The upcoming fifth anniversary of VAT being introduced in the GCC (Gulf Cooperation Council) seems an ideal opportunity to look back at the successes and surprises of the last half-decade, as well as consider what the coming years are likely to hold for businesses trading in the region.
What’s the story so far?
In June 2016, all six members of the GCC (Saudi Arabia, UAE, Bahrain, Oman, Kuwait and Qatar) signed a Common VAT Agreement pledging to introduce a 5% VAT on the sale of goods and services.
On 31st December 2017, Saudi Arabia and the UAE became the first two member states to implement VAT regimes.
When I look back at that time, the feeling that springs to mind is ‘tremendous satisfaction’ (amidst a load of stress of course)! So many of us at Innovate Tax were working around the clock to roll out fully automated tax determination for dozens of clients in time for the deadline – which we did, helping businesses in the region to be compliant from the VAT ‘go live’ date.
Have things gone to plan?
Few would disagree that the rollout has been a success. VAT is now in place in four of the six GCC nations and has been responsible for driving a huge increase in government revenues over the last five years.
For example, revenue from taxes on goods and services in Saudi Arabia totalled 232 billion Saudi Arabian Riyals in 2021; up from just 39 billion Riyals in 2017.
The GCC has also transformed the way tax is viewed by regional businesses, as a potential driver towards local economic stability, albeit not exactly embraced with open arms. That said, for many tax remains a burden – not so much in terms of the tax being paid, but in the determination, compliance and reporting of the tax – one which continues to offer challenges even after all this time.
We are starting to see a new culture of tax teams striving for tax compliance as they continue to struggle with poorly set up tax solutions and the lack of visibility in the reporting. Such teams are often still held back by their companies’ reluctance to spend any time or resource in sorting things out, often falling back on the counterintuitive idea that ‘many hands make light work’ by increasing physical peoplepower to help with the unnecessary manual processing of VAT.
The amnesty schemes offered by Saudi Arabia in 2020 and the UAE earlier this year are chief among the examples of how many companies still struggle with tax and how poor their tax data is.
And yet, because VAT touches every part of an organisation where there is a transaction, it involves multiple teams including the tax team, IT and stakeholders across the wider business. As such, we all too often see a lot of push back when we are trying to help our clients enhance their VAT automation. Why? It’s speculation of course, but in order to accept change, first there is a requirement to recognise where mistakes might have been made, an admission you might say. And who wants to ‘fess up?
This barrier is magnified in places like the UAE, where traditionally there is a heavily migrated workforce, and one’s job security and residence in the country could be at risk for not having had all the answers at the very beginning of a nascent VAT regime, and taking that all too undervalued decision to backtrack (which is wisdom, not failure).
I’ll give you an example of what I mean about problematic processes that have the potential to spiral:
I remember one particular project within which VAT was being added at the PO level, something that is not needed unless the VAT is not fully recoverable, and a resource was employed purely to create inventory items for every order – that is, after all, the very reason non-inventory purchase orders were designed.
In the project, there were over 140 different types of printer in the inventory, over 40 types of milk and a Porsche Cayanne plus break pads for the Porsche (presumably from when it went in for a service).
Let’s say it had it taken an average of 5 minutes to create each inventory item: our estimates suggest that it would’ve needed 9 years to have created all the items! This may not have been the case where the VAT was a challenge, but by implementing VAT it highlighted many areas of poor processes that ultimately were using a resource that did not need to be there.
With the introduction of corporation tax, will we see yet another level of turmoil? Will existing structures need to be re-engineered to effectively report the corporate tax, or have companies learned from the time implementing VAT?
But that’s not to say the arrival of VAT in the GCC and the complexities are all on the taxpayer. Indeed, there have been a handful of surprises, some of which remain unresolved today, including:
1) Discrepancies in approaches to enforcement
ZATCA (Zakat, Tax and Customs Authority), the Saudi tax authority, has to date proven to be the most rigorous in the region when it comes to auditing businesses and engaging in disputes when it believes mistakes or fraud have been committed.
It is followed by the UAE, which has imposed a rules and process-based approach to managing VAT compliance. Auditors in the country even give taxpayers a chance to voluntarily disclose their liabilities before closing an audit, which has proved to be a novel – and popular – scheme.
However, our friends at Aurifer, the Middle East’s leading tax advisory, recently told how Bahraini and Omani tax authorities have taken a more relaxed approach to VAT auditing and disputes; underlining the inconsistencies that still exist five years on from the first GCC implementation. Although, it must be noted that Bahrain did not introduce its VAT regime until 1st January 2019, while Oman was even later on 16th April 2021.
And are the tax authorities ever wrong? Well, yes of course they are, but trying to prove that may be a challenge. Recently, a friend of mine had a simple response to his request to challenge a decision by GAZT (General Authority of Zakat and Tax): ‘GAZT is correct’. I suppose with a response like that, how can you challenge it?
2) The reluctance of Qatar and Kuwait
Perhaps the greatest failure of GCC VAT over the last five years has been the fact two members of the six-nation bloc have still yet to introduce the tax.
Despite the original agreement stipulating that all six countries would move together towards introducing VAT, Kuwait and Qatar have not done so at the time of writing.
What’s more, neither are currently showing any clear intention to do so. Speculation persists in Qatar that VAT could come after this winter’s World Cup in the country, while VAT in Kuwait is seen as unlikely right now.
Introducing VAT in all six nations almost simultaneously was designed to ensure businesses could not engage in arbitrage or even fraud. It remains to be seen how Saudi Arabia, the UAE, Oman and Bahrain will respond if the tax remains off the table with their two key neighbours.
3) Broken promises on rates
Article 25 of the GCC VAT Agreement stated that all nations would implement VAT with a standard rate of 5%.
All four countries that have introduced the tax initially did just that, but on 1st July 2020 Saudi Arabia became the first country to break ranks by hiking its standard rate to 15%. Bahrain later followed suit by increasing its standard rate to 10% on 1st January 2022.
Further increases or decreases could be made in the coming years. Indeed, Saudi Arabia has already intimated its desire to lower its standard rate again once the effects of the pandemic are overcome.
But back in 2017, we could never have foreseen two of the four GCC VAT regimes having upset the status quo in the first five years.
But this pales in comparison to some other countries with many Scandinavian countries having VAT at 25% and Hungary breaking the rules by pushing it to 27%! But raising VAT is not popular so what we are seeing more of is the strictness of the tax authorities in making sure you are compliant and then fining when you are found to be at fault. So if you can’t raise the tax rate then make sure you get all the tax owed to you and fine those that are not compliant. And we are not surprised at how many companies do get fined because many are still not using VAT automation.
What do we predict for the next five years?
As we’ve already discussed, there have been some major changes to VAT in the GCC in its first five years. We can therefore be confident that many more twists and turns will come in the next five years as VAT in the region continues to mature.
We think these are three key areas to watch out for:
1) The rise of Electronic invoicing - widely referred to as e-invoicing - is the exchange of a digital document between a supplier and a buyer. E-invoices are issued, transmitted and received in a structured data format that enabled automatic and electronic processing. They contain data in a machine-readable format so that an AP system can read an invoice without manual data entry, leading to faster and more efficient invoicing.
Saudi Arabia has led the way when it comes to Electronic invoicing - widely referred to as e-invoicing - is the exchange of a digital document between a supplier and a buyer. E-invoices are issued, transmitted and received in a structured data format that enabled automatic and electronic processing. They contain data in a machine-readable format so that an AP system can read an invoice without manual data entry, leading to faster and more efficient invoicing. so far by making it mandatory for businesses operating in the country. There have been hints from the UAE and Bahrain that they could follow suit and we expect this to materialise within the next five years. Hopefully though we will see one of the countries to take the bold step of allowing not only the uploading of invoices to the tax authority but also to be able to download them too. Imagine a situation where you only have one source to import all your AP invoices, all accurate, all approved by the tax authority. This would be a huge step to eliminating VAT fraud including the carrousel fraud and eliminate the need for invoice scanning because everything will already be available in the right format.
2) Real-time reporting
While no GCC nations have yet confirmed they will adopt real-time reporting, we think it is inevitable that one or more will soon do so. Real-time reporting benefits both businesses (by allowing them complete visibility of crucial tax data and the chance to resolve errors before any deadlines for VAT returns) and the authorities (by increasing compliance and therefore ensuring a vast upturn in the amounts of VAT due that are paid).
Saudi Arabia is perhaps closest to introducing real-time reporting as from 2023 ZATCA will have enforce the arrival of Phase 2 of its VAT plan and will enjoy unprecedented access to transactional data. Unfortunately though, with so many companies still having to make VAT adjustments that they have not digitally linked back to the source, the live reporting is going to be a huge burden for most companies because its ultimately going to expose the heart of the business to the scrutiny of the tax authorities and it won’t be a person doing the audit but rather the software so no stone will go unturned.
3) At least one new VAT regime
As we’ve mentioned, Qatar and Kuwait have so far been reluctant to follow through on their pledges to introduce VAT. But with each of their four fellow GCC members enjoying new riches in the form of VAT receipts and, not to mention, a pandemic to pay for we believe at least one more new VAT regime will be up and running by 2027.
4) New job, new mess!
Already we are seeing there is a trickle of tax managers taking new posts in other companies, only to turn up on day one to find a complete tangle and mess left by their predecessor. Call it confirmation bias if you like, but the commentary is always the same: inheriting a poor tax determination solution that cannot provide the transparency and clarity of tax data needed to not only submit the VAT returns, but also to be able to reconcile that the tax determined is actually correct.
We will also start to see the replacement of poor software solutions claiming to offer VAT compliance but are ultimately hatchet jobs of converting a tax solution for one country to work in the GCC. We often conduct system tax reviews where we go through your applications, interfaces, processes and people so identify how well your tax technology is set up, making recommendations but also highlighting any risks to the business and what can be done about it.
Usually, we will only identify a couple of actual risks (and rarely more than 3) but with one VAT compliance application used by most of the banks in the region, I had to raise over 30 risks! Hopefully with new blood taking up the reigns of a tax department, we may be able to start to replace the poor decisions made 5 years ago because your predecessor had no idea what they were buying and were led by the charms of the salesperson (easily done, after all, this was all new at the time).
5) Corporate tax
The UAE will introduce Corporation Tax shortly and companies should be looking now at checking if their systems are fit for purpose to meet the new requirements. If it is anything like VAT, most won’t be 100% ready and so we urge those companies to start looking at what is needed now rather than the 4 weeks before you have to go live – as 80% of you will no doubt be doing. But good VAT automation and compliance is a great start to ensure your transactional data is properly recorded, which is also the data used by the corporate tax team.
If your business is trading in Qatar or Kuwait – or, indeed, any of the GCC nations – and requires specialist tax advice we recommend enlisting the services of Aurifer, if you want to make your tax data compliant, then contact us, Innovate Tax.