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Gurdeep Randhay, head of tax and VAT at accounting and consultancy firm Grant Thornton, discusses the challenges and costs of VAT implementation across the GCC in January 2018.
What are the key challenges facing CFOs ahead of VAT implementation?
VAT will have a substantial impact across the entire business, not least the aspects which the CFO manages. Internal processes will need severe scrutiny in order to ensure every aspect of the operational cycle is effectively considered and prepared for the implementation of VAT.
Across the wide portfolio of implementation programmes which I have led across various countries, the main aspect which commonly occurs is the need to change the internal mindset in terms of VAT readiness. Simply put, this means moving from the business process of non-documentation, where net-offs and set-offs are common, to a much more aligned and structured VAT-compliant documented process.
The penalty for a more relaxed approach to documentation in the past was non-existent. However, failure to comply with the process requirements from Jan. 1, 2018 includes penalties, prosecution, reputational damage and possibly cash flow complications.
The formal legislation is yet to be announced. This therefore leaves unanswered questions which many CFOs will be considering, for example, what will happen in a country such as the UAE where there are free trade zones? The VAT treatment of supplies from one free zone to another may be temporarily suspended. Not only are businesses operating in such free zones questioning the implication and impact which VAT law will have on their operations, but CFOs are wondering how to best prepare.
A key requirement will be Enterprise Resource Planning (ERP).
Finally - and this is a challenge mostly for larger companies - there will be six different sets of VAT laws across six different countries within the GCC. Whilst many companies believe they can undertake this huge challenge in-house, when it comes to cross-border transactions it is important to know what the other country's expectations are from a VAT-compliance perspective.
So will the launch of VAT represent additional costs for businesses?
Although hypothetically VAT should not cost a business since it's a tax on consumption with an input/output methodology and mechanism, two things should be considered. First, in terms of VAT readiness itself, the potential requirement to recruit additional staff to implement and manage the tax in a post-VAT world could significantly increase costs.
The second impact will be on businesses which are "exempt or partially exempt" from VAT, such as those in financial and medical services, sales and lease of residential accommodation, education, public transport, etc. These businesses will not be eligible for a full recovery of VAT and will end up bearing a direct cost as a result. Therefore, businesses need to transform to mitigate the impact of this potential leakage.
Could cloud technology help deal with this challenge?
Yes. Ultimately, if the various countries where VAT will be launched allow a paperless world to exist, documentation will need to be stored in electronic form. Companies will be able to store data in the cloud, which is a lot more practical in today's business operating environment.
Cloud applications can also add further value to businesses that work remotely, enabling greater collaboration, improving data sharing of information and accessibility across multiple locations with secure data backup and security.
Any advice for CFOs?
Time is of the essence. Depending on the size of a business, VAT implementation could take anything from three to 12 months. It is important that your business is up to speed with planning, applying the new requirements with adequate resources and dealing with the strategic implications.
Preparation is key. Evaluate the current business model and ensure adequate resources and technologies are in place. It is important to assess resourcing priorities and put in place a project governance framework as early as possible.
Adapt and implement change. Such a transformation will require the involvement and support of CFOs to prepare employees, vendors and customers, and for them to know what is expected of them as part of the process.
The clear message from the outset should be that VAT implementation is a business change for the entire organisation as opposed to a tax or finance compliance project. Training is needed from an early stage to ensure everyone from the board to sales, marketing and HR teams are fully aware of what is involved and their particular role in addressing the change.
Finally, attempting to implement VAT in a DIY manner is good as long as you have experience of such change programmes and you are confident that you are able to effectively align your business processes and internal mindset to the necessary VAT requirements. The motto should be: "If in doubt, consult". Money well spent today will repay itself in the future in terms of filing accurate VAT returns and mitigating or eliminating VAT penalties and levies.
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