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Feature
VAT alert After many years of discussion, leaders of the GCC have reached a verdict to finally implement value-added tax (VAT) in the region. Vijay Anand, Partner and CEO, HLB Hamt, discusses the possible impact of the new tax system to businesses in the region.
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The introduction of VAT signifies a major economic reform for the Gulf states, which has maintained high social spending and nearly no taxation subsequent to recent global financial crisis. Moreover, with the prevalence of the travel and tourism sector in these countries, officials believe that VAT will have to be imposed to avoid streamlining of untaxed goods across borders that could cost governments billions of dollars. In the UAE, HE Humaid Obaid Al Tayer, UAE Minister of State, Financial
Affairs, has confirmed a few details about the impending implementation of the VAT during an event it hosted together with the International Monetary Fund (IMF) earlier this year. “A VAT framework with a rate of five percent has been agreed by GCC states. Other aspects of the taxation structure will be formalised by June this year,” he said. “The UAE is planning to implement on 1st January 2018 and other GCC countries may do so at the same time or by 1st January 2019 at the latest.” According to the UAE Ministry of Finance, the implementation of VAT in the UAE is expected to bring estimated revenues of between AED 10 billion and AED 12 billion during the first year of its application. That tax will not be levied on spending on education, healthcare, social services sectors and a range of food items. What does this mean for businesses? Christine Lagarde, Managing Director, International Monetary Fund (IMF), during the Arab Fiscal Forum held in February, highlighted that the introduction of the tax system will shore up GCC economies. She pointed out that taxes are ‘the lifeblood of modern states,’ and the taxes will provide
more revenues for governments to create much-needed funds for spending on infrastructure, healthcare and education. However, as with any new policy being introduced, the initial stage of the tax system’s implementation can be challenging for many businesses as it will definitely be a big transition for them. Firms will have to re-evaluate their own policies and business models, and adjust it to accommodate the tax structure which will impact their profit margins. “VAT implementation will be a major business issue and businesses would be well advised to consider the impact it may have on short to medium term business plans. Moreover, they need to consider pricing and working capital issues,” said Justin Whitehouse, Indirect tax leader, Deloitte Middle East in a report. VAT will have an impact on nearly every aspect of a business, from information technology to human resources, procurement, finance and marketing. In an article published in The CFO Middle East, Sherif El-Kilany, MENA Tax Leader, EY, said, “The tax cost impact to most trading operating companies is likely to be minimal. However, business leaders need to