Dubai: The implementation of value-added tax (VAT) could pose some operational issues to businesses in the Gulf Cooperation Council (GCC) region, especially if they have not taken any action to prepare for the new system, according to industry experts.
Those that are most likely to encounter challenges are small and medium enterprises (SMEs) and other organisations that don’t maintain proper books of accounts. Concerns have also been raised with regards to the timeframe for which corporates need to become VAT-compliant.
It was earlier announced that VAT will be implemented in the UAE from 1st of January 2018. A 5 per cent tax is said to apply to the “majority” of payment transactions, although a legislation detailing which goods and services will be levied with tax has yet to be released.
Rakesh Pardasani, partner at financial consultancy firm RSM UAE , said that based on their experience with companies in the region and given the lack of tax culture in the market, a lot of business owners might need more time to prepare for VAT.
Prior to the rollout, entrepreneurs should ideally be able to understand the potential impact of the new levy on their products and services, including margins and cash flows; train staff, replace or update IT systems or streamline processes and accounting records.
However, since the VAT law is not out yet, Pardasani said there is not much businesses can do to prepare. "[They don't know yet] whether their products and services will be taxable or exempt. Once the VAT law is issued, [business owners] will have to study the impact and then make changes to their processes in order to ensure proper compliance,” said Pardasani.
“If this involves changing their ERP [enterprise resource planning] systems, this might be challenging because of the limited time available given that VAT is expected to be implemented with effect from 1st January 2018,” he added.
“Companies will need much longer to study the law, examine the impact of VAT on their operations and modifying their IT systems and business processes.”
Fitch Ratings Agency also raised a similar concern, citing that the go-live date would create a very tight timetable. “This will introduce greater uncertainty and operational challenges for GCC corporates. However, we expect GCC governments to recognise these challenges and show a degree of flexibility during the initial implementation,” Fitch said.
In the meantime, businesses should start looking at their commercial contracts.[They should] ensure that in all contracts they enter into, they include a clause which ensures that the burden of VAT can be passed on to the customer, as and when VAT is levied," said Pardasani.
Other experts had earlier advised that businesses should start preparing even without the new tax framework in place, to ensure a smooth transition.
The UAE’s Ministry of Finance, however, assured that it will provide businesses with guidance on how to fully comply with VAT once the legislation is issued.
“Businesses could start now so that they will be ready later,” the Ministry of Finance said on its website. “It is essential that businesses try to understand the implications of VAT now and once the legislation is issued, make every effort to align their business model to government reporting and compliance requirements.”
Another issue that could pose some challenges is the lack of proper books of accounts in many companies. “Given our experience with a large number of businesses here, they do not even maintain proper books of accounts till the time they need an audit report,” explained Pardasani.
“[Another thing], a tax regime wherein companies have to file regular tax returns means that companies have to keep their accounts updated at least every quarter. We have experienced from a number of our SME clients that they do not maintain records and close accounts [every month or quarter]. They wait for the year to end and then close their accounts.”
The Ministry of Finance, however, said that at least in the UAE, certain businesses – including those that only provide goods and services that are VAT exempt- are not required to register with the government for VAT.
“Many small businesses will not need to register for VAT. We have made this decision to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires.”