The introduction of five per cent VAT across the GCC by January 2018 will lead to a fundamental change in the way businesses operate and will impact most consumer sectors, including real estate, retail, luxury, telecom and IT, tax experts said.
Since five per cent VAT is modest by global standards, its impact will not be severe given that vital household expenditure items are exempted from its ambit, experts said. In the UAE, the exempted items include 100 types of staple food and other essential service sectors such as healthcare and education. As VAT does not exceed the rate of five per cent, commodity price levels will not increase substantially.
As VAT is not a tax on sales but a tax on consumption, it sticks with the final consumer. VAT is passed on through the supply chain until it reaches the consumer. Hence, most businesses can maintain tax neutrality, and become tax collectors for the government, experts said.
Analysts at Deloitte said one of the main concerns surrounding VAT is in its application to the property development and construction industry.
“This is because the range of transactions underpinning the planning, construction and sale of commercial or residential real estate is varied and often highly complex which creates the need for an extensive suite of bespoke VAT rules to cope with these challenges. The construction and real estate sectors are complex from a VAT perspective and this carries significant VAT risks, especially in respect of long-term contracts and, therefore, businesses are well advised to consider the impact of VAT as soon as possible,” said Nurena Tarafder, Deloitte Middle East real estate and construction industry VAT leader.
Commercial risks are the most significant of the challenges listed in the paper that need to be addressed, including lead times on major projects and registration of sub-contractors.
Real estate sale and lease of commercial property is likely to be treated as taxable as opposed to the sale and lease of residential property which is likely to be exempt.
In the tourism industry, the impact of VAT will be wide-ranging, said Deloitte analysts. There are very many distinct functions that are loosely categorised as part of the tourism industry, including airlines, travel agents, tour operators, accommodation and other local service providers. Each of these will be affected in one way or another by the application of VAT within the GCC.
“Businesses in the tourism sector are likely to find the impact of VAT wide-ranging and may find themselves with multiple VAT registration obligations and significant compliance requirements as a result,” according to Bruce Hamilton, Deloitte Middle East Consumer Business Industry VAT leader.
VAT will also have an effect on the buying power of tourists as they will have to pay duty tax again on certain goods in their country of origin.
In the oil and gas industry, many experts anticipate that there may be a VAT relief in some form – but even if this is the case, VAT is still anticipated to have an impact on all businesses. “Oil and gas companies will find VAT a significant planning and process issue but, in particular, being a capital-intensive industry, they need to think carefully about working capital issues and how long refunds of input VAT credits are likely to take,” according to Matthew B. Parkes, Deloitte oil and gas expert.
In the financial services sector, there will generally be a number of VAT exemptions that apply, especially to Islamic financing and insurance services, leading to complex classification issues, as well as the need for flexible systems and processes for managing implementation and ongoing compliance.
Key issues include decisions as to whether VAT costs will be borne by financial institutions or passed on to customers; the correct VAT treatment assigned to services provided by financial institutions, namely exempt or taxable, and the correct allocation and attribution of costs and input tax credit claims, including VAT on reverse charge and determining recoverable and irrecoverable VAT.Experts pointed out that the VAT position of free zones gives rise to a range of complex questions in terms of implementation. Issues to be considered include the VAT classification and treatment of goods and services obtained inside the free zone, brought from outside the free zone and from overseas; the VAT treatment of supplies from one free zone to another and the VAT treatment of entities operating in free zones.
The industrial products sector players face similar challenges and, therefore, ensuring efficiency of VAT implementation and addressing cash flow implications will be priorities for this sector. In particular, consideration should be given to the pricing impact on the end consumer; cash flow efficiencies; cross-border transactions within the GCC and the associated reporting and documentation requirements.
PwC experts said an inherent feature of telecommunication providers is that they provide services to individual and business customers who may reside within the GCC but who are also mobile and may move outside the GCC from time to time.
In the UAE, where VAT will bring more people in the tax bracket, a five per cent tax would generate additional revenue equivalent to about 1.5 per cent of the country’s gross domestic product. According to Alp Eke, senior economist at the National Bank of Abu Dhabi, given that the UAE economy is forecast to grow to $440 billion in 2019, the VAT contribution would be approximately $6.5 billion.
In the UAE, VAT is expected to generate around Dh10 billion to Dh12 billion in additional revenues in the first year of implementation, or about 1.5 to two per cent of GDP.
Key considerations when embarking upon a VAT implementation project are:
> Competition for resources within the business, as the VAT implementation project may coincide with other transformation projects planned for the business.
> The availability of internal resources such as project managers, business analysts, IT and others needs to be evaluated early.
> An early assessment of the requirement and availability to leverage external resources (such as VAT specialists, IT systems and business analysts as well as project management consultants).
> An early assessment of any impact the introduction of VAT may have on your cross-border transactions and GCC trade as well as any impact on pricing, customers, vendors, intermediaries, capital expenditure planning and your supply chain.