The signing of the VAT Treaty by the Gulf Cooperation Council (“GCC”) brings us a step nearer to understanding how VAT will affect businesses trading in the GCC from 1 January 2018. Whilst not all GCC states may go live on 1 January 2018, prudent businesses should be planning now to ensure they can meet the requirements of the new tax.
VAT will apply at a standard rate of 5 percent across the GCC. However, although the VAT Treaty sets out the general VAT principles that will apply across the region, it also leaves certain decisions to the discretion of the individual state. A final understanding will only be possible once the individual domestic VAT laws are released.
The VAT Treaty provides for certain exemptions, zero rates and other incentives to apply for companies operating in certain sectors or free zones. In particular, given the importance of the oil and gas sector to the region, Article 29 of the VAT Treaty provides for a specific zero rating. However, the exact conditions and how far this will extend to up- and down-stream service companies will be determined by the individual states.
Registration for businesses undertaking taxable activities will be mandatory where they exceed the relevant thresholds. It is likely that businesses will need to begin the VAT registration process in the last quarter of 2017.
Impact on your business
One of the key issues with the implementation of VAT will be how it will affect contracts that straddle 1 January 2018. As an immediate priority, a review of current contractual arrangements should be undertaken to reduce VAT inefficiencies. Contracts that treat the consideration as VAT inclusive could mean that you suffer a 5% reduction in the income received from the contract, significantly reducing your profit margins. If necessary, early steps should be taken to ensure that the relevant documents are amended where they do not adequately address the VAT position.
In addition to the actual administration of the tax, you will also need to keep a close eye on the impact of VAT on the business' cash flow. You will need to consider how the VAT liabilities will be funded if the payment terms mean that you have to account for the tax to the authorities before it is received from your customer. Cash flow will also be a factor for zero rated businesses that are in a repayment position as recovery of the VAT incurred on purchases may take several months to secure, seriously effecting your businesses working capital.
The immediate considerations, therefore, that you should address are:
- Prepare your VAT implementation strategy;
- Assess the capability of your existing processes and systems;
- Identify contracts that will continue into 2018 and consider what amendments are required; and
- Provide awareness training to affected staff.
The implementation of the new VAT system will raise a number of significant challenges for businesses operating in the GCC. It is essential that business act now to ensure that they understand these challenges and can operate in a tax efficient and compliant manner following 1 January 2018.
If you would like to understand how the introduction of VAT in the GCC states will affect your business, AAB’s Indirect Tax team can help you understand the new rules. If you require further information, please contact Alistair Duncan, Indirect Tax Director (firstname.lastname@example.org) or your usual AAB contact.