* GCC nations likely to implement VAT simultaneously on January 1, 2018
* Approximately 100 staple food items will be tax exempt
* Education, social services and healthcare to be zero-rated
The GCC finally approved the value-added tax framework early last month with Bahrain being the last signatory thereto, confirming that the GCC will impose VAT at a rate of five percent on the sale of goods and on services as from January 1, 2018.
The framework agreement on the implementation of the tax in the GCC is expected to be publicly released in six weeks’ to two months’ time. It allows for the implementation throughout the GCC to take place between January 1, 2018, until January 1, 2019. However, it is now expected that the entire GCC is likely to.
The framework also sets out exemptions from the tax. The GCC countries have agreed to approximately 100 staple food items that will be VAT exempt and have agreed to zero-rate certain industries, such as education, social services and health care.
Due to the limited number of exceptions, for which special arrangements are expected, all other goods and services will attract the new tax and all industry sectors will be affected.
According to recent speculation, the original threshold for compulsory registration of AED 3,75 million has been reduced to a mere AED375,000, thus considerably increasing the number of companies affected and imposing VAT compliance liabilities on the majority of businesses throughout the GCC.
The introduction of a value-added tax system in the GCC will not only affect consumers, but will have a broader impact on business in general.
At the moment, it is uncertain exactly which VAT model will be implemented in the UAE and if every GCC country will apply the exact same model. However, it has been speculated that the European model will be applied.
In order to deal with the challenges, businesses in the GCC should evaluate and review their daily business activities, with a focus on the following points.
- Understanding: Understand all of the operational processes and business domains to determine all areas that will be affected.
- Preparation: Formulate an implementation strategy and prepare a checklist.
- IT Systems: Ensure that IT systems are VAT-enabled, including enterprise resource planning (ERP), accounting and point-of-sales systems. The IT systems must be able for complete implementation of all legal regulations in order to comply with the tax requirements in daily business.
- Current accounting: Keep your books in order and make sure they are up to date by January 1, 2018, ready for the change, as the time of supply is critical to your VAT liability.
- VAT accounting: Ensure you have all the correct accounts and VAT codes set up to accommodate the calculation of your responsibility to generate a tax return, which will need to be submitted periodically.
- VAT return: Make sure your incoming and outgoing invoices are VAT compliant, on both the supply and sales fronts.
- Employees: Check that your staff is knowledgeable about VAT and update job descriptions to reflect VAT duties and responsibilities.
- Public officer: Appoint an appropriate person to be the public officer representing the company before the VAT authorities and make sure the person is suitable and prepared for the role.
- VAT guide: Prepare a policy manual for the business, to cover the company’s policy regarding VAT.
- Contracts: Put resources in place to provide for VAT should any contract or project extend into January 2018.
As a general custom around the world, the principles of self-assessment, declaration and payment are expected to be applied in GCC. Companies, as registered VAT vendors, shall be responsible for calculation of the tax payable and execute a payment every three months during a fiscal year. These assessments will be open to regular periodic audit by the tax authorities.
It is expected that the duties and responsibilities of company management will incur certain liabilities, and the consequence of non-compliance, errors and omissions weighs heavily on the company’s managers.
Taking into consideration the abovementioned consequences of non-compliance, the coherent and correct implementation of the VAT process and legally compliant execution on a daily basis is essential for the management of the company in order to avoid future errors and sanctions.
After implementation, value-added tax will affect practically every function within a business and will be applicable on goods and services at each stage of the supply chain. with the ultimate burden being borne by the customer, at least in theory. If not applied correctly, the new tax may become an additional cost to the business, and non-compliance with the tax law will lead to severe penalties.
Therefore, all businesses must undertake and review their current situation in terms of their suppliers and customers and if the former are registered or not. The timely training of employees who will be dealing with the tax issues is just as crucial as ensuring that all systems of the business enable VAT administration.
The implementation of VAT and the management thereof must not be taken lightly by businesses and the engagement of specialised consultants could be crucial to avoid unexpected expenses and as the adage says “prevention is better than cure”. There are several VAT consultancies emerging in the GCC with the associated import of the required skills which are lacking in the current environment and include accounting, legal and specialised VAT and tax consultants that can assist in the implementation process.
It is advisable for all businesses to start the review and preparation process in a timely manner to be able to evaluate their company’s situation and apply the necessary changes – after all, to paraphrase W Edwards Deming: “If you can measure it, you can manage it.”