10 May 2017
Arab Gulf-based companies must undertake complex preparations to be ready for the introduction of value-added tax (VAT) in the region next year and should not underestimate the scale of the task ahead of them, a financial expert who helped launch a similar tax in Malaysia warned.
The six members of the Gulf Cooperation Council (GCC) last year agreed to introduce a 5 percent VAT from 2018 to better diversify state revenue sources and reduce their reliance on energy exports following the slump in oil prices from mid-2014.
“Don’t take VAT lightly because it is not simple or as simple as it looks,” said Chew Yin Mok, a tax expert and partner at the BDO audit and advisory firm.
He worked with many businesses in Malaysia during the 2015 introduction of a 6 percent goods and services tax (GST), which, like VAT, is a form of tax levied on a wide range of goods and services.
“There are a lot of areas where you need to technically know how you work, otherwise you could get in trouble for filing wrong returns, which you can be penalised for,” Mok told Zawya in an interview.
Recent tax surveys and reports suggest businesses are ill-prepared and unhappy about VAT’s introduction in the Arab Gulf region, which has for decades styled itself as tax-free, with no tax imposed on personal income. However, in reality, a number of other forms of taxation are already levied on several goods and services, such as hotel accommodation and alcohol.
Mok said businesses should have a special tax implementation taskforce. This would usually be led by the chief financial officer and have jurisdiction over all business departments, not just finance. Marketing, human resources and purchasing, and others will need to modify their systems to become VAT-compliant.
“For example, when do you (as a business) consider a supply is done? If you receive cash in advance, is it already taxed? Are business gifts taxable and how?” said Mok, giving examples of the questions companies must answer ahead of VAT’s arrival.
VAT in the GCC, like Malaysia’s GST, could be applied on things that do not directly involve finance, such as gifts distributed as part of marketing campaigns, employees’ family benefits or companies’ entertainment events, Mok said. Businesses should also ensure all suppliers provide valid tax invoices, he added.
Grants for SMEs?
Malaysia’s government provided financial aid to some small- and medium-sized enterprises (SMEs) ahead of the launch of GST to help them get their accounting systems ready for the new tax, said Mok who has spent nearly a decade giving tax advice to various industries, including construction and property development, IT services, manufacturing, and trading.
“SMEs need a lot of guidance. The government (of Malaysia) helped them a lot. They also conducted numerous educational and training sessions for the SMEs along with other businesses to help them get prepared,” Mok said.
The SME sector is a significant part of the GCC economy. It constitutes about 90 percent of all companies in Saudi Arabia, Kuwait and Oman and around 95 of the companies in the UAE, according to regional media reports.
Yet the sector is perhaps the most vulnerable to economic slowdowns and cash flow can quickly become perilous, with financial and government institutions wary of lending to the sector.
Many SMEs’ owners fled the UAE in the aftermath of the country’s 2008-2010 real estate crash on fears of debt default, which is considered a criminal offence and can lead to lengthy prison sentences.
These dangers make it all the more necessary for SMEs to be prepared for VAT to ensure it doesn’t negatively impact their operations.
“VAT affects cash flow, especially for a small company that does not have the luxury to wait until it gets a cash substitute or a VAT reclaim,” Mok said.
Governments must prepare
GCC tax authorities should also be braced for a sudden surge in the number of companies applying to register for VAT, Mok said, recalling that Malaysia experienced such a spike ahead of GST’s introduction.
“At first they (Malaysian government officials) thought only around 40,000 companies will register but then later they were shocked as they received up to 250,000 applications and they ended up with around 400,000 registered companies,” said Mok.
The Malaysian government revealed GST’s details and conducted many awareness and training workshops for businesses over a period of one year, ahead of the implementation of the tax, which helped the government obtain a higher than expected number of registered companies, Mok said.
Malaysia collected over 30 billion Malaysian ringgit ($6.9 billion) in December 2015, eight months after the introduction of GST that April, the Malay Mail Online news website reported.
He also echoed the demands of many business people and tax analysts requesting GCC officials to release more details about the VAT legislation “as soon as possible”.
“In Malaysia, the details were out one year before the tax was implemented,” added Mok. “The GCC is already very late on this.”
Tax experts seem confident Saudi Arabia and the UAE will implement VAT from January 2018 as planned, although a GCC-wide simultaneous introduction of the tax seems increasingly unlikely.
© Zawya 2017
Arab Gulf-based companies must undertake complex preparations to be ready for the introduction of value-added tax (VAT) in the region next year and should not underestimate the scale of the task ahead of them, a financial expert who helped launch a similar tax in Malaysia warned.
The six members of the Gulf Cooperation Council (GCC) last year agreed to introduce a 5 percent VAT from 2018 to better diversify state revenue sources and reduce their reliance on energy exports following the slump in oil prices from mid-2014.
“Don’t take VAT lightly because it is not simple or as simple as it looks,” said Chew Yin Mok, a tax expert and partner at the BDO audit and advisory firm.
He worked with many businesses in Malaysia during the 2015 introduction of a 6 percent goods and services tax (GST), which, like VAT, is a form of tax levied on a wide range of goods and services.
“There are a lot of areas where you need to technically know how you work, otherwise you could get in trouble for filing wrong returns, which you can be penalised for,” Mok told Zawya in an interview.
Recent tax surveys and reports suggest businesses are ill-prepared and unhappy about VAT’s introduction in the Arab Gulf region, which has for decades styled itself as tax-free, with no tax imposed on personal income. However, in reality, a number of other forms of taxation are already levied on several goods and services, such as hotel accommodation and alcohol.
Mok said businesses should have a special tax implementation taskforce. This would usually be led by the chief financial officer and have jurisdiction over all business departments, not just finance. Marketing, human resources and purchasing, and others will need to modify their systems to become VAT-compliant.
“For example, when do you (as a business) consider a supply is done? If you receive cash in advance, is it already taxed? Are business gifts taxable and how?” said Mok, giving examples of the questions companies must answer ahead of VAT’s arrival.
VAT in the GCC, like Malaysia’s GST, could be applied on things that do not directly involve finance, such as gifts distributed as part of marketing campaigns, employees’ family benefits or companies’ entertainment events, Mok said. Businesses should also ensure all suppliers provide valid tax invoices, he added.
Grants for SMEs?
Malaysia’s government provided financial aid to some small- and medium-sized enterprises (SMEs) ahead of the launch of GST to help them get their accounting systems ready for the new tax, said Mok who has spent nearly a decade giving tax advice to various industries, including construction and property development, IT services, manufacturing, and trading.
“SMEs need a lot of guidance. The government (of Malaysia) helped them a lot. They also conducted numerous educational and training sessions for the SMEs along with other businesses to help them get prepared,” Mok said.
The SME sector is a significant part of the GCC economy. It constitutes about 90 percent of all companies in Saudi Arabia, Kuwait and Oman and around 95 of the companies in the UAE, according to regional media reports.
Yet the sector is perhaps the most vulnerable to economic slowdowns and cash flow can quickly become perilous, with financial and government institutions wary of lending to the sector.
Many SMEs’ owners fled the UAE in the aftermath of the country’s 2008-2010 real estate crash on fears of debt default, which is considered a criminal offence and can lead to lengthy prison sentences.
These dangers make it all the more necessary for SMEs to be prepared for VAT to ensure it doesn’t negatively impact their operations.
“VAT affects cash flow, especially for a small company that does not have the luxury to wait until it gets a cash substitute or a VAT reclaim,” Mok said.
Governments must prepare
GCC tax authorities should also be braced for a sudden surge in the number of companies applying to register for VAT, Mok said, recalling that Malaysia experienced such a spike ahead of GST’s introduction.
“At first they (Malaysian government officials) thought only around 40,000 companies will register but then later they were shocked as they received up to 250,000 applications and they ended up with around 400,000 registered companies,” said Mok.
The Malaysian government revealed GST’s details and conducted many awareness and training workshops for businesses over a period of one year, ahead of the implementation of the tax, which helped the government obtain a higher than expected number of registered companies, Mok said.
Malaysia collected over 30 billion Malaysian ringgit ($6.9 billion) in December 2015, eight months after the introduction of GST that April, the Malay Mail Online news website reported.
He also echoed the demands of many business people and tax analysts requesting GCC officials to release more details about the VAT legislation “as soon as possible”.
“In Malaysia, the details were out one year before the tax was implemented,” added Mok. “The GCC is already very late on this.”
Tax experts seem confident Saudi Arabia and the UAE will implement VAT from January 2018 as planned, although a GCC-wide simultaneous introduction of the tax seems increasingly unlikely.
© Zawya 2017
