Viewpoint: Riyadh Al Najjar

VAT is a tax on the consumption of goods and services borne by the final consumer. Based on the self-assessment mechanism, VAT is collected by businesses at each stage of the production and distribution chain, with a credit for VAT incurred on inputs.

VAT is generally seen as an efficient tax for authorities, neutral for businesses and transparent for consumers. Because of the deduction of any VAT paid on business purchases, VAT should not adversely impact enterprises. Businesses will act as agents of the tax authorities in collecting VAT from their customers who are ultimately the final consumers. VAT constitutes a substantial source of government revenues and, according to the OECD, the share of VAT revenue as a percentage of GDP in OECD countries has significantly increased from 0.6% in 1965 to 6.6% in 2012. In 2012 VAT accounted for approximately 20% of total tax revenue on average, compared to 1.8% in 1965. The IMF estimates that, even at low rates, VAT can generate revenue equal to 1.5-2% of GDP for the GCC states, and approximately 1.6% in Saudi Arabia.

The introduction of VAT took effect on January 1, 2018, with other GCC countries to follow suit during the year, by January 2019 at the latest. The unified agreement provides for the general VAT principles to be applicable across the GCC. Each member state is expected to issue its national VAT legislation to address certain policy and administrative areas.

In Saudi Arabia the draft VAT Law was published by the General Authority of Zakat and Tax on May 29, 2017 to conduct a public consultation and seek feedback. The final VAT Law was then published in the Official Gazette on July 28, 2017. Most of the VAT application details were left to the implementing regulations, which were issued in the Official Gazette on August 29, 2017, further to feedback from the private sector.

As with any major reform, the introduction of VAT brings many opportunities, but also significant challenges in an environment where there are few or no taxes. VAT implementation will strengthen the GCC economies and enable the region to diversify revenue sources beyond oil dependence. The ramifications for businesses, however, will vary from an organisational, operational, commercial and financial point of view; hence they need to make the necessary changes and be ready as it will affect all areas of activity, from finance, procurement and human resources, to IT and legal.

Experience from implementation in various jurisdictions has shown that businesses need significant lead time to prepare their people, policies, processes and systems for VAT introduction. Such a transformation will require the involvement and support of senior management to ensure the entire company is engaged in the implementation project. A well planned and well executed VAT implementation will result in benefits for the business with respect to ongoing compliance and management of risks, as well as cash flow management. The VAT implementation plan should cover various aspects of the business, such as determining the VAT treatment of business transactions; estimating the financial impact of VAT, including irrecoverable costs and working capital management; forecasting the impact of VAT on business functions and processes; updating and implementing systems, such as enterprise resource planning to cater to VAT; engaging and communicating with key stakeholders; and assessing resourcing and training needs.

Tax authorities also have much to do. Establishing a seamless administration includes registration and filing processes, communication and education to ensure there is sufficient guidance for businesses to comply with the requirements. This will mitigate against a last-minute rush and lessen penalties after VAT goes live. VAT collection will contribute to achieving economic and social objectives, boost capital expenditure on infrastructure projects with an ultimate effect on national growth, further improve the business environment and encourage investment across the region.