VAT in the GCCâ€“accelerating compliance with the right ERP platform
The benefits of tax aside, being prepared for VAT compliance can be a daunting prospect writes Monzer Tohme, Regional Vice President, Middle East & Africa, Epicor Software.
The clock is ticking. In January 2018, the UAE and Saudi Arabia will adopt a Value Added Tax (VAT) at a standard rate of five per cent, with the rest of the Gulf Corporation Council (GCC) to follow soon after. The UAE’s Ministry of Finance has explained in clear terms what is required of businesses—that they “will be responsible for carefully documenting their business income and costs, and associated VAT charges”. For those familiar with VAT compliance in other countries, there are no surprises here. And PwC, Deloitte, Ernst & Young and many others have already published whitepapers cataloguing the nuanced challenges of VAT in the Arab Gulf region.
The benefits of VAT are well established. For business, compliance is relatively straightforward and the tax is neutral to economic hiccups and changes in trading and distribution patterns. Governments benefit from VAT being a proven inflation-neutral system, and Gulf governments in particular can be assured of steady funding for public spending, to cover any possible shortfall in non-oil GDP in the midst of a dip in petrochemical prices.
If you manufacture, distribute or sell goods you need to understand its impact, and have a working knowledge of input and output tax. You need to understand the difference between Standard, Zero and Exempt rates. How will you manage VAT as it pertains to your cash flow? What deferred-payment schemes are available and how can you optimise the timing of recovery of VAT on costs? If your business crosses national boundaries, you need to consider the requirements of customs authorities—VAT will add an additional layer to import-export regulations, and full compliance will demand deft handling.
In addition to all of these considerations, it is expected that there may be many exemptions and exceptions when it comes to intra-GCC transactions. And there will remain the significant grey area of government suppliers, where a public agency may have its exempt status suspended for the purposes of maintaining a competitive market.
Different industries will need to address these complexities in different ways, in addition to keeping on top of their own sector specific issues.
The finance sector traditionally enjoys many exemptions when it comes to VAT. In the case of GCC VAT, it is expected that these exemptions will extend to Shari'ah-compliant banking and insurance (Takaful), but industry players will have to wrestle with a certain amount of complexity to make proper use of these benefits. Organisations need to ensure that services are identified correctly as exempt or taxable, and that VAT on reverse-charges is properly managed. Banks and other financial institutions may need to reassess the design of products to comply, not only with VAT, but with fundamental changes in consumer needs.
Organisations within the manufacturing supply-chain will feel acutely exposed to the impact of VAT. Smooth implementation is crucial, to ensure sustained cash flow and optimal operating efficiency. Manufacturers must keep price fluctuations firmly in mind, just as their customers will, and pay due attention to new invoicing requirements. Those that are involved in trade with other countries inside and outside the GCC, should be prepared to comply with the strict auditing requirements of customs officials.
Hospitality and tourism
Airlines, hotels, travel agents, and other industry specialists will have very different VAT stories to tell. The reason for this complexity lies not only in the vast operational differences between, say, an air carrier and a hotel, but also in the differentiation between a principal and an agent. In a recent report on GCC VAT by Deloitte, the consultancy firm pointed out that “many tourism businesses describe themselves as an ‘agent’”, but for the purposes of VAT compliance they must “consider if they are acting as a principal in reality, while referring to themselves an ‘agent’”. Other complexities will arise for the sector in its dealing with inbound and outbound business. Depending on an end-customer’s itinerary, multiple different rates of VAT may apply, depending on which country is deemed to be the origin of the business transaction—the so-called “place of supply”.
Technology to the rescue
Whether you run a fully-fledged, integrated enterprise resource planning (ERP) system or a standalone finance package, you will likely have access to basic VAT functionality. But compliance with new country-specific regulations within the GCC may require anything from mild configuration to extensive procurement.
Whatever your scenario, aim for extensible functionality and flexible options that minimise the likelihood of financial penalties. With a series of interlocking global engines, you can easily configure the rules that determine how transactions are posted, where they are posted, how tax is calculated, how currency is handled, and how data is stored.
Demand flexibility, so you can add the functionality that makes sense for your business. The best solutions are designed around core functions that worldwide tax systems have in common, with national variations as configuration options. In particular, ensure your chosen ERP system is capable of producing the required level of documentation. A comprehensive set of electronic-compliance features is advisable, as is a structured reporting framework that can produce VAT submissions in a wide variety of formats.
Remember that non-compliance can have a detrimental effect not only on the corporate purse, but on brand credibility. Managing the intricacies of VAT regulations is made a lot easier with the right technology platform for commerce.