Viewpoint: Dean Kern
As a business centre for the MENA region, the UAE continues to be a highly relevant and attractive destination for investors for a number of reasons including infrastructure, logistics and access to skilled labour. According to the PwC and World Bank’s “Paying Taxes” 2017 study, the UAE is the country with the single easiest system for paying taxes in the world.
In a region where more than 50% of government revenues come from oil and gas, the reduction in oil prices and the associated budgetary pressures has led to increased speculation that taxation reform will take place in the UAE. The UAE implemented a value-added tax (VAT) system on January 1, 2018. A broader corporate income tax (CIT) regime may follow in due course, however there is currently no timetable for its introduction. VAT is an indirect tax on the consumption of goods and services, and it can provide a sustainable approach for governments hoping to increase their revenue generation, while at the same time being neutral for business and limiting distortions in the economy. VAT is levied at all stages of the production and distribution chain at a relatively low administrative cost. It is neutral for businesses who would be acting as tax collectors as they do not bear the burden of VAT, as cumulative taxation is avoided through the right to deduct or refund input VAT.
VAT in the UAE was implemented under the Common VAT agreement of the GCC, with each member state responsible for formulating and enacting its national VAT legislation. Saudi Arabia also implemented VAT on January 1, 2018, with the remaining GCC member states expected to follow suit by January 1, 2019. For the GCC implementing states there are specific intra-GCC VAT provisions for businesses supplying goods and services between different GCC states.
Although from a business perspective VAT should not create an additional tax cost, businesses can still prepare to comply in terms of charging, collecting and paying VAT to governmental tax authorities. As VAT will have an impact on the whole business, there are a number of factors that should be considered for a successful VAT implementation. The main issue is ensuring that the correct systems and processes are in place to cater for VAT in an efficient way – that is, applying the correct VAT treatment and generating the required documentation. It will be easy to underestimate the additional workload and resources that will be required for implementation of VAT and the strain that this may place on tax and finance departments.
Investment in technology or upgrading existing systems to automate tax processes will need to be a part of the VAT implementation strategy, as this will improve accuracy while also saving time and money.
Alongside investment in technology, there also needs to be further development in employee training in all the necessary business units. It will be important to ensure an effective plan is in place to manage the additional compliance requirements.
In a region which has historically seen less investment in tax functions, the introduction of VAT will likely prove a catalyst for not just additional resourcing, but also having in place an appropriate tax framework to manage tax risks incorporating governance, tax strategy, tax risk registers and improved systems.
For the government there is an opportunity to build a leading global tax administration. The more they can provide clarity in the application of the laws, use systems to reduce compliance efforts and embrace new models for conducting audits, the greater the success of any VAT implementation will be. For companies that are headquartered in the UAE and operating globally, the increased attention given to corporate taxes and perceived tax avoidance in Europe, US and other parts of the world does mean careful consideration needs to be given to how taxes are managed. In short, globally the management of taxes has never been more prominent in corporate, government and public interest circles, a situation that is increasingly the same in the UAE.