The introduction of VAT in GCC will be a significant change for businesses across GCC states. While businesses operating in the region have little to no history of taxation, the broad scope of VAT ropes in more ambiguity on specific impacts it will have on transactions, prices and profit margins of different enterprises.
“It’s high-time for entities and other organizations across the region to take into account the impacts and other changes that will accompany [the introduction of VAT]” says Nauman Ahmed, Partner and Middle East leader at Deloitte.
Even if your business is currently falling below the VAT threshold (AED 375,000), you still need to be tax-aware.
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How is VAT in GCC going to impact different sectors?
The Gulf Tax Treaty specified some sectors that each member state would either declare as zero-rated or exempt from value-added tax in their local laws:
- Local Transport
- Real Estate
However, the new tax law will be applied differently in other sectors:
No essential items – Home Furnishing, Electronics, Textiles etc.
According to GCC agreement, businesses will charge VAT at a standard rate of 5% for transactions involving all non-essential items. For instance, you are selling an item worth AED 3000, the customer will have to pay AED 150 more as a VAT. However, second-hand item vendors are not required by the new law to remit VAT to the authorities.
VAT is likely to have minimal impact on the real estate sector that makes the economic barometer of the GCC countries. Residential property sales would attract minimal VAT while commercial property sales would be required to remit 5% VAT to the tax authorities.
For example, Dubai Land Department (DLD) collects about 4% of each property sale. Experts say that the DLD transfer feels “is already a kind of tax”, implying that “property sales and rental sales [won’t] attract VAT”. However, commercial property leases, offices and probably hospitality units wouldn’t escape VAT.
To cushion themselves from the impact of a VAT, developers will pass the extra charges to tenants in form of increased rental fee.
Most of the countries that have already implemented VAT or GST (Goods and Service Tax) like Singapore, India and United Kingdom don’t charge VAT on air tickets. Similarly, flights from Riyadh to Dubai or any other country within the GCC region will not be subject to VAT, which is good news to tourists who flock to this region. Besides, international transportation (including airlines) will also be zero-rated.
Tobacco, Food, and Beverages
The basic food commodities will not attract VAT. But, beverages and other non-essential food items will be taxed. So, to comply with the new law, you will need to adjust your accounting and reporting systems to include all functionalities of a VAT. That will mean more expenditure to be incurred acquiring new ERP systems.
Besides, the new law imposes 50% selective tax on carbonated drinks and 100% selective tax on energy drinks and tobacco. That amount of taxation will increase the price of the commodities, as a result, leading to reduced demand for the same. In the long run, the highly competitive environment will force some brands out of business.
Technology, Media, and Telecoms (TMT)
All the core activities in TMT sector will be subjected to a standard rate of 5%. That includes software development, a supply of lease line, broadcasting, telecommunication services, advertisements, etc.
However, you are not going to remit VAT in GCC to the authorities if you are exporting electronically supplied services and telecom services to another country, VAT in GCC will be levied by the country where the actual use of these services is. The VAT is the accrued as per Article 20 of the Treaty. That could mean such business may be forced to register for VAT in other GCC states.
Oil and Gas
According to the Gulf state treaty, the supplies of gas and oil will taxable at zero-rates for VAT purposes. What does it mean by zero-rate? It means VAT in GCC will be charged at 0% on the supplies, and VAT incurred you incur with regard to these supplies can be reclaimed in full from the government.
What business functions will be impacted by VAT in GCC?
The impact of the new tax law will be felt across the business functions too, including:
Finance and Accounting
Except for purposes of internal monitoring, businesses across the GCC were previously not mandated to maintain books of accounts. However, the new law will require businesses to maintain accounts regularly. On top that, businesses will also be required to keep a record for, among others:
- The list of all the Invoices with all their details intact.
- All Taxes and Credits availed period wise to authorities for verification.
- Know your customers (KYC) of all the Vendors.
To effectively perform these functions, businesses will be forced to adopt a VAT compatible accounting software that rhymes with their immediate accounting needs.
Procurement and Supply
Trading companies will have to relook at the whole supply chain to determine whether the vendors shall comply with new tax law and whether the credit for supplied items shall be available or not. The tricky part about it is that they need to keep a series of documentation – even if the credit is available to ensure all the details are filled correctly in the books of the taxman.
You can not personally track every transaction for the purposes of the VAT in GCC. Given the volumes of transactions made, your business will need to make a lot of changes to the way the business systems work. That means you have to upgrade your IT systems.
Stressing the importance of giving IT systems a facelift, Hucknall, ME Finance Consulting Partner said that the IT department will be key to “implementing VAT”.
“Among the areas IT department will focus on include tax relevant master data, tax condition rules, invoicing and documentation, intercompany transactions, reporting, maintenance of tax master data and codes”,he added.
Compliance with new tax law has created a huge demand for tax professionals. However, there is still a challenge – bringing qualified accountants and other tax professionals to the fore.
Business will be forced to scout for employees who have “the appropriate skills and knowledge for their roles, through appropriate training and recruitment”.
However, the demand is too high to point that is stretching the capacity of most HR departments leading staffing challenges for agencies.
Businesses are rushing against time to comply with the new tax law in the GCC region. It is not a small undertaking, especially for countries with no prior experience with taxation. And the impacts of the new law on businesses – both economic and cultural – will be felt far-and-wide within the region.