The Gulf introduces VAT: what are the business implications?

Fuelled by a combination “demographic pressures of an education-hungry, aging population and over-reliance on unstable revenues from hydrocarbons that are declining in value and demand”, the Gulf co-operation Council (GCC) has confirmed the introduction of value-added tax (VAT) to the six Gulf states from January 2018. It is estimated that the move will raise approximately 1.5% of GDP in the GCC region. In doing so, the Gulf States follow in the footsteps of 160 countries across the globe, each of whom implements their own version of Value Added Tax and it is likely that VAT in the Gulf will reflect a number of the features of the global OECD model.

What we know at this stage, is that key features will include a standard VAT rate of 5%, at a registration threshold of approximately $100,000 per annum, with the option of voluntary registration for small businesses. In addition, there will be an option for group registration for connected companies within each state, although this is doubtful across the GCC region.

Imports will be subject to 5% import VAT, whilst exports from the GCC will be VAT exempt. There will also be VAT exemption for health, certain financial services, education, public transport and general transport. Finally, there will be a nil-rating on B2B supplies of goods and services within the GCC region and for some foodstuffs and oil-related supplies.

However, businesses are yet to receive confirmation on exactly what implementation of VAT in the Gulf will entail in each country within the region, as each member state will establish its own separate national legislation.

Are businesses prepared for this change in legislation?

Thanks to this lack of clear guidance and country-specific detail, many businesses that operate in the region are wary of investing time and money into the required overhaul of ERP, stocks, IT systems, purchasing and sales, for fear of changes to the eventual legislation. However, those that continue to resist essential modifications are rapidly running out of time. Failure to prepare in advance of the introduction of VAT next year will leave businesses at risk of delays in product deliveries, invoicing sales, settling payments and leaves them vulnerable to potential audits and fines.

How could this impact companies that operate in the Gulf?

Commercially, businesses will need to map out trade arrangements and supply chains that are likely to be affected by the introduction of VAT. This will include careful consideration of how to deal with the added fiscal levy to sales prices, weighing up the options of absorbing the VAT or passing it onto customers. It will be crucial to do some background research – seeing how competitors are positioning themselves to gain a clearer insight into customer expectations and how this could impact the business. Reviewing and analysing the impact on key contracts will also be crucial – checking to see whether the introduction of VAT could trigger any accidental breaches or force majeure clauses.

When it comes to technology, companies must:

  • Assess the company’s ability to adapt to the implementation of VAT, based on existing IT and accounting systems and upgrade systems where necessary
  • Set-up their ERP and tax engines to process transactions and calculate VAT cost
  • Create VAT codes to reflect the multitude of transactions companies are involved in

In addition to these operational changes, businesses will need to assess their skills internally. Does the company need to make hires, or can third party consultants support here? Staff VAT manuals and training programmes will need to be constructed and developed in order to ensure current staff are aware of how to operate with the VAT regulations.

What to do next?

The introduction of VAT will lead to a fundamental shift in the way businesses operate in this region, so it’s crucial that the full leadership team plays a role in devising the strategy. Businesses should create a panel of stakeholders from across Accounting, Tax, Finance, HR, IT, Sales and Procurement. This team needs to take responsibility for drawing up a risk impact report for the board and senior executives, with clear timetables.

Embracing this as a business-wide responsibility should ease the burden from the finance team and encourage them to stop burying their heads in the sand about the impending tax shift. VAT is coming to the Gulf in 2018 – regardless of the current lack of specific legalities. Businesses that have operations in this region need to prepare now, to avoid an expensive fallout later down the line.

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