Gulf Cooperation Council (GCC) states could see higher rates of value-added tax (VAT) in the future, with the current five percent rate applied in the United Arab Emirates (UAE) and Saudi Arabia seen as a ‘starting point’, according to one UAE banking executive.

Pointing out that he was speaking in a personal capacity rather than for his employer, Emirates NBD, the bank’s group financial controller, Asim Rashid, said: “My personal view is that five percent is a starting point. The governance and administration of VAT is not cheap.

“In the UK the rate is 20 percent, but the revenue to the government is around 11 percent, so nine percent roughly is the cost of administration of this framework. I don’t know whether [the VAT rate in the GCC] will change, but I think we will expect some changes moving forward in time.”

Opening a panel session at the 10th MENA CFO conference event, held at Dubai’s Conrad hotel on Monday, Lindsay DeGouve De Nuncques, the Association of Chartered Certified Accountants’ head of Middle East, told delegates that the implementation of VAT in the UAE and Saudi Arabia was the first time many organisations in the two states had operated in a taxed environment.

“Not being able to comply can expose organisations to financial penalties,” she said. “Penalties can be between five and 25 percent of the tax value in Saudi Arabia, 1,000 dirhams (UAE) for a first offence in the UAE, up to 50,000 dirhams for repeat failures to maintain records and tax-related information.

“Being compliant is a financial imperative,” she added, with 3,000 VAT violations in Saudi Arabia in January and February alone, but no information yet published on the number of violations in the UAE.

While it had been expected that the six Gulf states would implement VAT in January 2018, only Saudi Arabia and the UAE did so. Bahrain and Oman are expected to follow suit next year, but Kuwait has postponed VAT implementation until 2021.

“The landscape we were expecting before VAT is quite different from where we are now,” said De Nuncques.

For Emirates NBD’s Rashid, the implementation had been ‘a roller coaster’ but also ‘a good journey’.

“We filed two returns, one in April and July and we are due a third. Banking implementation is different somehow from manufacturing, for example, or trade, because the products are different, the VATability of the products are different.”

He said 80 percent of banking products are not VATable [subject to VAT], and the challenge for banks had been to identify which products which were subject to it, then to configure systems to capture, record and report the tax in a way the complies with the Federal Tax Authority’s requirements.

The week leading up to implementation had also brought a surprise for banks, he said, when the UAE Central Bank issued a circular instructing banks not to pass VAT on to their customers.

“It was Thursday, the Central Bank was off on Sunday. Imagine a situation where the banks had configured their systems in one way, and the instructions were to move it to another way. That weekend was a terrible weekend,” said Rashid, adding that it resulted in an emergency meeting of the UAE Federal Banks Committee. 

A show of hands at the session on the aftermath of VAT Implementation suggested that around half of the organisations present had already filed VAT returns, with Rashid advising those yet to do so that it was important to plan in advance in order to understand the products that are subject to VAT and those that aren’t, to make sure their implementation is compliant. 

“To me, the risk of VAT leakage is more than the risk of liquidity crunch. In liquidity crunch, you can get some sort of funding, but to me the major risk is that you configure something, you apply something, you implement something, you report something - it’s not a risk for the first two years, it is actually a risk for the third or fourth year when the tax inspector inspects you and says ‘actually, your implementation is not compliant’.”

The two-day MENA CEO conference concludes today.

(Reporting by Imogen Lillywhite; Editing by Michael Fahy)


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