The word VAT is loaded. Wherever it’s been launched it has exploded into a multitude of meanings. In this article, with the behind-the-scenes assistance of an assessment of accountants (I believe that is the collective noun) we take a look at how the arrival of VAT has played out in a handful of countries from Lebanon to Malaysia.
Remember, VAT is coming to the UAE on January 1. Businesses need to prepare and the experience of other countries suggests ways in which they need to do so.
Let’s start with Malaysia.
A year after Malaysia launched VAT, the government undertook a substantive test to gauge progress. Over the subsequent four months and by this time fully staffed, its VAT administrators audited 12.5 per cent of all registered entities.
Compliance issues were found in a third. The key failure was an inability to provide the required supporting documentation for periodic submissions. Reporting in any jurisdiction can be single, dual or tri-monthly, or even a combination depending on how a system is structured by sector or turnover value.
Lack of knowledge and incorrect guidance were material factors. The last grouping of note was the deliberate misdeclarations. Malaysian law at that time allowed a fine equivalent to about Dh40,000, up to three years in prison plus a fine equal to the difference reported. Plus interest.
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At a glance
■ What: In countries around the world, value added tax has proved to be a complicated thing.
■ Why: Because there are so many details, both for administrators and companies.
■ Further reading: Four steps to being VAT ready
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In the UK, Her Majesty’s Revenue and Customs has systematically launched focused campaigns targeting those sectors identified as the worst offenders. In 2011, it had the delightfully named Plumbers Safe Tax Plan, targeting sole traders operating on a cash basis. It expected all outstanding amounts to be paid with interest but without fines, this leniency being allowed where the mistake was self-confessed.
Closer to home, the upcoming substantive legislation, which will have some differences for each GCC country, is unlikely to be a definitive document.
Peter Whatley, the chief executive of Argent Gulf Consulting, highlights how this is an organic framework and is likely to contain some transitory treatment favouring SMEs. “Typically, smaller businesses are initially allowed to report VAT on a cash basis. This means the VAT liability falls into the reporting period in which a customer invoice is settled and is thus relatively cash neutral.
“As VAT evolves we can expect the qualifying businesses and turnover levels to change, moving more businesses to accrual basis reporting. This means the VAT event is at the time of invoicing. The key change here is that a business must review the value of its outstanding debtors and creditors and apply VAT, report and pay in their next return.
“The service sector suffers further as payroll is typically their highest cost, something that has no VAT. With little input VAT to offset against output VAT, the effect can be debilitating.”
As well, the first year of VAT will include the beginnings of a transfer market in personnel. Amakudari, a Japanese word meaning to descend from heaven, describes the movement of civil servants to the private sector monetising their knowledge. At the end of the first year their operational VAT skills will command eye-watering salaries in the private sector, probably larger at the end of year two.
Governments should not fear such a migration as the traffic is likely to be temporary. These switchers will be able to provide a holistic perspective proving invaluable on joint tax authority industry feedback and feedforward panels.
Many jurisdictions require tax and VAT practitioners to be registered by an accredited body to ensure that a uniform code of conduct is applied. A similar scheme in the GCC would go far to reassure worried executives.
VAT and the predecessors of the EU came into being together. In recent years, harmonisation has begun. However, its 27 constituent systems, even with all their shared development, still have enough individuality to be causing endless technical headaches and days out in court.
India has spent 16 years trying to introduce VAT and the no-nonsense Modi government intends to declare mission accomplished in July. Marshalling 29 regional authorities into line in this famously bureaucratic environment is no mean achievement.
Lebanon launched VAT in 2002, and by 2011 it represented a quarter of all tax income. But the devil is in the details, of course, and such is the sensitivity in Lebanon surrounding fraud that even academics have been unable to ascertain little beyond the categories that Lebanese fraud falls into.
I believe the greatest shock will be felt in the grey market, parallel imports if you prefer. The GCC-enacted agency law to allow local companies the time to become globally competitive, is a common practice throughout global economic history. Such exclusivity is market inefficient and has, as it always does, encouraged an illicit secondary supply chain.
Take bathroom goods. The lucrativeness lies in leveraging the lowest retailer purchase price in the GCC and supplying into that market paying the highest. Thus, it is still profitable to supply, say, an authentic branded soap rather than the fake.
This profitable niche is never conducted on a scale to materially affect the incumbents. But under VAT scale won’t matter; the hiding places will be smoked out and the authorities will be waiting.
In much of the world the VAT man is more frightening than the defence forces. It is time to get your affairs normalised or retire.
Everywhere VAT was launched, it was proposed as a simple, easy-to-collect tax but it has comprehensively failed on that promise. As accountants we’re inherently cynical but remain hopeful as the GCC countries come on stream that this conundrum can be resolved.
David Daly is a chartered accountant (CIMA) typically serving in chief financial officer or finance director roles.
business@thenational.ae
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Value Added Tax in the GCC
Pawan Singh / The National
■ Analysis: Who should worry most about VAT in the UAE?
■ Analysis: All in the details for value added tax in the GCC
■ Saudi Arabia approves an end to tax-free living
■ VAT to generate Dh20 billion in second year for UAE, Minister of Economy says
■ Comment: The basics of value added tax
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