The Cooperation Council for the Arab States of the Gulf, also known as the Gulf Cooperation Council or GCC, is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except for Iraq. Its member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The GCC’s Charter was signed on 25 May 1981, formally establishing the institution (Source: Wikipedia).
The GCC recently released a VAT Framework Agreement, which essentially states that starting in 2018, all GCC members will start charging 5% VAT (one of the lowest rates in the world) on all goods and services across the region. Some exceptions apply, such as basic food supplies, certain medications and medical services, educational services and others.
The new VAT framework requires:
- Mandatory VAT registration for all enterprises exceeding the registration threshold
- Filing of monthly/quarterly VAT returns with the tax authorities
- Payment of any VAT due by a specified date
- Transactional record keeping, including invoices, debit or credit notes, import and export records, records of zero rated or VAT exempt supplies and purchases, and records of goods/services provided for free or for private use.
While the new GCC VAT goes live in 2018, countries will have until January 1, 2019 to implement the tax.
Each Member State to Establish National Legislation
The Kingdom of Saudi Arabia is the first GCC member state to publish its domestic VAT legislation, and the United Arab Emirates (UAE) are expected to finalize their legislation shortly. Other member states are either in the process or are in the preparatory stages, but are expected to publish their specific rules and regulations in the later part of 2017. This staggered implementation will complicate cross-GCC transactions and is likely to drive higher administrative costs as well.
In addition, implementation will be even more complex as the new VAT laws will differ from one member state to the next. For example, according to Saudi Arabia’s General Authority for Zakat and Tax (GAZT), all businesses with annual sales revenues of VAT taxable goods and services of 375,000 SAR (Saudi Arabian Riyal) or above will be required to register for VAT with the GAZT. Businesses with revenues below that threshold, but above 187,500 SAR annually can choose to register for VAT voluntarily. The UAE legislation does not differentiate between revenue thresholds. Also, while the UAE specifies additional zero rated supplies beyond those mentioned in the Agreement, the Saudi legislation does not, simplifying the Saudi VAT system as there are less exceptions to the general rules.
Businesses Must Prepare for This VAT Change
All businesses operating in the GCC region need to take immediate steps to become compliant with the respective GCC member states’ VAT laws. Companies must be proactive in updating their accounting and business practices, and modernize their record-keeping processes in advance of the upcoming VAT collection and reporting requirements. Significant technology, platform and systems changes may be required to ensure workflows and processes can support the new VAT legislation, including point-of-sale (POS) terminals, invoice and accounting systems, IT systems and management reporting systems. Businesses should not underestimate the complexities involved in introducing and integrating a whole new tax system, and business owners must plan accordingly.
According to Finbarr Sexton, indirect tax leader for the Middle East and North Africa at Ernst & Young, “If VAT is not applied correctly, it may become an additional cost to the business. Further, non-compliance with tax laws attracts severe penalties. All businesses must undertake a review of their current contracts to determine if VAT has been appropriately addressed.”
The bottom line according to Sexton, “Businesses and merchants will need to incorporate VAT into their accounting systems and will need to keep accurate records to demonstrate to the tax authority that they have correctly applied the VAT rules. IT systems will form an important part of this process and in larger organizations, a fully automated tax engine will likely be a necessity.”
Ten Steps to Take Today
- Map all business processes and transactions to identify which systems will be impacted.
- Ensure Enterprise Resource Planning (ERP) systems reflect all relevant VAT processes.
- Institute integrity checks at key transaction points.
- Build in accuracy tests between different enterprise systems.
- Commence cash flow monitoring activities.
- Implement data and analytics tools to monitor VAT applications.
- Set up forensic and fraud checks.
- Compile and store data for audit trail purposes.
- Determine appropriate governance and compliance controls.
- Ensure all relevant employees are aware of the new legislation and its impact.
Partner With VATBox
If you have business operations in the GCC and need help preparing for the upcoming VAT implementation, or would like to learn more about automating your VAT processes, VATBox can help. VATBox’s automated technology has helped businesses around the world improve their VAT recovery rate. VATBox’s technology provides complete transparency to the VAT recovery process and always stay up to date on the latest technology and regulation changes. VATBox can help ensure that your company is always in compliance with the latest VAT laws and always has access to the most current VAT-related information. Request a free demo here.