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Sunday 08, April 2018 by Jessica Combes

VAT: Towards a single unified economy

 

In an exclusive interview with banker Middle East, Amit Dua, President and Global Head at SunTec, says that the implementation of VAT may facilitate inter-GCC trade.

How would you describe the transition for banks in implementing VAT in their businesses?
It’s a completely new world—taxation. Neither the UAE nor Saudi Arabia have ever experienced indirect taxes on goods and services, so this transition is challenging. There are differences in the way both countries have implemented VAT. While in Saudi Arabia the VAT liability is passed on to the consumer, in UAE, certain services are absorbing VAT as part of their cost of service. Banks are one unit with multiple business houses, making it a largely mixed supply organisation under VAT.

This means the attributability of input to output is a challenge for them. The input tax credit that can be claimed by banks for expenditure tax is also significantly low (compared to other industries). Therefore, one of the key impacts of this transition is the increase in costs and the lower recoverability for banks. From a system perspective, it means all banks need to have an umbrella system for overall tax to be calculated. This system also needs to be agile to be able to update and change as regulations evolve.

These updates are quite common when a new system like VAT is introduced. We expect a lot more changes to come from the regulators and the capability of systems to manage these changes will be crucial, not just in UAE and Saudi Arabia, but as VAT gets introduced across the region this capability will be crucial for all GCC countries. 

Having it take effect in full force this year, what is your projection of its long-term implications on the banking business in these respective markets?
In the long term, I believe we will see a strategic shift in the way banks are structured. Currently, a bank is one unit with multiple business houses, making it a largely mixed supply organisation. We now expect banks to strategically plan businesses based on recoverability of expenditure tax. For example, if one of the businesses of the bank has higher recoverability and lesser exempted income, they may start mapping input and output accordingly rather than reporting the entire bank under mixed supply.

Some of the large-scale changes could also include having separate invoices from vendors for goods and services provided to different business units in the bank. Focus will be on increasing recoverability of expense taxes. Banks will take a deeper look at managing income that is exempted and may need to restructure some of its portfolio. As the year progresses, we will see more complexities being introduced, especially as the rest of the GCC begins the introduction and implementation of VAT.

Regional taxation laws will come into effect. Banks will need to look at not only their own local taxation rules, but also those of the other industries since their corporate customers will be from these other industries and, in some cases, across the region.  

What other issues should financial institutions be aware of regarding VAT moving forwards?
There are a couple of areas that need to come under scrutiny, such as the import of goods and services, inter-change income, realised and unrealised foreign exchange income, etc. Inter-change income is a complex area where too many parties are involved, and a systemic approach is required to analyse the impact of any additional expenditure. For example, pre-VAT, imports had no great meaning, but with VAT, they are treated under reverse charge mechanism and that is an additional expenditure. Another significant area which we think needs more attention is the field of manual or ad-hoc transactions in the bank. It was acceptable in a pre-VAT scenario, but any VAT-able service accounted without taking the impact of VAT will pose a big challenge in FTA audits. In conclusion, I think that the allocation of taxes will become an issue that the banks will need to seriously consider even more seriously, meaning they will need better analytics to provide the right amount of flexibility and scalability as regulations change and get adjusted. 

Seeing things from a broader point of view, what major impacts do you expect the economies of KSA and UAE to face following the implementation of VAT?
We see a very bright picture. We see a unified GCC and country borders becoming state borders, thus making it easy for inter- GCC trade. We see harmonisation of goods and services, tax rates, standardisation of exempted supplies and the ability to claim inputs for supplies across GCC. We also see that systems will play a very big role with digitised invoices and effective tax management solutions. Regulators may simplify procedures and systematically approach a unified GCC goal.

  

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