By Stasa Salacanin
VAT implementation could be as soon as early 2018 in a region with little history of taxation of any sort. The new tax represents a major shift in tax policy that will impact all segments of the economy and lead to a fundamental change in the way businesses operate. And it is already clear that many businesses will not be ready in time.
The introduction of value-added tax (VAT) in the GCC could create operational and financial risks for companies, Fitch Ratings warned. GCC-based companies will have to replace or update IT systems, implement new procedures and train staff. Additionally, businesses with VAT-exempt goods and highly competitive sectors could find themselves, rather than customers, taking on this additional cost, while companies involved in supplying goods and services between GCC members, or those operating within or between free zones, are likely to face additional complexities. It added that the main long-term risk from the introduction of VAT is the potential for errors in collecting and accounting for the tax that could leave companies liable for the cost themselves.
Some businesses behind already
In order to comply with the new tax requirements, many businesses in the region will have to make a range of changes to the way that they currently go about their day-to-day operations. As Deloitte highlights in its survey, recently conducted amongst businesses in the GCC, “The implementation of VAT is not a matter which will just affect the finance function of a business – it affects business operations across the board. Processes need to be re-designed, transaction mappings need to be re-assessed, staff need to be trained adequately, consideration needs to be given to pricing strategy, contracts need to be renegotiated, procurement decisions need to be taken, and the list goes on.” Whether or not a business can be ready in time, will come down to the scale of change that is required, one prominent tax expert, who prefers to stay anonymous, points out. It is thus vital all affected businesses should investigate what changes are needed now so that they can then plan and implement the change either themselves or with the assistance of external advisors. In Deloitte’s survey majority of the respondents estimated that it would take them longer than six months for their businesses to adequately prepare for introduction of VAT.
Our source recommends that any medium-sized business sets aside at least 6 months for the necessary work. “It usually takes between 9-12 months for a large sized business to be sufficiently prepared. That means that certain businesses are now behind the curve when it comes to implementation; this has certainly led to significant demand for advisory services across the region,” he told the New Arab.
Although the survey shows that the majority of respondents are aware that VAT is coming to the GCC, only 26% feel well informed on the subject. One of the reasons could be the surprising fact that despite formal announcements from the GCC, less than half of the respondents believe that VAT will be introduced in the GCC very soon, with 2.4% going as far as to consider that it will never be brought in.More than half (53%) of the respondents have no experience with VAT implementation in other jurisdictions and could not readily source people with that experience. Additionally, 69% of respondents estimated it would take longer than six months for their business to adequately prepare for the introduction of VAT, and 24.55% say they would need more than a year.Deloitte finds especially concerning, that 69% of respondents said they had not undertaken, or were not aware of, any strategic planning around the introduction of VAT. “Given the length of time which businesses will need to become adequately prepared, especially with regards to their IT infrastructure, it is important that VAT is put on the boardroom agenda as a matter of urgency,” the consultancy said.
Set up and compliance costs “notable”, talent scarce
There will be “notable” set up and compliance costs in collecting and remitting tax to GCC governments as they introduce VAT, Fitch said. Businesses will need to put new IT systems in place, alongside new procedures and staff training. Our source explains that the impacts of VAT on a business depend on the type and the complexity of the transactions undertaken by it. “A very large scale business which is only engaged in local sale of goods may not be as complex from a VAT perspective as compared to a medium sized business which is engaged in cross-border trade or transactions in a free-zone.” Therefore, the overall cost involved in a VAT transformation project may depend on several factors like nature of transactions undertaken by it, type of IT system used, level of training required for staff etc. According to Deloitte’s survey, 43% believe the annual costs of being VAT registered could be between $25,000-100,000, and 36.61% believe it could exceed $100,000.
VAT implementation will have a major impact on companies’ workforce as well,and will present them with sudden and large demands in terms of organisational design, training, recruitment and compensation aspects, Viacheslav Shakhov, Principal Consultant Tax, at Cooper Fitch, warns. One of the main considerations for businesses is who should be performing VAT related activities within the company; not just creating and implementing VAT systems and procedures initially, but also performing on-going VAT compliance activities long-term. “Depending on the scale of operations, companies will have to decide on whether they would need to hire a specialist tax resource, outsource tax function to consultancies or train existing staff. If the business is substantially large, employing an in-house tax specialist will be beneficial. It will allow businesses to have internal capabilities to tackle ongoing tax compliance issues, keep up to date with tax legislation changes and inform various stakeholders on required changes. This would also help in saving costs. Experience from the Western world shows that employing a tax specialist(s) and using consultancies for highly technical matters is the best approach. In turn, companies with relatively low-scale operations and turnover could opt for training existing staff and using consultancies when required,” Shakhov advises.
In any case, the business should act now, as there is a tremendous scarcity of the relevant talent in the GCC region. According to Shakhov, companies have to recruit relevant staff internationally and often they have to access such markets as the UK, Ireland or other European countries, Malaysia, Australia and other jurisdictions with VAT in place. Lebanon, Jordan and Egypt are also quite relevant if a company requires Arabic speakers.
And, as KPMG pointed out in their statement, it is not just the finance department that needs training. Legal, IT, sales, marketing, and even HR must understand the impact of VAT on their function and determine whether the introduction of VAT will result in additional costs, which could be actual or cash flow or compliance-related.
Renegotiating previously agreed contracts
Another important step for the companies to consider is how to renegotiate the existing contracts, so they will not end up shouldering the VAT themselves. The UAE has indicated there will be some transitional provisions which may allow VAT to be charged on pre-existing contracts if the customer can claim the input VAT credit. But this practice may not be shared by all, our source warns, so a close-eye should be kept on developments around the GCC. “It critical that businesses consider all of their existing long-term contracts, for both purchases and sales, to understand their likely exposures on a best-case or worst-case basis. Early negotiations with suppliers and customers will, in most cases, be preferable for all involved,” he adds.
Many unknowns remain
It is not just businesses, ministries also will have to build the tax system from scratch, and some experts expect it will take years, maybe even a decade for everything to flow smoothly. The ministers of finance of the six GCC states approved an in-principle agreement to provide a common framework, but each GCC country is developing its own VAT regime.There is information available on the general workings of the system, but truth be said, there are many unknowns left in the equation and the lack of detail about how the tax is going to work is hampering the ability of businesses to get ready, some tax experts warn. For example, companies that supply goods and services between GCC members or operate within or between free zones are likely to face additional complexities, or where a ‘third country’ or non-GCC business is involved.
But our source believes there is enough known about VAT implementation for the companies to get started. “We must not forget that some 165 countries have adopted VAT or its equivalent, Goods and Services Tax. In many respects this has led to a standardisation of design across the globe where we see a range of fundamental requirements having been codified and accepted as common practice. On their own these global standards are often sufficient for businesses to start a program of change. Also, the Unified VAT Agreement for GCC member states which provides the framework for levying tax in all the GCC states was published last month. It lays down the basic fundamentals of VAT which can be used by the businesses to understand, broadly, how the VAT system will work in GCC. Moreover, Saudi Arabia recently released its draft VAT law for public consultation and feedback. We are expecting that the KSA will release its VAT regulations for consultation too. The UAE maintains an extensive VAT FAQ page on the website of its Ministry of Finance and has also held a series of in-depth workshops with the public on its VAT plans over the last number of weeks.” He adds that, in time, further clarifications relating to the treatment of specific transactions should be expected. The VAT treatment of transactions taking place within and involving free-zones, for example, is still under consideration, while VAT treatment of transactions across borders has been broadly set down in the GCC Agreement. Many cross-border transactions within the GCC where registered businesses involved will see the recipient of goods and services accounting for VAT in the destination country under a so-called “reverse-charge” mechanism.
Last but not least, the current tensions in the Gulf may well impact the implementation of the new tax. But that is another story, and not one anybody seems comfortable to comment on at the moment.