TAX REFORMS ON THE ANVIL
The days of tax-free regimes in the GCC region are set to end with the Ministry of Development Planning and Statistics (MDPS) confirming that Qatar will introduce a 5% value-added tax (VAT) from January 1, 2018.
THE DAYS OF TAX-FREE REGIMES IN THE GCC REGION ARE SET TO END WITH THE MINISTRY OF DEVELOPMENT PLANNING AND STATISTICS (MDPS) CONFIRMING THAT QATAR WILL INTRODUCE A 5% VALUE-ADDED TAX (VAT) FROM JANUARY 1, 2018.
“This is the perfect time for the companies in Qatar to start preparing for the VAT implementation by conducting an impact assessment of their operations, and upgrading their systems to accommodate the VAT requirements and be in compliance with VAT legislation in the country.” CRAIG RICHARDSON Partner Tax and Corporate Services, KPMG Qatar and Bahrain
The Ministry of Finance has already initiated the exercise of drafting domestic legislation for VAT and is expected to issue the same in the first half of 2017. Imposing VAT was a GCC-wide agreement, MDPS said in its semi-annual economic update early this year. Leaders of the sixmember Gulf States debated the subject for more than a decade and adopted a draft VAT framework executive summary in May 2015. Subsequently, the states held several rounds of meetings and finally agreed on the introduction of VAT in the GCC in June this year.
While these countries had surplus cash reserves owing to high oil prices till June 2014, they started to feel the pinch as the oil prices crashed from $114 per barrel at that time to as low as $27 per barrel early this year. This is said to be one of the reasons for the GCC region to tighten the purse strings and take several steps to rein in their respective economies. The steps include gradual phasing out of food and fuel subsidies.
Besides VAT, Qatar is considering levying additional taxes on items such as fast food, tobacco and soft drinks. It also plans to hike the water and power tariffs to bring them closer to fair market value as they are still heavily subsidised at present. The government has already increased power and water tariffs earlier last year.
The possibility of new taxes will nudge up Qatar's consumer price inflation and these measures are expected to cause inflation to increase from 3.4% this year to 3.8% by 2018, the ministry's economic update said.
“This is the perfect time for the companies in Qatar to start preparing for the VAT implementation by conducting an impact assessment of their operations, and upgrading their systems to accommodate the VAT requirements and be in compliance with VAT legislation in the country,” said Craig Richardson, Partner, Tax and Corporate Services, KPMG Qatar and Bahrain.
While how much revenue the proposal will generate cannot be assessed as of now, the major impact of VAT on companies will be gearing up for the tax, understanding how to apply the draft legislation (when issued) and the implications on all aspects of their business including Treasury, Finance, HR, Procurement, Sales, Legal and IT, he said. Richardson also said that VAT, being a consumption tax on the end customers, is ultimately borne by them. To mitigate the effect of this burden on low income earners, many basic foodstuffs are exempt from VAT and the same could apply to medicines and medical equipment and other essential items. “This is how VAT works. Simplistically, companies that are registered for VAT pass it through as input tax incurred on their purchases against output tax on their sales, and pay over the ‘net amount' to the tax authorities,” he pointed out.
However, it is not going to be an easy task for the GCC countries to implement VAT effectively as they face many challenges and need several important sequential steps to secure it.
“The GCC governments have to establish an effective VAT administration, IT system and a well-trained professional workforce with the necessary knowledge, skills and competencies to efficiently administer the VAT system, develop and deliver public and industry information campaigns and education programmes to ensure that taxpayers are fully aware of their rights and responsibilities, and the likely impact the tax will have on them,” Richardson added.
Global audit and consulting firms such as PricewaterhouseCoopers (PwC) and Ernst & Young (EY) have been holding
“Corporate structures and supply chains also need to be analysed in light of the new tax to ensure that potential inefficiencies can be detected and addressed in a proactive manner.” FINBARR SEXTON MENA Indirect Tax Leader Ernst & Young Qatar VAT workshops as part of a region-wide initiative to update local businesses on the latest developments and the implications of the legislation. At one such meeting in Qatar, tax experts from PwC felt that VAT will present a number of challenges for businesses and individuals operating in the region. Addressing the participants, Wadih AbouNasr, Qatar Country Senior Partner, said that PwC's recent publication entitled “Managing Tax” highlighted the importance of investing in technology to help manage the additional workload that VAT would introduce in the coming days.
“The clients we surveyed and spoke to recognised that making the required systems changes for VAT would be a major challenge. They also saw that putting in place appropriate controls and tax knowledge to manage VAT technical issues would also be challenging,” he averred.
Wadih further said, “It can be easy to underestimate the amount of time and resources that will be required to implement VAT effectively. There will be great demands placed on finance and tax departments given the volume of data and number of transactions that will be covered. Ensuring that systems are installed to help manage this will save both time and money, and improve accuracy and efficiency.”
Finbarr Sexton, MENA indirect tax leader, EY, said that VAT will have a broad impact and diversify government revenue sources and reduce reliance on oil revenues to finance government expenditures.
He said that the timelines for businesses to build out the VAT capability was challenging as it required careful planning and a structured programme to ensure that the business was VAT ready, including people, processes, controls and technology. “Corporate structures and supply chains also need to be analysed in light of the new tax ... to ensure that potential inefficiencies can be detected and addressed in a proactive manner,” he said.
Sounding a word of caution, he said that businesses may have to bear additional costs if VAT was not applied correctly and non-compliance with tax laws would attract severe penalties. “All businesses must undertake a review of their current contracts to determine whether VAT has been appropriately addressed,” he said.
He said that the GCC member states are at varying degrees of readiness for VAT implementation but it is expected that at least some countries will come out with their respective VAT laws shortly after the release of the GCC VAT Framework Agreement, and therefore, before the end of 2016. The implementation of VAT in the GCC from 2018 means that businesses operating in the GCC now only have 14 months to prepare for its implementation and to become compliant with the respective GCC VAT laws. As such, GCC businesses should initiate a VAT impact assessment immediately in order to determine the impact that VAT will have across their operations, he said. This assessment should consider the impact of VAT in key areas such as finance and accounting, IT and systems, tax and compliance, supply chain - goods and services, contracts, sales and marketing, legal structure and human resources. “The impact assessment should be used to develop a clear plan as to the steps that must be taken to be ready for VAT from January 2018 and this plan should be implemented as soon as possible,” Finbarr said.
The GCC Finance Ministers are also expected to finalise the GCC Excise Duty Framework Agreement in addition to the VAT regulations. They have already discussed implementing excise duty in their countries from January 1, 2017. The GCC Excise Duty Framework has also not yet been officially released, but it is expected to be made public by end of 2016, he added
“The clients we surveyed and spoke to recognised that making the required systems changes for VAT would be a major challenge. They also saw that putting in place appropriate controls and tax knowledge to manage VAT technical issues would also be challenging.” WADIH ABOUNASR Country Senior Partner PricewaterhouseCoopers Qatar