Value-Added Tax impact across the organisation

The introduction of the value-added tax (VAT) regime in Oman will not only affect consumers, it will also have an impact on the businesses. VAT will have an impact on virtually all functions within an organisation, including information technology, finance, sales, procurement, legal and human resources.

While it is the finance function that usually drives the progress of VAT implementation, the efforts need to be enabled throughout a range of processes and technologies within the organisation. Some of the impacts of VAT across the business functions are discussed below.

Information technology

IT systems form an important part of the VAT implementation process and are often considered the backbone of VAT compliance. Businesses need to assess their system’s capability and make the necessary upgrades required to handle the requirements of VAT such as issuing valid tax invoices and generating VAT reports.

In larger organisations, business may revert to external tax engines and third-party solutions to automate the compliance process or add efficiency to the determination, consolidation, reporting and VAT analytics processes.

Finance and administration

VAT will impose a number of compliance requirements that will constitute an administrative burden for the business. These requirements include obtaining a VAT registration, filing the periodic returns and making payments of VAT due or claiming refunds from the authorities, in addition to maintaining records and documents in accordance with the requirements of the VAT law. Additionally, a business will have to be ready to attend to tax audits and queries raised by the Tax Authority as well as handle any fines or penalties imposed on the business.

Internally, the business needs to ensure it is correctly managing any cashflow risks resulting from VAT and introducing processes and controls to manage these risks, such as optimising payment terms.

Sales and marketing

All businesses should review their sales contracts and commercial arrangements to determine the appropriate VAT treatment of their supplies and assess if VAT has been appropriately addressed in the contracts or not. If long-term contracts are not amended to accommodate the introduction of VAT, businesses may be forced to absorb the impact of the new tax.

Moreover, businesses need to carefully assess the impact of VAT on consumer demand and whether a competitive pricing strategy should be introduced to maintain market share.

Procurement and supply chain

Similar to sales, businesses should review their commercial arrangements to minimise any VAT risks that could result in a cost escalation to the business. A significant effort is required to validate vendors’ VAT credentials as well as ensuring all invoices issued by vendors are VAT compliant. Additionally, businesses should evaluate the VAT liabilities on their various purchase transactions including scenarios involving imports or where a special VAT self-accounting mechanism is due.

Human resources

The human resource (“HR”) department and fringe benefits provided to employees are considered “low hanging fruits” for VAT audits across the globe in jurisdictions implementing VAT. Businesses may need to optimise their HR policies for VAT after considering the input VAT recovery position of their HR-related purchases and the VAT impacts of making free of charge supplies to employees.

Training and development of staff are crucial to a smooth business transformation while implementing VAT and for on-going compliance. Besides training existing staff, businesses should consider the need to hire additional resources with VAT expertise to handle the business’s additional compliance requirements.

Watch this space for more on the impacts of VAT across the business community and on specific sectors.

[Alkesh Joshi may be contacted by email at: alkesh.joshi@om.ey.com]