GCC countries are aiming to introduce VAT (Value Added Tax) in order to mobilise tax revenues and thereby reduce budget deficits.
The proposed rate is likely to be 5% with the UAE planning to implement it by 1st January 2018. Other GCC countries are planning to follow soon with 1st January 2019 being the latest.
While VAT is generally perceived as an effective tool in tax revenue mobilisation, while causing minimal economic disruption, there is still a great amount of uncertainty among individuals and businesses on how VAT will impact on their operations and compliance. Much hinges on the details of how the VAT is to be implemented and audited. Adding to that, governments are still in the planning phase and the final framework, let alone the underpinning legislation, has not been announced to date. What is certain is that businesses will need to go through a transformation period as they prepare for the VAT’s possible introduction.
VAT implementation will not only affect businesses from the perspective of procedures and systems, it will also have a major impact on their workforce and put pressure on organisations now. Furthermore, the impact will also depend on VAT implementation strategies that businesses will deploy. Considering the recent example of GST (similar to VAT) having recently been implemented in Malaysia, it is clear that business will have sudden and large demands in terms of organisational design, training, recruitment and compensation aspects that will have to be tackled in a timely manner.
One of the main considerations for businesses is who should be performing VAT related activities within the company. While companies will need those who will create and implement VAT systems and procedures initially, GCC businesses also need to think long – term and identify whether they will need to have an in – house tax function, a shadow tax function (staff outside the tax function) or outsource the on-going VAT compliance activities. Small and medium enterprises may opt for training existing accountants to perform VAT compliance (in addition to their current duties) whereas large local conglomerates may consider separate in – house tax departments or additional resource to the existing tax department. This decision will mainly be dictated by company size as well as operational scope and complexity of business structures. There will also be an option to use the services of Big 4 and similar firms as well as boutique VAT consultancies that are about to open across the region.
Training and development of staff is an absolutely crucial element of a smooth business transformation while implementing VAT and for on-going compliance. While governments are likely to have specific VAT workshops these may not cover every aspect of an individual businesses activities, businesses have to ensure that employees understand the basics of the new tax and how it will affect their particular business operations and ultimately its competitiveness in the market place. Moreover, since VAT implementation implies major changes across every facet of the business, in particular, departments as IT, finance and supply chain; organisation wide training on the new procedures will be mandatory in order to ensure full VAT compliance of the business and the ability to deal with the vital day to day impact of VAT on every purchase and sale transaction. This training is equally important to ensuring that the business is able to recover its full entitlement of VAT paid on acquisitions to ensure its cost structures remain competitive.
Consideration of hiring additional tax talent will be logical for those companies which plan to add additional manpower to their existing tax departments or wish to add a tax department to the organisation in general. Moreover, companies may consider hiring experienced VAT accountants. Regardless of the option chosen, recruitment of suitable talent with VAT experience maybe a significant constraint due to the limited talent pool of such professionals within the GCC and the level of competition for that talent. On the other side, the costs and timing constraints will play a significant role in the recruitment process as well.
From the perspective of potential sourcing markets, there may be several options. Firstly, VAT professionals from Western countries such as the UK, Western and Eastern Europe are already active in the market and show particular interest in the region. Furthermore, a great base to search talent from can be found in countries which recently implemented or are currently implementing indirect tax e.g. Malaysia, Australia, China and India. Finally, there are countries in the Middle East region that already have indirect taxes in place and may have the suitable human resource (Palestinian Territories, Egypt, Jordan, Yemen and Lebanon).
Compensation following the introduction of VAT
The question that many employees may ask, and every employer should consider, is whether he or she can expect a salary increase once VAT is introduced. The question seems fair as the introduction of a VAT in the GCC will see the prices of many goods and services increase initially pushing up the rate of inflation as the burden of VAT is essentially designed to flow through to consumers and not fall on businesses. Therefore the real disposable income and savings of every employee in the company is likely to be reduced upon the introduction of VAT. Whilst this will ultimately be a decision for each business, past experience shows no direct link between tax and immediate salary increases.
In turn, there are two important aspects to be taken into account. Firstly, although VAT implies 5% price increases, it may exclude essential food commodities, healthcare and education therefore the effect on income and savings will be somewhat mitigated.
However, businesses should still consider adjusting their salaries long – term since there will be more pressure from employees as well as competition that is ahead of the market in terms of pay rates.
VAT will bring significant changes and effects to the workforce. In order to ensure successful transition of the business, companies should already be considering how they will manage the potential introduction of VAT in the region. Whilst there remain many uncertainties, in particular, whether VAT will proceed within the frame suggested, business should not wait until the last minute. Prudent risk management would suggest now is the time to plan for the contingency of VAT. There is a fine balance between budget management and ensuring the availability of scarce resources for the successful handling of VAT within the business.
If you are an employer planning on recruiting staff or a person looking for a new role within tax and VAT in particular, then specialist tax recruiter at Cooper Fitch would be happy to assist you.
Thank you for your enquiry. A member of our team will be in touch with you shortly.