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| 16 February, 2017

GCC firms may see margins squeezed as a result of VAT costs- Fitch

Image used for illustrative purpose.

Image used for illustrative purpose.

16 February 2017

By Waheed Abbas

Gulf businesses will have to bear additional costs of implementing value-added tax (VAT) when it is introduced next year and some may see their margins squeezed as a result, the Fitch Ratings agency said in a note on Thursday.

“Companies will have to replace or update IT systems, implement new procedures and train staff before VAT is introduced. This will be particularly burdensome as it will add to costs when low oil prices and lacklustre economic growth are weighing on corporate performance, particularly for SMEs (small and medium-sized enterprises). Companies involved in supplying goods and services between GCC (Gulf Cooperation Council) members, or those operating within or between free zones, are likely to face additional complexities, as agreements between individual GCC members could vary,” the agency said.

The Gulf Arab countries have announced a plan to introduce 5 percent VAT across the region from January 1, 2018. Business Monitor International (BMI) earlier forecast that the governments could hike the rate to 10 percent over the period to support fiscal deficit. BMI believes that the introduction of 5 percent VAT will have a minimal impact on the GCC consumers and inflation. (Read more here)   

Zawya earlier this week reported that the UAE government was aiming to implement 5 percent VAT across the board, though parts of seven sectors - education, healthcare, renewable energy, water, space, transport and technology - might get special treatment. (Read full story here)  

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Fitch said that even businesses with VAT-exempt goods and highly competitive sectors could find themselves taking on additional costs, as collecting and remitting VAT to the governments will have notable set-up and compliance costs.

“If the goods or services a company sells are VAT exempt then they (companies) will not be able to reclaim VAT on purchases and will have to bear this cost themselves. So it will be important to know the VAT treatment for sectors like healthcare, and education, which could face profit margin erosion if they are VAT exempt and are unable to increase prices to compensate,” the global ratings agency said in the statement.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, said: “Even with no VAT exemption, highly competitive sectors, or those with thin margins, could face a cash flow burden from having to meet the cost of paying VAT on purchases before it can be reclaimed. Fierce competition in some sectors may also put pressure on companies to cut pre-tax prices and absorb some of the cost themselves. This is most likely in sectors like telecommunications, consultancy and contracting and will vary by country.”

To read the Zawya Special Coverage on VAT in the GCC click here

© Zawya 2017