“In this world, nothing can be said to be certain except death and taxes,” suggested US Founding Father Benjamin Franklin, whose rather fatalistic observation nonetheless succinctly underlines life’s inevitabilities. For businesses in the GCC region, a new VAT regime means there will be even more of the latter to look forward to from next year.

 

Originally a French idea started in the 1950s, VAT has since swept the world, with more than 140 countries having since adopted it – from Switzerland to South Korea. One of the few still holding out is America (it imposes sales tax, which varies from state to state); other notable absences include the six member states of the Gulf Cooperation Council (GCC).

 

Time and again, GCC governments have expressed their desire to implement a VAT system, as countries across the region strive to diversify their revenue streams. As governments in the region look to generate revenue to counter the slump in remittances from oil, that goal now looks set to be realised next year, with a planned treaty providing an overarching framework for such a tax regime.

 

In January this year, the Shura Council in Saudi Arabia approved the GCC Value Added Tax (VAT) Framework Agreement. Officials at the Saudi Arabian Ministry of Finance have since indicated the VAT regime will be applicable from 1st January 2018, and a five-per-cent levy will apply to goods and services as set forth in the GCC agreement.

 

In February, Bahrain’s Minister of Finance H.E. Shaikh Ahmed bin Mohamed Al Khalifa signed the unified GCC VAT Framework Agreement and reaffirmed the expectation that VAT will take effect from 1st January 2018, after completion of the due constitutional and legal process. Likewise, in the same month Younis Al-Khouri, Undersecretary at the UAE’s Ministry of Finance, reaffirmed that the GCC governments were planning early simultaneous adoption of VAT in the new year.

 

Those official affirmations are in line with similar pronouncements made by government officials from other GCC member states. The text of the GCC VAT Framework is expected to be made available shortly and is already being shared by some countries with business leaders in strategic economic sectors.

 

The countdown begins

 

Based on the above developments, businesses should expect VAT in the GCC region to be a reality from 1st January 2018, giving firms just eight months to prepare for, and also ensure compliance with, VAT laws in each GCC country in which they operate.

 

Despite such expectations, an EY webcast at the end of February demonstrated that 51 per cent of respondent businesses did not intend to make VAT compliance a major focal area, while just eight per cent said they were concerned about procurement considerations and only 10 per cent reported that they would look to address customer and vendor pricing as a priority. Such results were a surprise to David Stevens, EY’s VAT Implementation Leader. “VAT will impact all key areas of business operations and it is imperative that businesses act immediately to avoid serious issues and costs,” he said.

 

Given the looming tax cliff, it is perhaps surprising that just 13 per cent of the survey’s respondents considered education and training of primary importance during VAT preparations. “Global experience has shown that VAT training and education is fundamental to ensure successful implementation,” said Mr Stevens. “The focus should be primarily on system and business process readiness, communication, staff training, and sourcing VAT knowledge internally or externally. Compliance with the requirements of the VAT law will follow if these areas are properly addressed.”

 

Immediate action required

 

Business systems – from fully-integrated ERP systems to stand-alone finance packages – will often include standard VAT functionality. However, this is likely to require modification to capture specific GCC regulations. For larger organisations, configuring VAT in their ERP and finance systems will be resource-intensive, potentially complex and expensive. Making preparations within a tight schedule could also lead to financial advisers, system specialists and solution providers being stretched as they attempt to support their customer base across the GCC region.

 

As for respondents from multinational companies operating in the region, the survey showed that 62 per cent of businesses said that their head office or parent company was not involved – or was only partially involved – in their efforts to prepare for and implement appropriate system, process and organisational changes to accommodate the looming VAT regime introduction next year.

Ultimately, firms operating in the region will require a clear, deep understanding of the new tax regime. They will also need an awareness of the costs associated with the business changes that will be required to successfully incorporate VAT into all their processes, so as to ensure sufficient funding is budgeted for this purpose.

 

Tax experts have warned that VAT comes at a cost and exposure to penalty if administered incorrectly. Companies and traders who are consistently in a position of recovering VAT from the government will need to factor in the potential negative cash flow impacts that their business will be exposed to, as well as the likely additional scrutiny their books and records will be subject to by the authorities.

 

A significant issue for GCC businesses is obviously the lack of familiarity with VAT. And since VAT is a tax on every business transaction, it impacts all functions in an organisation. And if impacts are not addressed in a timely fashion, a company’s competiveness could easily be compromised.

 

To access EY’s ‘Preparation for GCC VAT by 1 January 2018 requires immediate action’, visit: www.ey.com