Value Added Tax (VAT) will be implemented in the GCC in January 2018. Businesses need to register if their annual turnover is above $100,000. The limit seems low as it covers most mid- to large- sized companies. Also, each GCC country has a choice to add exceptions. For example, Saudi Arabia has provided short-term relief to small suppliers by extending the mandatory registration limit for one year. Similar regulations might be seen from other GCC countries.
The standard rate of five percent may not be a major concern for businesses, but there is no denying it can be a significant challenge to a region implementing such taxation for the first time.
VAT is being charged based on “place and time of supply”, rather than it being a sales concept. This might be a new and tricky concept for most business houses. Treatment of zero rate and exempt supplies, output and input credit rules also require attention.
The GCC’s Framework Agreement set some mandatory areas for zero-rating (such as, exports of goods and services outside the GCC, medicines and investment metals). Individual countries are, however, able to apply exemptions in other sectors. This differentiation will need further analysis when dealing out of one state, directly or indirectly, as customer/supplier concerns also impact the businesses.
Matching input credit to taxable and exempt supplies, dealing with compliant supply chain members, and adopting new accounting processes to the transactions, all need proper professional advice and adoption at an early stage.
There are also cross border transactions within the GCC and outside, reverse charge mechanisms, delayed payment of VAT by the supplier, differing refund rules, and more. These are critical aspects that may block cashflow and require a greater compliance process.
It will be tricky to manage if the VAT cost is to be passed on to the customers, or it has to be compensated with reduced margins and operational re-engineering. Retaining market share will thus be the main focus for any business.
Some other immediate actions include a requirement for all companies to assess the impact of VAT, including staffing and accounting processes, and IT system changes. Companies also need to map transactions leading to ease of compliance, including reviewing, and updating contractual arrangements with vendors and customers to find caveats in contracts.
To do this, they need to revisit the supply chain, and start discussions on the impact of the procedures. Lastly, but certainly not the least, they need to assess VAT’s cash flow impact due to Input/Out timing difference.
Enterprise resource planning and IT system upgrades, along with user acceptance, is another aspect to consider. Proper business analysis has to be taken as a major project by each business unit, where communication with employees, suppliers, customers and supply chain members are given equal importance.
Business units need to identify VAT touch points, analyse customer and supplier nature, study the contracts, learn the law, educate and bring all relevant stake holders on board. They must update customer/supplier databases and study the seven pillars of tax planning.
And now the good news
It is evident that current oil prices require oil-based economies to look beyond fossil fuels. VAT is not merely a new tax; rather it is a critical reform leading to a new way of handling businesses, who will benefit from organised accounting, aligned with the standard practices followed by over 160 countries.
The introduction of VAT is therefore a positive change, as it will create a new source of stable revenue for governments, with the least negative impact on regional economies. It will encourage economies to scale, and allow for the transparent and cohesive movement of financial information within the GCC.
These tax reforms will help governments diversify away from oil, and will encourage foreign investment to the region, actively reducing reliance on a commodity-centric model at a time of significant market volatility. But businesses need to plan for it properly, starting today.
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