By Clare McColl
The new economic landscape will pose unprecedented challenges to businesses, particularly small- and medium-sized enterprises
A brief analysis of history suggests that the people, systems and organisations most responsive to change tend to be the most successful, which is directly relevant to the various structural reforms currently being introduced across the region.
As governments respond to lower oil prices, the past year has seen a slew of regulatory reforms that will help diversify national economies. The Arab world’s largest economy, Saudi Arabia, has unveiled a robust National Transformation Plan to wean the national economy off oil. Not surprisingly, these reforms include plugging fiscal gaps by various means, including the introduction of a value-added tax (VAT).
The proposed reforms will impact businesses in a number of ways, many of which are positive. For example, according to the Ministry of Finance, the UAE expects to generate approximately AED12 billion ($3.27bn) in the first year of VAT, which is roughly a quarter of the country’s federal budget of AED48.65 billion ($13.25bn) for 2017. Revenue from VAT could be used to further empower the national economy through, for example, improved infrastructure, better schools and higher levels of productivity.
The proposed VAT rate of 5 percent is relatively low when compared to levels in Europe, China and Australia. Nevertheless, there has been some discussion of negative implications, largely because businesses and residents have enjoyed relatively high incomes and low deductibles for a long time.
There is a concern that this new economic landscape could pose unprecedented challenges to businesses, in particular small and medium enterprises (SMEs). And this concern is, for once, well founded: put simply, the way businesses have been operating is about to fundamentally change. Businesses need to adapt because their future could essentially depend on how VAT-ready they are in the very short-term.
Since the new VAT system was announced earlier this year, perhaps the biggest worry businesses have had is the relatively short preparation window. The window – if VAT is introduced as intended on 1, January 2018 - is indeed short and demands that businesses urgently take action. There is something of a consensus that VAT will be a cost to business, but, with adequate preparation, businesses, and SMEs in particular, can introduce systems and processes that reduce any cost implications, are aligned with the new tax system and ensure that they are fully compliant.
So how should businesses brace themselves?
The starting point is to raise awareness within the organisation. Carefully review supply chains and internal processes to fully understand the impact of VAT on the overall business model. Determine what needs to be done to be fully compliant with the new system. Clear communication within organisations is critical, as employees need be aware of how the business model might have to change.
Functions across the business - including finance, legal, IT and sales but also marketing and human resources - must understand the impact of VAT, including additional costs – which could be actual or related to compliance or cash flow - on their operations. It is also critical to evaluate contracts that go beyond January 2018 as these may be silent on the ramifications of VAT – and who pays.
Leading practice compliance standards must be implemented by maintaining appropriate books of account. This will help support VAT refunds and avoid penalties for non-compliance. Accounting systems should be able to identify and record VAT – payable and receivable - across the entire supply chain. Businesses must also be able to identify and record rebates, exemptions or other special VAT treatments on particular transactions.
In the run up to the implementation of VAT, business should consult with specialist VAT advisors to help them fully understand their tax obligations and ascertain what needs to be done to be fully compliant.
While further specifics on the VAT and excise tax legislation are expected shortly, it is imperative that businesses respond now rather than adopting a wait-and-watch approach. Make the most of the next 12 months. Be adaptable to any announced structural changes and feed them into strategic planning.
As Christine Lagarde, the director-general of the International Monetary Fund (IMF), reinforced during her visit to the UAE in 2016: “It is worth remembering that GCC economies have made large fiscal adjustments in the past – and I am confident that they can do it again.”
VAT is a new departure for the GCC, but a well-travelled path for many leading economies. Adapt to the road ahead and keep in mind the old adage: “If you fail to prepare, you should prepare to fail!”
For SMEs cash is used as it is earned a lot of such businesses have limited working capital and daily cash flow via sales is vital for survival. I wonder what happens to an SME when it collects the VAT uses it up and is then unable to pay it to the relevant taxation authorities. Will the owners be fined or even sentenced? How will policing be carried out to catch SMEs for not declaring the true VAT received?
VAT is going to hurt thousands of small business across the UAE. Why? Because the cost and complexity of administration for many of these micro businesses - think corner groceries, laundries, souk operators etc will be more than what the business can sustain. Many will not act and fall behind on payments, receive fines for doing so and then close as a result. This is exactly what happened in Australia when the 10 % GST (VAT) was introduced.
Further, in the lead up to and after the introduction of the VAT every business put prices up by far more than 10%, this lead to a massive bout of inflation, cost of living and eroded the disposable incomes of millions of people. This will no doubt occur in the UAE adding to an already grossly over inflated cost of living. This will greatly affect retail spending and thus employment. Not a good idea.
As yet with less then a year to go there has still not been any detail released on how it will be applied, which supplies will be exempt, which supplies will be zero rated etc. VAT is a simple concept but very complex in its administration. i.e will every airfare have 5% added to it etc?
I agree with you completely. Just look at opportunistic money grabbing retailers at Ramadan where they try to over inflate prices and have to be controlled and monitored by the government. When people are already being hit here with the increased cost of living, retailers are going to see a hit on the sales that they currently have.
I already shop abroad and courier goods in wherever I can to avoid paying higher costs here - so now with VAT added here I will save even more money ! Time for a rethink - yes the region has to recover money from sources other than O&G - but look at the current market and cost of living and predict what is going to happen.
Cost of living depends on how you choose to live. You can eat at small places in Bur Dubai where a meal costs 10 dhs rather than go to a 5 star hotel. And you can use public transport or buy a Toyota Yaris instead of an SUV. The UAE is how expensive you make it to be.
As for VAT, I have been reading the news and most experts and business leaders are welcoming it as it will improve the economy by diversification, so the bigger picture scenario seems be that the overall economy will gain.
Glad my comment has sparked some debate. The cost of living in Australia since the introduction of the GST in the year 2000 has risen by 150%. This is not down to the GST alone.
What I am trying to put out there is that there are "unintended consequences" that arise from the introduction of new taxes and these typically impact small business and middle to low income earners.
There is no reason to doubt that this will not occur here in the UAE when the VAT is introduced, there will be the typical gouging, price rises and additional costs if doing business all of which will be passed on as always to the consumer. This will contribute to an increased cost of living at a time where few can afford it and as a result discretionary spending will reduce.
More than likely it will be a Sales tax on Consumer products borne by the final customer. VAT is too burdensome administratively to consider.
There might be exempt Items e.g. food kids clothes etc.
Do expats really believe they can enjoy, Metro, Roads, World class facilities and safety etc for free indefinitely. Someone has to pay and the municipality fee on dewa isn't enough to cover the Bill.
The GCC will be forced by the IMF to go the way of other developed economies
If a company is below the minimum threshold they don't have to pay VAT. I don't know why everyone is talking about SMEs, the threshold is mainly very large corporations with high revenues. VAT is not being applied on all types of businesses, big and small.
You make a sound argument. In Canada, VAT replaced an inefficient tax system that impacted producers who paid different input taxes at varying rates. VAT put the burden of tax on the final user instead and it makes sense. Regardless of how we look at it, it is a way for the government to obtain funding. I also think that VAT administration is cumbersome and this region and its mentality will make it impossible to enforce. The best way to go about it is to impose a sales tax on specific industries and products that businesses collect from end-users and remit to the government. This will have a negative impact on the economy, but so will potential worsening government services due to lack of funding. In the end, it is a balancing act and having faith the tax revenues will be put to good use and positively impacting growth.
If that's the case then it would add even more complexity and cost to the back end administration for the Gov. to verify who qualifies and doesn't, who is collecting, collecting what and when and on what items.
For a consumption Tax to be most effective for all concerned it needs to be broad based and simple to apply.
As there is no real detail out there as of yet on these matters (which I am sure for business is a hug concern) then let us wait and see how it all pans out.