VAT in the GCC - How should companies prepare?

The approval of the GCC VAT means that the countries and the business enterprises operating in them will face a tight timeline of 18 months to prepare for the opening phase of VAT implementation by January 1, 2018. It is expected that the rate will be low, likely around the 5% mark (Ministry of Finance of the UAE). As a general consumption tax, VAT will apply to the majority of commercial transactions in goods and services.

When VAT goes into effect, it will mean that businesses will be responsible for diligently documenting their business revenue and costs and related VAT charges. Registered businesses and traders will apply VAT to all of their clients or customers at the prevailing rate and incur VAT on goods / services that they purchase from suppliers. There are indications that the GCC is taking the implementation of the VAT very diligently, since it will help in diversifying the income bases of the various countries. According to the UAE Ministry of Finance, rules that mandate businesses to be clear about how much VAT is being paid for each transaction will be included. This means that businesses will possess the required information to decide whether to purchase something or not.

Given the momentous development, business owners in the GCC will have to prepare at multiple levels. It should be noted that not all businesses will have to register for VAT. Businesses that meet a certain minimum annual turnover specification will have to register for VAT. This means that many small businesses will not have to register for VAT. Thus, small businesses will not have to face the rigorous documentation and reporting that a tax regime like VAT needs. Moreover, businesses will not have to register with the government if they only offer goods and services that are not subject to VAT.

Various GCC governments have not finalized and announced the specific conditions (such as minimum yearly turnover) that will aid in identifying businesses that do not have to register for VAT. For companies that will come under the VAT regime, the following responsibilities or actions will generally apply:

Since the final responsibility and total accountability to comply with VAT is on the registered business, it is essential that enterprise financial records are accurate and fully updated. It may be prudent for businesses that are not VAT registered to maintain detailed financial records in any event, so that they can comply with the VAT regime if any change in policy suddenly brings them into the VAT bracket. Once the VAT is in place, VAT-registered business have to report the amount of VAT that they charge and the amount of VAT they pay to the government on a periodic basis.

The reporting or submissions will be a formal process; and probably, the submissions are likely to be made online (i.e., e-capable) in the case of many GCC countries. If a business is charged more VAT than they have paid, the difference will then have to be paid to the government. Conversely, if a business has paid more VAT than it has been charged, then the difference can be reclaimed. Thus, in light of the complexity and the detailed processes underpinning VAT, businesses will need to take the following steps to prepare to meet their VAT commitments (Deloitte Touche Tohmatsu Limited).