VAT regime could present chal­lenges to GCC: Ex­pert

BDO VAT ex­pert Fe­er­ick pro­vides in­sight

Kuwait Times - - BUSINESS -

Hav­ing made pre­sen­ta­tions to a to­tal num­ber of 1400 -1500 clients of BDO in each of the 6 Gulf GCC states over the past four weeks and hav­ing fielded about 130 in­di­vid­ual ques­tions from the par­tic­i­pants, Ivor Fe­er­ick, In­di­rect Tax Part­ner at BDO stated that he is in no doubt that the pro­posed in­tro­duc­tion of a Value Added Tax (VAT) sys­tem into the re­gion will present sig­nif­i­cant chal­lenges for the lo­cal govern­ment au­thor­i­ties.

Al­though it is widely ex­pected that VAT rate will be 5 per­cent, there has been very lim­ited of­fi­cial in­for­ma­tion re­leased re­gard­ing the specifics of how the VAT sys­tem to be in­tro­duced will op­er­ate. Ivor ex­pects that the GCC Coun­tries will repli­cate a lot of the fea­tures of the Euro­pean Union VAT Sys­tem, par­tic­u­larly bear­ing in mind the sim­i­lar­ity be­tween the six coun­try co­op­er­a­tion in the Gulf and a28 Coun­try co­op­er­a­tion in Europe. Fur­ther­more, Ivor ex­pects that cer­tain Ed­u­ca­tional and Health­care ser­vices will be purely ‘Ex­empt’ from VAT with no en­ti­tle­ment to VAT re­cov­ery on costs by the re­lated ser­vice provider, whereas the pro­vi­sion of Ba­sic Food­stuffs (e.g. bread, milk, fruit & veg­eta­bles, meat etc.) will most likely be ‘zero-rated’ (ex­empt with credit, thus en­abling the sup­pli­ers of ba­sic food­stuffs to re­cover VAT on their op­er­at­ing costs etc.).

Bear­ing in mind the close co­op­er­a­tion be­tween the six GCC States and their shared in­ter­est in en­sur­ing that the sys­tem to be in­tro­duced in their in­di­vid­ual coun­tries is as closely aligned as pos­si­ble, Ivor said that he will be very sur­prised if most of the coun­tries do not opt for the 1 Jan­uary 2018 im­ple­men­ta­tion date as this will help avoid any po­ten­tial dis­tor­tion of com­ple­tion aris­ing from VAT re­lated con­sid­er­a­tions and will also help em­bed the sys­tem across the re­gion in pos­si­bly ‘one full swoop’.

It is also Ivor’s view that in con­sid­er­ing what kind of a VAT sys­tem would be best to in­tro­duce, GCC Govern­ments will in­vest a con­sid­er­able amount of time and ef­fort re­view­ing VAT sys­tems in place in ma­jor­ity of the coun­tries across the Globe in­clud­ing the cur­rent 28 Euro­pean Union (EU) Mem­ber States (Note the UK is not due to leave the EU un­til 2019) which have VAT Leg­is­la­tion in place, with a view to

Ivor Fe­er­ick

en­sur­ing that the sys­tem to be in­tro­duced is ‘ ef­fec­tive’, ‘ef­fi­cient’ and ‘best in class’ to serve the needs of the GCC re­gion. In sum­mary this means that the VAT regime to be im­ple­mented will re­sult in the early col­lec­tion of as much VAT Tax as pos­si­ble, as early as pos­si­ble, with the least pos­si­ble in­con­ve­nience to busi­nesses op­er­at­ing across the GCC as un­paid tax col­lec­tors on the Govern­ments’ be­half!.

One of the chal­lenges in introducing a VAT sys­tem in a de­pressed mar­ket place is that many hard pressed con­sumers, who will have ex­pe­ri­enced de­creases in their house­hold in­come due to cut­back aris­ing from the halv­ing of the price of oil as well as in­creases in oil re­lated prod­ucts, are dis­in­clined to spend due to lack of con­fi­dence in their per­sonal fi­nan­cial cir­cum­stances.

Need­less to add, in­creas­ing the price of most goods and ser­vices by 5 per­cent will act as a fur­ther dis­in­cen­tive to con­sumer spend­ing so in the early days fol­low­ing the in­tro­duc­tion of the new VAT sys­tem it is likely that re­tail­ers may re­duce their profit mar­gins and ab­sorb some or all of the VAT costs with a view to main­tain­ing the sales vol­ume re­quired to sus­tain their busi­nesses.

Fi­nally, al­though VAT is ul­ti­mately a tax on the sup­ply of goods and ser­vices to con­sumers, the charge of VAT on all sup­plies to both busi­nesses and con­sumers will mean that busi­nesses will be­come un­paid tax col­lec­tors on the Govern­ments’ be­half and apart from in­creas­ing their ad­min­is­tra­tion and IT re­lated costs, they are likely to be ex­posed to sig­nif­i­cant in­ter­est, penal­ties and po­ten­tially more se­ri­ous ex­po­sures for any non-com­pli­ance with the new leg­is­la­tion. In the cir­cum­stances, it is im­per­a­tive for them to start plan­ning their VAT strat­egy and im­ple­men­ta­tion road map with­out de­lay and this is the mes­sage that BDO has been shar­ing with our clients in the re­gion.

Ivor Fe­er­ick is a Part­ner / Head of In­di­rect Tax (VAT / Cus­toms & In­ter­na­tional Trade) at BDO Ire­land and has been Chair of the BDO In­ter­na­tional VAT Cen­tre of Ex­cel­lence for the past 5 years. BDO is the 5th largest pro­fes­sional ser­vices provider with rep­re­sen­ta­tion in 154 coun­tries across the world.

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