UAE all set for business transformation

Companies need to prepare by reviewing existing systems and building a VAT implementation plan to conform to upcoming regulation.

The UAE businesses look set to enter into new taxation era with the introduction of value-added tax from January 2018. With VAT legislation is expected in coming weeks following announcement of VAT law and online registration from mid-September, there is little time for organisations to become a VAT-compliant unit by the end of this year.

The introduction of 5 per cent consumption tax is likely to have implications across business functions, especially, but not limited to finance, IT and legal. Analysts and tax experts said companies need to prepare by reviewing existing systems and building a VAT implementation plan to conform to upcoming regulation.

David Stevens, VAT implementation leader, EY, said the UAE companies have generally been ahead of those in other GCC countries, but many still need to begin preparing their businesses for the introduction of consumption tax from January 1, 2018.

"Businesses need to prepare in terms of people, processes, systems, contracts, and stakeholders, which requires an extensive amount of time and resources," Stevens told Khaleej Times.

Elaborating, he said even if a business is making zero-rated supplies or exempt supplies, they will still be affected by the impact of VAT on their purchases and need to adjust their business practices accordingly. "If they haven't already started then they need to act quickly."

Julie Lere Pland, VAT director at KPMG in the Lower Gulf, said many organisations are considering the introduction of VAT seriously and approaching it as an important business transformation project impacting most of the aspects of their business operations.

"Although, the UAE specific VAT legislation is not yet published, there is a lot of preparatory work that can be done. Given the latest announcement by the Federal Tax Authority that it will open online registration for businesses next month, businesses that have not yet started their preparations may do so now," she said.

Challenges seen
Jeremy Cape, partner at international law firm Squire Patton Boggs, said the UAE has no significant tradition of taxation, so the introduction of any tax would be challenging.

"There is a significant element of self-assessment in VAT, which will be challenging for all businesses. I'm also a little concerned about the possibility that in principle documents relating to VAT will need to be submitted in Arabic, which will be an issue for businesses that operate principally in English, but I'm hopeful that the revenue authority will take a relaxed attitude to this," Cape told Khaleej Times.

According to Sunstream Research and Consulting pre-legislative guide on VAT in the UAE, new consumption tax will bring up some corporate challenges in the GCC because many companies have not been exposed to tax regulations in the past. It further said that VAT implementation may affect consumer behaviour and the businesses should assess its impact on sales and profitability. The businesses should also review existing contracts for goods and services to consider if these are still financially viable after January 1, 2018.

"Many small firms have no inherent VAT experience and a limited understanding on how it will affect their operations. However, larger corporations have readied themselves," said Ibrahim Serafi, business head, Sunstream Research & Consulting.

Deloitte Middle East, in its regular pulse survey in July, claimed that nearly 60 per cent of businesses are well informed about the VAT introduction in January 2018. The UAE and Saudi Arabia led awareness drive in the region to prepare their corporate sector for the consumption tax.

Laurent A. Voivenel, senior vice-president for operations and development in the Middle East, Africa & India, Swiss-Belhotel International, said most large companies have already started preparing for VAT, but a lot of smaller companies are lacking full understanding in terms of implementation.

"Almost every country in the world has VAT so it is not something new. In fact its impact in the UAE is going to be relatively less compared to countries such as UK where standard VAT is charged at 20 per cent," he said.

Danyal Tirmazi, engagement manager, Sunstream Research and Consulting, said there is no dearth of tax specialists and consultants in the market, many of whom have come from countries where VAT is already an everyday reality. "So organisations should have a relatively straightforward transition, provided they choose the correct tax partners," he said.

Stevens of EY said the policy shift to a modern VAT regime will give rise to many challenges for businesses in the UAE and wider GCC, and business owners will need to be prepared for the introduction of a tax system that impacts every sector of the economy from importer, manufacturer, wholesaler, retailer, and finally to the end consumer.

"Businesses will experience an upfront cost for VAT implementation as they alter their operations, systems, processes and communications to comply with the new VAT requirements, challenges or opportunities. However, if the implementation of VAT is executed correctly from the start, it will become part of the everyday operations with minimal additional ongoing costs."

Diversification is a must
Serafi of Sunstream Research and Consulting said diversification is the need of the hour in this region and the Emirates leads this path with sector growth in the tourism, transport and logistics and real estate sectors.

Referring to the Ministry of Economy, he said 46 per cent of GCC revenue is based on oil sales in comparison to a smaller but significant 25 per cent in the Emirates.

"In the last three years the oil price has plummeted on global markets. Today at around $48, it trades at less than half of what it did in the summer of 2014, which means revenues have been whittled down considerably.

With an expected additional Dh 12 billion in its first year, and Dh 20 billion in the second year, VAT will help stabilise revenue streams during economic cycles and equally the management of public deficit and government debt," he said.

VAT will be introduced from January 1, 2018 as part of the UAE government's initiative to further diversify revenue sources in a bid to move away from dependence on oil income. The introduction of consumption tax will create a more stable revenue source for the government, which will instill confidence in the UAE's economy and business environment.

Cape of Squire Patton Boggs said VAT has generally proved to be a good source of revenue for countries that have introduced it.
"I cannot see a 5 per cent rate ultimately providing sufficient compensation for reduced oil prices, and envisage that there will be pressure on government to increase this rate in the not-too-distant future. It's possible that the UAE may need to look at introducing other taxes too," he said.
- muzaffarrizvi@khaleejtimes.com