Preparation is key as VAT looms in the GCC

Earlier this year, the ministers of finance of the Gulf Cooperation Council member states approved in principle the Value Added Tax Treaty for the region, meaning the spectre of a consumption tax is fast becoming a reality.

As a result, businesses across the GCC need to start preparing now for what could potentially be an incredibly disruptive event. Assessing the impact of VAT on their businesses, their customers and their suppliers is crucial in ensuring a smooth transition to a new operating environment.

The formal announcement of the treaty is expected to come in the fourth quarter of 2016, paving the way for the adoption of new VAT regimes by member states, which are expected to take place over a phased period.

Upon the ratification of the treaty, each member state will issue its own national VAT legislation based on the agreed

framework under the treaty. This will entail the issuance of domestic VAT laws, coupled with national implementation regulations establishing mechanisms for the charging, collection and management of VAT related matters.

With falling oil and gas revenues and a need to diversify income sources, VAT has been on the agenda of the GCC member states for a number of years.

A uniform GCC-based form of VAT does bring about a careful balancing act between raising revenue and stifling spending. This is particularly true in the consumption driven markets of the region that have traditionally benefitted from being viewed as low tax rate jurisdictions, albeit with a corresponding high cost of living.

Clearly in the early stages of implementation, the costs of establishing the apparatus for the collection of VAT will be a significant overhead to meet. The potential effect on ‘big ticket’ purchases such as cars and luxury goods and the impact on tourism spending will also need to be evaluated.

All that being said, at this point in time it is fair to surmise that no one knows for sure exactly what effects the introduction of VAT might have on the GCC economies, or exactly how VAT will be implemented.
Given that VAT is charged and collected by businesses on behalf of relevant tax authorities there will no doubt be an additional burden in terms of administration and compliance with the new VAT regime on businesses throughout the GCC. Consequently, businesses will need to update their existing internal systems, processes and procedures, and will need to ensure they comply with the new requirements. This includes:

• Charging VAT on supplies at the correct rate
• Calculating VAT deductible on purchases
• Calculating the overall net amount of VAT to pay/ refund
• Submitting VAT returns, showing the required information, within the prescribed deadlines
• Paying the net amount of VAT due within the prescribed deadlines
• Keeping the correct documentation in relation to invoices, records, accounts, VAT returns, etc

Due to the relatively short time frame for implementation of the new VAT regime across the GCC, it is important that businesses start to plan for the VAT era with their professional advisors, both legal and accounting.

The amount of work to get matters prepared will likely depend on the size and complexity of a business. Consequently, it is essential that businesses consider the impact of VAT and ensure that all measures are in place to attend to it.

While further clarifications on various administrative matters (such as the tax collection mechanism related to intra-GCC trade) are eagerly awaited, it is prudent for businesses to begin to do the following:

• Understand how VAT impacts their business and operational models
• Assess the capability of the existing accounting systems to cater for VAT
• Undertake an initial review, and then formulate a plan/timeline for implementation
• Identify its business transactions including intra-GCC transactions and inter-company transactions
• Identify all contractual arrangements that require re-drafting to cater for VAT

There is little doubt that the introduction of VAT in GCC countries presents a number of challenges to both businesses and private individuals. But by having a robust plan in place, a lot of the short-term disruption that a new tax regime can potentially cause will be minimised.

Planning for VAT now will only save companies precious time, money and effort in the long run.

Chris Williams is managing partner of Bracewell LLP, Dubai, and a member of its Business and Regulatory Group