ISME Magazine -Issue 39 webview (1)

VAT in the Gulf
Corporation Council—
Accelerating Compliance
with the Right ERP Platform
Whatever your scenario, aim for extensible functionality and flexible options
that minimise the likelihood of financial penalties. With a series of interlocking
global engines, you can easily configure the rules that determine how transactions
are posted, where they are posted, how tax is calculated, how currency
is handled, and how data is stored.
The clock is ticking. In
January 2018, the UAE
and Saudi Arabia will
adopt a Value Added
Tax (VAT) at a standard rate
of 5 percent, with the rest of
the Gulf Corporation Council
(GCC) to follow soon after. The
UAE’s Ministry of Finance has
explained in clear terms what
is required of businesses—that
they “will be responsible for
carefully documenting their
business income and costs
and associated VAT charges”.
For those familiar with VAT
compliance in other countries,
there are no surprises here.
And PwC, Deloitte, Ernst &
Young and many others have
already published whitepapers
cataloguing the nuanced
challenges of VAT in the Arab
Gulf region.
The benefits of VAT are well
established. For business,
compliance is relatively
straightforward and the tax is
neutral to economic hiccups
and changes in trading
and distribution patterns.
Governments benefit from VAT
being a proven inflation-neutral
system, and Gulf governments
in particular can be assured
of steady funding for public
spending, to cover any
possible shortfall in non-oil GDP in
the midst of a dip in petrochemical
prices.
Operational Readiness
But benefits aside, being prepared
for VAT compliance can be
a daunting prospect. If you
manufacture, distribute or sell
goods you need to understand
its impact, and have a working
knowledge of input and output
tax. You need to understand the
difference between Standard, Zero
and Exempt rates. How will you
manage VAT as it pertains to your
cash flow? What deferred-payment
schemes are available and how
can you optimise the timing of
recovery of VAT on costs?
If your business crosses
national boundaries, you need
to consider the requirements
of customs authorities—VAT
will add an additional layer to
import-export regulations, and
full compliance will demand
deft handling.
In addition to all of these
considerations, it is expected
that there may be many
exemptions and exceptions
when it comes to intra-GCC
transactions. And there will
remain the significant grey
area of government suppliers,
where a public agency
may have its exempt status
suspended for the purposes
of maintaining a competitive
market.
Different industries will need
to address these complexities
in different ways, in addition
to keeping on top of their own
sector specific issues.
Financial Services
The finance sector traditionally
enjoys many exemptions when
it comes to VAT. In the case of
GCC VAT, it is expected that
these exemptions will extend
to Shariah-compliant banking
and insurance (takaful), but
industry players will have to
wrestle with a certain amount of
complexity to make proper use
of these benefits. Organisations
need to ensure that services are
identified correctly as exempt
or taxable, and that VAT on
reverse-charges is properly
managed. Banks and other
financial institutions may need to
reassess the design of products
to comply, not only with VAT,
but with fundamental changes in
consumer needs.
Manufacturing
Organisations within the
manufacturing supply chain
will feel acutely exposed to
the impact of VAT. Smooth
implementation is crucial, to
ensure sustained cash flow and
optimal operating efficiency.
Manufacturers must keep price
fluctuations firmly in mind, just
as their customers will, and pay
due attention to new invoicing
requirements. Those that are
involved in trade with other
countries inside and outside
the GCC should be prepared to
comply with the strict auditing
requirements of customs officials.
Hospitality and Tourism
Airlines, hotels, travel agents
and other industry specialists
will have very different VAT
stories to tell. The reason for
this complexity lies not only in
the vast operational differences
between, say, an air carrier
and a hotel, but also in the
differentiation between a principal
and an agent. In a recent report
on GCC VAT by Deloitte, the
consultancy firm pointed out
that “many tourism businesses
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