GCC gears up for VAT in 2018
Abu Dhabi - In tax terms, 2017 marks a watershed year for the Gulf Cooperation Council (GCC) since it will be the last one when it will be free of the value-added tax (VAT).
While the VAT is an established part of the corporate and consumer scenery in about 150 countries, it is new in the Gulf region. With all six GCC countries set to implement VATs in 2018, a financial instrument that was a speck on the horizon a few years ago is looming large.
The realisation that VAT is coming was strengthened recently when the Saudi cabinet approved the Unified Agreement for Value Added Tax, an agreement — known as GCC/UVAT — that arches over the GCC members and is designed to ensure its arrival, at a rate of 5%, is smooth and coordinated.
Away from the technicalities and administrative processes that come with its implementation, governments across the Gulf have other VAT matters to consider. Hearts and minds must be convinced and reassured. Businesses will need to review and possibly reconstruct their models and systems while considering whether rising prices drive consumers away. Concerns have been raised about a talent gap in terms of the skilled and experienced financial professionals required to ease VAT’s entrance into the GCC.
Public awareness programmes have been pledged, recognising that any form of taxation is hardly destined to be popular. The message that the GCC needs to find other, non-hydrocarbon income streams to fund spending on infrastructure, education and economic diversification is likely to be amplified over the next 11 months.
Reports that VAT could generate $3.27 billion in new money for the United Arab Emirates in its first year and up to $5.44 billion in the second and that goods such as tobacco and soft drinks will be on the VAT front line suggest a certain degree of charm offensive is under way.
Charm, however, will not dissolve the challenge of introducing VAT to a minimal tax area such as the GCC; a challenge outlined by Ivor Feerick, partner in charge of indirect tax at chartered accountancy firm BDO Ireland. “There are many missteps that can be made during implementation,” he explained.
“Low VAT registration by businesses, arbitrary price increases, incorrect filing of tax returns, lack of access to expertise — these are some of the problems historically encountered by Asian and African countries during the implementation of VAT systems.
“It would be wise to use the time available to ensure a successful implementation and it is critical that the authorities provide comprehensive and understandable guidelines in a timely manner to enable those businesses that are to be VAT-registered to accommodate the requirements.”
Feerick said that all GCC countries implementing VATs at the same time would smooth the process but the onus will still be on businesses “to start planning their tax strategy without delay”.
“One of the challenges in introducing a VAT system in a depressed marketplace is that many hard-pressed consumers, who will have experienced decreases in their household income due to cutbacks arising from the halving in the price of oil as well as increases in the cost of oil-related products, are disinclined to spend due to lack of confidence in their personal financial circumstances,” he said.
“Increasing the price of most goods and services by 5% will act as a further disincentive to consumer spending. So, in the early days, it is likely that retailers may reduce their profit margins and absorb some or all of the VAT costs with a view to maintaining the sales volume required to sustain their businesses.”
However, an official at professional services firm Ernst & Young, which claims VAT at 5% could generate annual revenues of more than $25 billion for the six GCC countries, says VAT’s bark is worse than its bite.
“While the introduction of a tax may seem daunting to consumers and businesses alike, the overall impact for consumers is less than the usual annual inflation rate,” said the firm’s VAT implementation leader, David Stevens.
In terms of the bigger picture, according to Gerard Rahman, chief executive officer of BDO UAE, VAT is a necessary step towards economic diversification, the sign of a “mature economy” and a vote of confidence in its “reliability and sustainability” in an uncertain world.
“The idea of value-added tax is also consistent with our vision of a diversified economy built by adding value to products and services as we participate in a global economy,” he said. “We see an important step, with the introduction of VAT, in terms of realising the UAE’s vision of a world-class nation.
“VAT is intrinsic in delivering our vision for the UAE — a diversified, world-class economy. The key to a diversified economy is the capability of an industrial and business sector to add value to a product or service and participate in the global economy. It takes innovative, visionary and creative people to add value.”