"Its ramifications on business and the economy, A Pro-active Approach"

Economic Backdrop: GCC Value added tax (VAT), a popular topic of discussion across the globe where companies and investors are 'eyeing' the region with great anticipation, interest and promise A low 5% unified rate will be introduced in the UAE (and across GCC) with some exemptions. Consumer's spending on essential food items, education, health sector is expected to be zero rated or may fall in the ''exempted'' category.

Economic Benefits: Besides additional revenue generation, introduction of a simple unified VAT framework is also expected to promote trade within GCC resulting to overall growth in the business environment despite political challenges. This will help in continued infrastructure spending on social sectors like education, healthcare and housing.

Cash management

Most businesses are expected to have more VAT payables (Output VAT) than VAT receivables (Input VAT). If the frequency of VAT payments and filing will be the same, businesses will be expected to remit to the tax authority every quarter the difference between the collected Output VAT and the paid Input VAT.

For VAT-registered businesses it is therefore crucial to ensure that they have sufficient funds to fulfil their tax obligations.

Cash management would be complex for groups with multiple entities that have no clear separation and maintenance of their tax accounts.

What lies Ahead:

  • Legislation is not in place yet leading to continued uncertainty about its coverage, implications, exemptions.
  • Businesses will most likely have around 6-9 months to understand, implement and comply with VAT legislation.
  • Most of the businesses are unequipped and are yet to prepare for the implications of VAT. Most are awaiting country specific guidelines prior to taking any action; and are hoping that the implementation deadlines will be extended or delayed.
  • Small businesses are likely to be majorly impacted if the revenue threshold of US$ 1,000,000 is reduced in the final framework agreement as currently being speculated.
  • Most small businesses, traders, shops, groceries in the region do not maintain proper accounting records resulting to major compliance challenges.

What can be done in the interim?

  • Businesses must prepare proper books of accounts, which is a good omen for the authorities, auditors, consultants and IT vendors.
  • Many other preparatory steps can be initiated in key areas of business such as contracts, procurement, logistics, finance, legal and commercial structures, technology and human resources.
  • Long-term contracts must take into consideration the effect of VAT
  • As per recent reports, businesses will be given three months prior to start date of 2018 to start registering under the new VAT system which will require updates to worksystems, human resource training and cash flow management.

Implications on non-compliance:

Important areas can be completely overlooked, thereby inviting losses for missed Input VAT credits, fine and penalties Companies should be aware of the risks and costs associated with the VAT implementation to its business and accordingly strategise for it in a planned manner.

It would be in the interest of the businesses to be proactive and stay 'ahead of the curve'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.