Now that Bahrain has reportedly signed the unified agreement to implement a common value added tax (VAT) across the Gulf Cooperation Council (GCC) states, all six GCC countries appear to be on board and the stage seems to be set for the VAT’s implementation starting 1 January 2018. Details of the agreement are expected to be made public soon. Once it has been ratified, Bahrain and its fellow GCC members – Saudi Arabia, Qatar, Oman, Kuwait and the United Arab Emirates – will then take the next step of releasing domestic legislation to govern how the tax will apply in their jurisdictions.
With less than a year to go until the VAT’s implementation, GCC businesses should be starting now to get ready to comply with the new tax. Even though the details of the tax are not yet known, it is expected that it will be largely modelled on the VAT currently in place in the European Union (EU).
The GCC VAT will apply at the rate of 5 percent, with possibilities of exemptions and zero rating for some supplies and incentives for companies operating in certain sectors or free zones. Businesses would likely need to register for the VAT in the last quarter of 2017. VAT-registered businesses would charge and collect VAT on the supply of VAT-able goods and services (“output VAT”), and claim refunds for VAT paid on VAT-able goods and services procured by the business (“input VAT”). The business would then remit net VAT – output VAT less input VAT – to the tax authority.
For many GCC companies, the VAT will affect most transactions, with implications across the company’s IT systems, compliance processes and business functions – from finance, tax and treasury to procurement and human resources. Supply chains, contracts and the pricing of products and services will need to be reviewed. New forms (e.g. invoices) and new reports need to be designed to facilitate the completion of VAT returns, and processes need to be put in place to ensure VAT is properly collected and fully recovered within required timeframes.
The VAT could significantly affect the cash flows of GCC companies, especially those with high volumes of transactions. Cash flow forecasts may need to be updated, and company cash flows may change due to VAT credits. Companies that are not adequately prepared could see their cash flows disrupted and business operations at risk. Where input VAT is not fully recovered, VAT leakage could produce significant and unnecessary costs. Even more costs can arise for non-compliant businesses from fines, penalties and potential reputational damage.
Based on the experience of professionals with KPMG member firms in the region advising GCC companies dealing with new VAT regimes in other jurisdictions (e.g. Malaysia), companies that are well prepared to manage their VAT compliance from day one can manage the cash flow impacts, reduce cash costs, maximize VAT recoveries and win competitive advantage.