The first phase of implementation will start on January 1, 2018…

With the approval for the introduction of value-added tax (VAT) by the GCC ministers recently, Gulf businesses are on a tight timeline to prepare for the first phase of its implementation by January 1, 2018, analysts said.

As there is less than 18 months to go, businesses need to start preparing in advance to be able to comply with the new tax obligations, experts said. “Businesses should start adopting VAT and excise tax-compliant strategies now to ensure a smooth transition at a later stage,” they said.

Following an extraordinary meeting of finance ministers in Jeddah on June 16, the GCC chairman, Bahrain’s Finance Minister Shaikh Ahmad bin Mohammed Al Khalifa announced that the VAT Framework Agreement is expected to be finalised at the next meeting of the GCC Financial and Economic Cooperation Committee in October 2016, analysts at EY said.

Most GCC countries have already made substantial progress on preparing their tax administration systems for VAT and from July 2016 onwards, the focus will shift to preparing the business community for VAT.

The UAE will start implementing the VAT rate of five per cent from January 1, 2018. On June 15, 2016, the Undersecretary of the UAE Ministry of Finance, Younis Al Khoury, announced that companies in the UAE that report annual revenues over Dh3.75 million will be obliged to be registered
under the GCC VAT system.

The requirement to be registered will arise in early 2018 during the first phase of the GCC VAT implementation. Once registered, companies will be required to account for VAT on an ongoing basis to the MoF.

Al Khoury confirmed that companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation.

The minister said it would eventually become obligatory for all companies to be registered under the system when it is rolled out in the second phase, regardless of the reported revenues. The roll-out date of the second phase of the implementation is still to be decided.

Tax experts said the excise tax and VAT treaties constitute the common framework for the introduction of these taxes in the GCC which is expected to occur by January 1, 2017, and January 1, 2018 respectively. The treaties will form the basis for the issuance of national VAT and excise tax legislation by each GCC member state.

Jeanine Daou, PWC’s Middle East Indirect Taxes Partner, said the introduction of VAT and excise tax constitute an important policy reform aiming to help GCC gvernments achieve medium- to long-term social and economic policy goals, and reduce reliance on hydrocarbon revenues.

“Companies should take action now, if they have not already, to prepare for the implementation of the new tax systems and be ready by go-live date.”

The PwC analyst said upon the ratification of the treaties, each member state would need to issue its own national VAT and excise tax legislation based on agreed common principles.

“In any case, businesses need to start preparing in advance to be able to comply with the new tax obligations, including charging, collecting and paying VAT and excise tax to the tax authority in a timely manner,” said Daou.

“It is the right time to start creating awareness and increase knowledge throughout the organisation, as well as start assessing the potential impacts of the new taxes on the business, including impact on margins and cash flow. It is also essential to ensure the right systems and processes are in place to apply the tax correctly and generate the required reporting and documentation,” said Daou.

The system will be based on a destination principle, according to which VAT is charged at import and on local supplies of goods and services. “VAT is a tax on consumption. It is a transaction-based tax levied at each stage in the chain of production and distribution. VAT is charged on supplies and is deducted on purchases, except when exemptions apply,” experts explained.

VAT is a broad-based tax and is charged on most supplies of goods and services. Traditionally, few sectors or supplies would be exempt, zero-rated or subject to special schemes, including education, basic food, medical services, financial services, real estate sector.

Issac John / Dubai ; Khaleej Times ; 30 June 2016