Future of VAT in the GCC: Higher, more complex, so be ready
With the introduction of 5% VAT in the UAE and Saudi at the start of the year, and with other Gulf countries to follow suit in the next few years, businesses have had to accustom themselves with an entirely new concept they’ve not needed to contend with before.
VAT percentage is still at a relatively low mark-up in the region, as a meager 5% barely compares to 25% VAT in Sweden, or 18% in Turkey. As we inch closer to peak oil, however, we could see the GCC bump up its VAT in coming years.
So, how can businesses prepare ahead of time?
Businesses: Adapt your administrative procedures ahead of time
VAT brings with it a lot of baggage. Reshaping the entire business landscape is not a matter to be taken lightly, and businesses themselves have a lot of restructuring to do as they adapt their transactional models and operations to incorporate VAT.
Here are the things that companies need to consider:
(Infographic by Ernst & Young)
Many businesses have already adapted to the change, yet some still haven’t.
Back in April, Khalid Ali Al Bustani, the director general of the UAE’s Federal Tax Authority (FTA), stated that 98.8% of UAE businesses had become VAT-compliant.
“Even though the UAE is new to the tax system, achieving that level of compliance reflects how advanced the UAE is,” he said. “They were ready for the implementation of VAT.”
Following the implementation of value-added tax, auditing firm Deloitte recommends a VAT Check procedure to ensure the company is compliant with government-standards for VAT.
(Infographic by Deloitte)
Higher VAT could and will most likely happen, but you have some time to prepare
An increase in VAT is unavoidable. Lebanon, to cite a regional example, has recently bumped up its value-added tax up to 11%.
The UAE and Saudi, however, will have a safe period of 5 years starting in 2018, according to a recent official announcement. Obaid Al Tayer, UAE’s Minister of State for Financial Affairs, guaranteed that VAT and excise tax will not increase within the next 5 years.
Tim Callen, the IMF mission chief to Saudi Arabia, also recently said that he doesn’t see any increase in VAT for the next five years, Khaleej Times reports. “However, we have suggested that once VAT is successfully implemented and the people have got used to it, the rate could be increased in the future depending on the revenue needs of the individual country,” said Callen.
Realistically, we could see the tax rise to 8 or 10% following the 5-year period.
Technology is the answer
In the long run, the implementation of an effective electronic system will ensure transaction data and other financial records are stored securely and efficiently. It also allows for the ease of adaptation with changes in VAT, when companies will eventually be forced by official bodies to implement higher and higher rates of the tax – a given at this point if things continue to progress the way they have.
According to the 2017 Paying Taxes report by Pricewaterhouse Coopers (PwC), it takes 27% less time on average to comply with VAT obligations in countries where businesses pay and file VAT online.
(Infographic by Infinite IT Solutions)
Chris Govier, writing for Forbes Middle East, details some of the IT solutions available.
“With the help of artificial intelligence, automated classification solutions can identify document types and classify them through a combination of text and image-based analyses,” he explains. “Machine learning makes assigning digital files very easy while minimizing the time taken to manually categorize paper transactions.”
Another solution is automated validation, “which involves integration with other data sources such as an existing database or enterprise application. Manually validating transactions is a time-consuming process and risks human errors. On the other hand, digitally automating the validation process means the business will have more accurate scripts while saving time.”
An increase in VAT will also mean one of two things to you as a business: Either drop your profit mark-up to accommodate for the increase in VAT to the final price, or simply add the goods levy and hope your customers don’t flock away following inflated prices.
As this is a lose-lose situation, it is important to make production processes as efficient as possible ahead of time, cutting costs to allow for any fluctuations in VAT.
Simple, but confusing
When it comes to VAT, there are three kinds of goods to conisider: standard-rated goods, zero-rated goods, and exempt goods.
According to Pwc, “the main difference between zero rate and exempt supplies is that the suppliers of zero-rated goods and / or services can still reclaim all their input VAT, but the suppliers of exempt goods are either not registered for VAT or if they are, they cannot reclaim their input VAT.”
Businesses need to maintain a clear understanding of these different classifications to operate at maximum efficiency.
Investopedia explains, “in many cases, buyers use zero-rated goods in production and benefit from paying a lower price for the goods without the tax. [For example,] a food manufacturer may use zero-rated goods in the manufacturing of a food product, but when the consumer buys the final product, it includes a VAT.”
An increase in VAT might also affect the aforementioned zero-rated goods.
In the end, companies will need to keep up with the latest trends in operational management and IT solutions to stay on top of any VAT changes that could occur in coming years. Preparation is key.