Preparing your enterprise systems for VAT
On 1 January 2018, value-added tax will come into effect for the first time in United Arab Emirates. Naturally, small businesses are concerned about the financial and operational impacts of VAT compliance, especially since they are used to operating in a low-tax business environment.
While there will be implications for systems, infrastructure, skills and training, there are a number of benefits to the new tax system on businesses and the economy.
For decades, the economies of the GCC countries have benefitted from high oil prices. However, a drop-in demand, increased global competition, and a substantial decrease in the price of crude oil per barrel, has forced GCC countries to look for other sources of revenue to diversify their economies and remain globally competitive. VAT is one such revenue source.
VAT is a tax on the consumption of goods and services and has been set at 5% across GCC countries. This rate is among the lowest in the world, with some countries charging VAT of more than 20%.
VAT is levied at each stage of the supply chain, from the manufacturer, to the wholesaler, to the retailer, taxing the value added by businesses at each point in the chain. For example, raw cotton becomes more valuable as it moves along the supply chain to eventually be manufactured into a T-shirt, or the end-product.
Certain sectors will be exempt from paying VAT, such as healthcare, education, certain foods, some type of real estate transactions and local transport, but these may differ between member countries. Export of goods outside the GCC will be zero-rated, which means exporters can claim a tax refund.
“Businesses that need to be VAT compliant should work through a detailed impact assessment with a trusted business partner”
VAT is an efficient and transparent way for governments to increase revenue. The IMF predicts that GCC states can boost GDP by 1.5% with the implementation of VAT. This will help GCC states to diversify their economies away from oil and to continue delivering on their public service mandates.
The important thing to note is that VAT is not a business expense but a cost that is ultimately passed on to the end-consumer when they buy a product. Businesses act as the collection agents, collecting the tax on behalf of the government. In this way, they are helping to make the economy more prosperous and efficient.
However, there will likely be indirect costs associated with becoming compliant, which will affect many areas of your business, including pricing, cashflow, financial reporting, tax accounting, supply chain and compliance processes.
Businesses that need to be VAT compliant should work through a detailed impact assessment with a trusted business partner to guide them through the implementation and operations phases. An effective VAT system relies on shared responsibility between governments, businesses and consumers. The additional revenue will go a long way to maintaining effective public services and positioning GCC countries as globally competitive nations with truly diversified economies.
While it may be daunting initially, preparing your systems for VAT collection and payment to governments need not be a massive or expensive undertaking. More than 150 countries have VAT systems in place – by partnering with a solution provider that has experience in these markets, you will be taking a smart first step to becoming compliant. Malaysia was the most recent nation to implement VAT.
Most businesses by now should be working with a trusted partner to prepare their financial systems for GCC VAT explains Aaron White from Sage.