* 6 GCC countries to introduce 5 per cent VAT by next year
* Challenges include legislation, compliance and tax documentation
* But economists and officials have said simultaneous introduction may not be feasible
* Governments expect billions from tax revenue upon introduction
* Average cost of food and drink will likely rise by up to five per cent
In less than one year from now, six GCC nations will introduce a five per cent Value Added Tax (VAT).
However, there are many challenges for businesses to introduce tax, with an extensive checklist of items to consider, including legislation, compliance and tax documentation, among others.
The GCC, its finances strained by low oil prices, has long planned to adopt the tax in 2018 as a way to increase non-oil revenues, but economists and officials in some countries have said privately that simultaneous introduction in all countries may not be feasible.
Yet, despite the administrative obstacles, the decision has been made. Younis Al Khouri, under-secretary at the UAE finance ministry, said GCC governments were planning for early, simultaneous adoption so that VAT could be adopted across the GCC, including Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, Reuters reported Sunday.
According to Al Khouri, the UAE government aims to implement tax across the economic sectors, but part of education, healthcare, renewable energy, water, space, transport and technology sectors might be dealt with differently, he told Reuters in an interview.
Governments expect billions from tax revenue upon introduction. For instance, the UAE expects roughly $3.3 billion of tax revenue in the first year, Reuters reported, equivalent to nearly 0.9 per cent of the country’s gross domestic product in 2015, which was estimated at $371bn, according to official data.
From the start, authorities will seek to register all companies with annual revenues exceeding $100,000 for the tax. They anticipate 95 percent or more of companies will comply in the initial stage.
It has taken the countries a few years to adjust to the reality of VAT, but what should businesses consider when working towards a smooth and seamless implementation?
Below are a few areas to look at, from a business perspective, according to tax consultants PricewaterhouseCoopers (PwC):
VAT’s introduction is a way of diversifying economies in the wake of recent oil market volatility. Research carried by Euromonitor on the F&B industry in the UAE and Saudi Arabia estimates that the average cost of food and drink in countries like Saudi Arabia will likely rise by up to five per cent.
This is expected to cause a drop in consumer spending on the short-term, for which companies will have to bear the costs. However, after the initial drop, most companies are expected to begin to see a revenue increase within five years.
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According to PWC’s January 2017 report on the topic, some of the challenges for businesses include being able to bring through a serious transition phase in the middle of other big projects, as well as a potential drain on internal resources and external contractors to facilitate the change effectively.
The introduction of VAT will allow for serious diversification and produce more stable business structures that will permit governments to create reliable income streams for the future.
Revenues from the tax may increase gradually with economic growth, but the government is not at present considering any increase of the tax above five per cent and would not raise it in the future without a thorough study of the economic and social impact, Khouri said.
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