The plan to introduce value-added tax (VAT) in the Gulf region could create operational risks for companies and put pressure on profits and cash flows in some industries as markets adjust, according to Fitch Ratings.
The ratings agency said in a statement that collecting and remitting VAT to the government will have notable set-up and compliance costs.
It added that businesses with VAT-exempt goods and highly competitive sectors could find themselves, rather than customers, taking on this additional cost.
VAT implementation could be as soon as early 2018 which Fitch described as "a very tight timetable" in a region with little history of taxation of any sort.
"This will introduce greater uncertainty and operational challenges for GCC corporates than for companies in other regions with established tax cultures that have introduced VAT or reformed their tax systems. However we expect GCC governments to recognise these challenges and show a degree of flexibility during the initial implementation," Fitch added.
Policy makers in the six-nation Gulf Cooperation Council are aiming to introduce a 5 percent VAT at the start of next year, despite administrative and technical obstacles, a senior UAE finance official said on Sunday.
The GCC, its finances strained by low oil prices, has long planned to adopt the tax in 2018 as a way to increase non-oil revenues, but economists and officials in some countries have said privately that simultaneous introduction in all countries may not be feasible.
Fitch said in its statement that GCC-based companies will have to replace or update IT systems, implement new procedures and train staff before VAT is introduced, which will be "particularly burdensome as it will add to costs when low oil prices and lacklustre economic growth are weighing on corporate performance, particularly for SMEs".
Companies involved in supplying goods and services between GCC members, or those operating within or between free zones, are likely to face additional complexities, as agreements between individual GCC members could vary, the agency added.
"We believe the lack of any significant historical taxation means it will take time for companies to fully pass on costs, but that they will be able to do so eventually," Fitch noted.
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.
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