David Stevens and Ismael Hajjar Image Credit: Supplied

Dubai: Family businesses across the GCC are likely to face tax compliance challenges as Value Added Tax (VAT) is being introduced in the region starting with the UAE and Saudi Arabia from January 1, 2018.

The challenges faced by the regional family owned businesses are likely to go beyond the conventional dilemma of whether to pass the VAT costs on to the customer or bear the increased costs in order to preserve their market share, according to a recent discussion paper by EY and Thomson Reuters.

Lack of clear segregation between family private wealth and the family business in the region is expected to result in management and ownership, and business and personal finances, being intermingled. In practice, it is often the case that a family patriarch is the personal owner of the office building and/or family members own various commercial properties managed and used by the family businesses. This legal separation of property ownership versus use means that in order to be able to recover VAT, the family member will need to personally register for VAT, issue VAT invoices and account for VAT (often at an arm’s length basis) for the family business.

“To ensure VAT readiness, family-run businesses in the GCC need to conduct a comprehensive VAT impact assessment of the operations, goods and service flows, identifying and segregating business and family related expenses, and defining the scope of the required VAT and organisational structure and resources,” said David Stevens, GCC VAT Implementation Partner, EY.

The VAT treatment of the family office would need to be determined together with the VAT exposure, which would depend on the type of transactions entered into and its duties and responsibilities. For instance, investment management of family assets, wealth management at the family level as well as services rendered for individual family members.

“It is vital for family businesses operating in the GCC to raise awareness across the entire organisation, educating all employees about the implications of VAT and potential penalties in the case of non-compliance,” said Stevens.

According to experts, the overall lack of a clear dividing line between the family and the business could complicate tax related to business and family expenses due to mixed family and business bank accounts; obtaining VAT refunds on expenses which cannot be directly traced to business operations; claiming VAT credits due to the lack of supporting documentation, i.e. evidencing the acquisition of the goods and services for business use rather than for the benefit of the family members and deemed VAT payable on company property or services are used for personal/family purposes.

“This is an ideal time for GCC family businesses to reconsider their approach to ownership structures and family governance along with conducting VAT assessment analyses. In fact, reviewing the legal structures and considering efficient tools to streamline the family wealth with business investments are important prerequisites for a successful VAT implementation. Ignoring such measures may result in significant costs and inefficiencies,” said Esmael Hajjar, MENA Private Client Services Leader, EY

Analysts say some issues related to the introduction of VAT would be common for most businesses operating in the GCC, including family businesses. For instance, the working capital issue related to the fact that most GCC businesses often operate on long payment terms (exceeding 6 months, even when contracted for only 60 days) means that in case of any delayed receipt of payments by suppliers, businesses will be financing the VAT to the government even when not actually received from the customers.