VAT in the GCC: A post-Covid warning for tax professionals

It’s just over two-and-a-half years since VAT was embraced by the early adopting countries in the Gulf Cooperation Council (GCC).

To date, considering the enormity of the task, it’s fair to say significant progress has been made and three nations (Saudi Arabia, Bahrain and the UAE) have implemented a functional VAT system that has helped to drive government revenue.

However, in these uncertain times, I believe the landscape is changing rapidly and a series of macro-environmental factors will combine to impose lasting changes on the way VAT is handled across the region.

Tax professionals can’t afford to ignore those factors any longer, including:

  • Economic woes

It’s no secret almost every country in the world is suffering economically as they respond to Covid-19. The IMF predicts real GDP in the Middle East and central Asia will fall by 4.7% in 2020.

  • Decreasing reliance on oil

Several GCC countries have expressed a desire to reduce their reliance on oil to power their economies. Saudi Arabia believes it is tourism, rather than oil, that will drive its fiscal recovery from Covid-19.

  • Creaking tax infrastructure

From experience, I know of many businesses in the GCC that have not implemented either the systems or people required to effectively manage VAT processes – and we’re close to breaking point.

What does the future hold?

As the GCC grapples with the impact of Covid-19, VAT has become more important than ever before, generating crucial revenue for states that have seen the price of oil plummet.

To survive, the Middle East will have to change – and I predict VAT will soon become the ultimate priority for governments in the region.

Tax professionals must be prepared for GCC governments becoming much stricter in setting and enforcing VAT regulations.

It’s also likely that disparity in VAT rates between countries within the GCC will widen. After the expiry of a collective agreement to hold the rate at 5% until 30th June 2020, Saudi Arabia responded by increasing its rate to 15% the very next day.

What does this mean for businesses?

I’ve always thought of the GCC as being like a mini-European Union (EU). Of course, when it comes to VAT the EU has had almost 50 years’ experience, meaning its processes are pretty much watertight and member nations trade with relative ease.

I’m certain the six nations of the GCC – including Oman, Qatar and Kuwait which do not currently impose VAT on goods and services – will eventually harmonise and a similarly progressive and mutually beneficial system will be found.

But for now, those factors I mentioned earlier create a considerable challenge for businesses and their tax teams. In all likelihood, fines and other penalties dished out to businesses will increase in the next 12-18 months.

Even putting to one side the varying degrees of success businesses in the GCC have had in implementing VAT over the last 33 months, rates that differ between member nations are likely to trigger a raft of new challenges, including:

  • A potential impact on the entire VAT system life cycle. The change in Saudi Arabia’s VAT rate means a change in tax master data, which in turn affects materials, customers, supplies and other fields. It’s easy to see how workflows – if handled manually – can quickly spiral into immense levels of complexity.
  • As with any tax process, it’s crucial that businesses are able to validate their results are correct. Again, this is a laborious and difficult task without technology. And in cases where multiple financial systems are used, there is even more scope for inaccuracies.
  • For VAT to be determined accurately across all financial processes, thorough testing of each workflow must take place.

With VAT entering an unprecedented period of change in the Middle East, companies must remain on red alert; one mistake or act of non-compliance could result in a penalty running into hundreds of thousands of dollars.

What can businesses do?

With businesses set to be put under increasing scrutiny to ensure VAT is accurately calculated, collected and paid to the government, investing in a fully automated tax technology solution is the only sure-fire way to guarantee 100% compliance.

My advice to companies based in and operating within GCC countries is to invest in systems and solutions that provide local tax logic for every country, region or state; ensuring compliance with all relevant taxes, codes, rates and regulations.

As we’ve already seen in Saudi Arabia, rate changes can be unpredictable and without warning. This creates a complex set of issues for tax professionals working in a bloc, such as the GCC or the EU.

A quality automated solution should also offer the flexibility to instantly adopt new rates, making it significantly more efficient than completing the same process manually or via a third-party consultant.

In the post-Covid world, relying on failsafe technology is the only way to enjoy ultimate peace of mind.

For more information on how Innovate Tax can implement a bespoke tax solution to ensure compliance for your business, contact us.

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