key areas to focus on include:
Companies will need to make a strategic decision on how they deal with this added fiscal levy to sales prices. From a commercial perspective, does it make sense to absorb the VAT, or pass it onto customers – and how does this compare to what competitors are doing?
Businesses affected have very limited time to make the necessary changes to IT systems and upgrades to reporting platforms, which will enable them to effectively comply with this regulatory shift. They’ll also have to ensure that their ERP and tax engine are set-up to process each transaction and calculate the VAT cost. Charts of Accounts will have to be updated, and VAT codes created reflecting the multitude of transactions companies are involved in.
VAT expertise decisions
If companies are to manage all of the calculation and reporting of VAT manually, they’ll need to hire new staff with a strong tax background, while developing training programmes for existing staff.
Cash flow decisions
Companies must determine where VAT may be charged in all their business dealings, and how it can manage any partial or exempt VAT losses. There may be the risk of additional cash flow requirements.
Asquith recommends that companies trading in the GCC region, whether resident there or selling/buying there, should consider addressing a range of issues immediately to help mitigate the risks of the introduction of VAT. “This should include creating a panel of stakeholders from Accounting, Tax, Finance, HR, IT, Sales and Procurement, to ensure that this fundamental change to operations is considered across the business,” he says.
According to Asquith, this multi-functional team needs to be responsible for:
- Mapping out trading arrangements and supply chains that are likely to be impacted by the introduction of VAT, including careful consideration of the cost implications.
- Reassessing IT and accounting requirements and the company’s ability to adapt to the implementation of VAT, based on existing systems. VAT codes will need to be created to properly calculate and report VAT.
- Setting timetables for drawing up a risk impact report for the board and senior executives.
- Drawing up a skills requirements schedule, and beginning to identify whether they need to look outside the company for guidance – whether that is third party consultants or new hires. Staff VAT manuals and training programmes will need to be developed.
- Reviewing the impact on key contracts, and the risk that the introduction of VAT could trigger any force majeure clauses.