The economic developments of the past years have narrowed the action radius for the governments of the Gulf Cooperation Council (GCC). Striving to adapt to new economic reality, all governments have agreed to introduce the Value Added Tax (VAT) at different paces. These reforms are expected to be introduced in January 2018 in the United Arab Emirates (UAE) and one year later for some other member countries. This article shows why it is important for local businesses to be aware of the challenges that this reform brings on the way they will conduct business.
Many accounting and auditing firms that are active in the UAE have focused on the skills needed for accountants to “do the taxes”. Others have also highlighted what solutions are needed to merely complete the process. Yet no words have been spent to shed light on the largest gap that small and medium enterprises will face when implementing taxes: The organizational awareness. Firms that are founded in jurisdictions with a long-standing tax tradition grow with the tax practice: the awareness of integrating the process as a normal operational process. The capabilities from staff members and the solutions per se must be coordinated by an approach at the organization level.
Businesses across the GCC are feeling the same constraints that their governments felt a couple of months back: they are short of cash. Although many businesses have a secure asset position, the liquidity of these assets is just as important as having them when it comes to making business. The cycle of having to pay taxes and receive tax returns from the central government will put pressure on every single business that is already experiencing a cash shortage. Taxes are paid as soon as any good or service is purchased from outside the company. The cash will eventually return as reimbursement on a regular basis.
This means that even though the extra burden will lastly be paid by the customer, businesses will have to make more cash available to fill the payment needs while the central government makes the reimbursement. Having cash available instead of receivables will add to the overall costs of capital.
As businesses will want to be reimbursed on the taxes they paid on goods and services that were used to produce something of greater value, government agencies will gain unprecedented access to business transactions from private organizations. Although common in other geographies, this practice will be unprecedented across the GCC. Business will have to be aware of how to report certain expenses and how to shape their transactions in order to keep the reimbursement process running smoothly.
Further compliance issues are also important, and management will need to make every procurement and business development officer aware of the risks involved in every business transaction from a reporting point of view.
In fact, the risk of reporting comes in two different shapes: not only will management have to explain why certain expenses are necessary for their specific business activity. Many will have to formalize transactions across the value chain in order to benefit from tax reimbursement and avoid other complications.
The following are the necessary steps to set up a business VAT system:
Every business that exceeds a turnover amount that will be determined in the future will need to register. The registration period will start three months before the tax is implemented. The current threshold is 375,000 AED per year of revenue.
It is expected that return filings will be made on a monthly, quarterly or annual basis. Every business has different cash needs and should be advised on which policy will benefit its operations.
In order for the Ministry of Finance to be able to reimburse businesses properly, claims should be filed in compliance with all rules and regulations. Failure to comply will result not only in businesses missing their reimbursement, but also incurring in penalties and fines.
It will not be enough just to hire accountants with VAT experience and buy software packages that cater to VAT filings. Many accountants are not familiar with the specific regulations requirements within the GCC. Many managers are also not fully aware of the cash flow pressure that VAT will generate, in addition to the new access from the government to information on transactions and compliance risks.