Complex Made Simple

VAT’s impact on your company: what you need to know

There are just eight months to go until Value Added Tax (VAT) is implemented in the GCC. But almost 70 per cent of businesses say they are not ready for VAT target date yet.

VAT is coming

The Gulf Cooperation Council (GCC) Value Added Tax (VAT) Treaty has now been signed by all six GCC states who have been taking concrete steps toward implementation on January 1, 2018.

General Authority for Zakat and Tax (GAZT) in Saudi Arabia has made official announcements and the UAE’s Ministry of Finance has launched a series of public awareness sessions.

A recent Indirect Tax Client Survey conducted by Deloitte revealed some surprising statistics about the level of knowledge of VAT within the GCC marketplace and the preparations underway.

While 96 per cent of respondents confirmed they were aware that VAT is going to be introduced in the GCC, less than half believe that VAT will be introduced in the very near future.

Justin Whitehouse, Deloitte Middle East Indirect Tax expert said in the report:  “We are reaching a critical point in time for businesses to react to the quickly evolving tax environment. Businesses believe that it will take them longer than six months to adequately prepare for the introduction of VAT. Whilst this is a fair estimate, where large or complex businesses are concerned, or those with an IT infrastructure that cannot be easily adapted, businesses may need more time to be comfortable that they will be able to meet their VAT compliance obligations on day one, which clearly means that some businesses are already running out of time.”

GCC businesses concerned

Clearly businesses will be impacted financially by the introduction of VAT, both initially by the work involved in updating their business operations to be VAT compliant and on an ongoing basis, particularly in sectors where VAT may be wholly or partially irrecoverable.

It is important that businesses start to understand these impacts now in order to take steps to mitigate the hard cost of VAT implementation, e.g. contract renegotiations, business restructuring, pricing considerations, supply chain management etc.

The Deloitte survey was completed by businesses spanning all industry sectors, 71 per cent of the manufacturing industry respondents thought they would need the help of VAT specialists whereas 60 per cent of consumer businesses were concerned that VAT will have a negative impact.

A parallel survey was conducted by Deloitte among clients of Deloitte Malaysia, entitled The Journey to Malaysian Goods and Services Tax (GST), to offer insights from businesses that have very recently been through a GST implementation process.

To compare with their Malaysian counterparts, 69 per cent of the GCC respondents estimated it would take longer than six months for their business to adequately prepare for the introduction of VAT although 30.91 per cent thought it would take their business less than six months to get ready, which contrasts significantly with the Journey to Malaysian GST survey, in which only 10 per cent of respondents needed less than six months to prepare.

When asked what their main area of concern was at the outset of the process to prepare their business for the implementation of GST, respondents to the Journey to Malaysian GST survey cited similar concerns to those currently experienced by businesses across the GCC. In practice the majority of these concerns are internal to the business – the availability of information from the government being the only external factor.

Almost 70 per cent of respondents to the Journey to Malaysian GST survey who exceeded budgets for their implementation project confirmed that the principle reason consisted of issues with the IT system.

Whitehouse explained: “The implementation of VAT is not a matter which will just affect the finance function of a business – it affects business operations across the board. Processes need to be re-designed, transaction mappings need to be re-assessed, staff need to be trained adequately, consideration needs to be given to pricing strategy, contracts need to be renegotiated, procurement decisions need to be taken, and the list goes on.”

The report notes that whilst domestic VAT legislation in each State may not have been published yet, it is possible to predict many aspects of how the VAT system will operate.

There are many aspects which are generic to all VAT and GST systems around the world which can be planned and prepared for without waiting for the publication of domestic legislation. Given the timeline in play, businesses should not delay in beginning their preparations.

Editor’s note: AMEinfo will continue to explore VAT and its impact on citizens and businesses. Watch this space for more updates.