Meeting the challenges of Value Added Tax implementation in the GCC states
By Jennifer O'Sullivan & Morris Rozario
Posted: 16th January 2017 08:24
The strategic motivation to introduce VAT in the Persian Gulf countries is the ultimate aim of the GCC Union (comprising Bahrain, Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Oman) to achieve economic integration that would lead to a common market and economic and monetary union. The IMF has long identified the introduction of VAT and corporate tax as a primary means to enhance market mechanisms and significantly increase the contribution of the private sector to the generation of public revenues in the GCC states. The more immediate and urgent imperative driving the introduction has been the prolonged and likely longer term decline in oil and gas prices. Obviously, the need to reduce the dependence on oil and gas to contribute over 60% of the revenues is immediate.
Not surprisingly, on 16 June 2016, at an extraordinary meeting in Jeddah, Saudi Arabia, the Finance Ministers of the GCC states approved the introduction of the first phase of VAT implementation by the beginning of 2018 for businesses with a turnover of over US$1 million.
Across the GCC region, the requirement to be registered will arise in early 2018 during the first phase of implementation. Once registered, companies will be required to account for VAT on an ongoing basis. Companies whose revenues fall between US$500,000 and US$1 million will have the option to register for VAT during the first phase of the VAT implementation. It will become mandatory for all companies to be registered under the system, when it is rolled out in the second phase, regardless of the reported revenues. The roll-out date of the second phase of the implementation is yet to be decided.
All the six GCC member states will be signatories to the GCC VAT Framework Agreement, which is in the very final stages of negotiation on certain procedural aspects only. The GCC VAT Framework Agreement is expected to be ratified at the next meeting of the GCC Financial and Economic Cooperation Committee in October 2016. Once ratified, the principles contained in the GCC VAT Framework Agreement will be transposed into and augmented by the domestic VAT law in each of the six GCC member states.
With the approval of the GCC VAT, companies doing business in the GCC are on a tight timeline of 18 months to prepare for the first phase of VAT implementation by 1 January 2018. The urgency is even more evident when one is aware that most of the GCC countries have already made substantial progress on drafting their domestic VAT legislation and preparing their tax administration systems for VAT, such that the focus has now shifted to preparing the business community for VAT.
Although the VAT rate has not been officially confirmed, it is expected that a 5% VAT will apply on supply of most goods and services including imports with specific exemptions for basic and essential foods, medicines, health services and specified banking, financial and insurance services.
Preparing for VAT
The experience from VAT and GST implementations in other countries clearly shows that a comprehensive understanding of the impact of VAT on all facets of business, its customers, and then making the business VAT-ready early are key to the ongoing successful conduct of business under the new tax regime.
10 key preparatory actions
Companies doing business in the GCC region would be prudent to undertake the following key actions to prepare the business, accounting and reporting systems, staff, suppliers and customers for the new tax regime:
- Developa project plan and budget for the cost of implementing VAT (e.g., consultant fees, configuration of accounting systems, training expenses and hiring of additional finance support)
- Analyse the business itself in order to determine if it will constitute a VATable entity and determine the VAT rate and tax treatment which would be applicable to each supply which it undertakes
- Consider the tax cost if any exempt activity is undertaken and the cash flow impact, as VAT is payable on an accruals basis
- Identify the tax and legal implications of the existing long-term contracts spanning the VAT implementation period – i.e., who bears the burden of VAT
- Analyse the capabilities of the existing accounting systems to deal with the new tax – all transactions should be VAT coded in the ERP system
- Review accounts payable processes to assess whether tracking and posting of expenses are done in a timely manner, including employee benefits
- Determine the changes required for existing documentation to support compliance with the new tax
- Analyse and understand transitional issues for supplies of goods and services that span the VAT implementation period
- Evaluate the impact on pricing for any supplies that span the VAT implementation period
- Train employees to appreciate the impact of VAT on accounting and reporting processe
Jennifer O'Sullivan is a Director at Ernst & Young Qatar and EY VAT Services Leader in MENA. Morris Rozario is an Executive Director and Technical Communications Leader in EY MENA.
EY is the leading professional services firm in the Middle East with professional tax advisors and subject matters specialists in 15 countries across the Middle East and North Africa (MENA) region.
The opinions expressed in the article are the personal opinions of the authors and do not necessarily reflect the views of EY.
Morris Rozario is an Executive Director responsible for tax technical communications with Ernst & Young, MENA. Morris is a corporate tax specialist with over 30 years of experience advising and working with multinational companies in Asia, East Africa and the Middle East. Ernst & Young is the leading professional services firm in the Middle East with professional tax advisors and subject matter specialists in over 15 countries across the Middle East and North Africa.
Morris can be contacted email@example.com