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VAT: 7 challenges GCC companies will face

Only 10 and a half months to go, but many companies, particularly small and medium enterprises (SMEs) have little clue how value-added tax (VAT) will impact their businesses, when it is introduced on January 1 across all the GCC states.

The reason for this ambiguity is that the region’s countries has little or no history of taxation, and the shift to levying goods and services a charge is coming in a very tight time frame.

Experts say the new tax could create operational risks for companies, so they need to chalk out a clear roadmap to ensure timely and smooth implementation.

“With the possible introduction of VAT by 2018 in most of the countries of GCC region, it is a critical time for entities and other organizations across the region to take into account the impacts and other changes that will accompany this introduction,” says Nauman Ahmed, Partner and Middle East Tax leader at Deloitte.

Credit ratings agency Fitch Ratings says VAT could put pressure on EBITDA (earnings before interest, tax, depreciation and amortization) and cash flows in some industries as markets adjust.

Here are top seven challenges the region’s businesses could face with the implementation of VAT:

1. Updating IT systems

Companies should design and establish an internal control system for ongoing monitoring, understand changes required to native systems such as Oracle and SAP and any separate transaction systems and assess the use of VAT determination (tax) engines, says Rob Hucknall, ME Finance Consulting Partner, PricewaterhouseCoopers.

“The IT department is the backbone of a compliant model while implementing VAT and it should consider the key areas such as tax relevant master data, tax condition rules, invoicing and documentation, intercompany transactions, reporting, maintenance of tax master data and codes,” adds Hucknall.

From our experience, says Deloitte Middle East VAT leader Justin Whitehouse, the area with the longest lead time is technology and so businesses need to commence planning any major system changes to their ERP in the next few months.

Companies use Enterprise resource planning (ERP) software to manage and integrate core business processes.

2. Training staff

Human resources has the most vital major role to play in the process of the implementation of VAT.

“Businesses must therefore ensure relevant employees have the appropriate skills and knowledge for their roles, through appropriate training and recruitment,” says Whitehouse.

3. Slowdown in business

Sluggish economic growth after oil prices declined, and uncertainties have already been plaguing businesses in the region. The new tax is feared to reduce disposable incomes of consumers as a result it will lead to a weakening demand which will eventually affect profitability of companies, according to Fitch.

4. VAT dilemma

Bashar Al Natoor, Global Head of Islamic Finance, Fitch Ratings, says some goods or services may be assigned a zero rate, meaning the business will charge VAT at 0 per cent on sales and will be able to reclaim VAT on purchases.

“But if the goods or services a company sells are VAT exempt then they will not be able to reclaim VAT on purchases and will have to bear this cost themselves.”

5. Rising cost

Another blow for companies, Al Natoor says, will be fierce competition in some sectors that may also put pressure on companies to cut pre-tax prices and absorb some of the cost themselves. According to his opinion, this is most likely in sectors like telecommunications, consultancy and contracting.

6. Renegotiating contracts

Many businesses will have to call their suppliers, vendors and other partners again to negotiating table to rework the agreements they have already made. And in some instances, companies will need to renegotiate  conditions with their customers.

7. Pricey errors

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, according to Fitch.