Taxpayers in the UAE and Saudi Arabia will have to brace themselves for official audits next year as the roll-out of the 5 per cent VAT since January 1 this year overcomes a number of hurdles and teething problems.
Now that regulations are in place, taxpayers are expected to prepare for audits by the UAE’s Federal Tax Authority and Saudi Arabia’s General Authority of Zakat and Tax next year. It is an exercise that will test their resources and the accuracy of record keeping as well as the filing of tax returns.
The two states were the first countries in the Arabian Gulf to introduce the levy following the implementation of excise taxes on energy and fizzy drinks and cigarettes in 2017.
"In the UAE and Saudi Arabia, next year there will be a lot of full-scale tax audit activity undertaken on businesses," said David Stevens, GCC VAT
Implementation Partner at advisory EY.
“These businesses need to prepare themselves to be able to completely justify all of their numbers, all of their data, all of their statements, all of their payments, all of their invoices, all of their record-keeping, and all various other aspects of their VAT compliance that will come under increased scrutiny by the authorities as we go into the second year of operation.”
GCC countries are introducing taxes to cope with the crash in Brent oil prices from more than $115 per barrel in mid-2014 to around $50 per barrel currently.
The International Monetary Fund estimated that the introduction of VAT in the region could generate new revenue of 1.5 to 3 per cent of non-oil GDP.
Bahrain will be the third country to introduce the levy on January 1, 2019, but it plans to introduce a more complex system that has a lot of items exempt from VAT amid a lack of clarity over many aspects of the regulations.
Meanwhile, in the UAE and Saudi Arabia, the tax authorities – which toiled in 2018 to clarify ambiguities about VAT rules and regulations – will need to continue this exercise into 2019 as they begin to conduct tax audits.
“The authorities will be launching audit activity while there are some areas with unclarified rules, so they won’t know how to enforce them,” said Mr Stevens.
“The pressure falls on the authorities to resolve any unsettled, non-clarified or disputed areas of interpretation. They need those clarified so that auditors can do their job and taxpayers need that to make sure they are fully compliant.”
Companies in 2018 struggled to be compliant for various reasons. Some waited too long, some did not expect the levies to be introduced, while others changed their processes to comply, but their work was dogged by mistakes.
“Readiness was certainly a challenge given the relatively short lead time between announcement and go live date,” said Jeanine Daou, Middle East Indirect Tax Leader at PwC. “Unfortunately many businesses either expected a delay in the implementation date or underestimated the changes required and started late.”
There was a steep learning curve to get it right due to the fact that tax is an unfamiliar zone in the GCC. Authorities in the UAE and Saudi Arabia both provided taxpayers with leeway to help them get over the initial hiccups. For example, the UAE extended the exemption period for late registration penalties until the end of April to help businesses prepare.
The authorities will need to continue clarifying rules and regulations as more issues come up in 2019 because VAT is a complex duty that is constantly updated and interpreted.
"All of the easier things have been applied and pretty much given detailed guidance by the authorities so far," Mr Stevens said. "The more difficult the issues, the more difficult the structured transactions, and the items that are on the edge of definitional boundaries are coming into more and more focus. Going forward, the challenge that the authorities will have is being able to speed up the clarifications, the rulings and the guidance process so that taxpayers don't just say they will charge VAT."
Businesses will need to further digitise their processes amid expectations that the UAE and Saudi Arabia will require tax procedures to be more digital. "What we are seeing now and I expect will continue to exist for the next couple of years is companies trying to streamline their processes, automate them in the system, build tax departments and hire people," said Jason Riche, a tax partner at advisory Deloitte.
“In the Middle East right now VAT management and compliance is very much a manual process and there is a lot of room for companies to improve on this using technology.”
All tax returns in the UAE and Saudi Arabia are presently filed online, but other aspects could also be required to be digitised. Experts expect the two countries to adopt a global approach to VAT, where items such as invoices are filed online, sometimes even real time.
"It wouldn't surprise me if over the next 12 months we start to see announcements about the future of the VAT regime in this part of the world going towards a world-class, more digitised, electronic-based approach to compliance as well," said Mr Stevens.
"The governments here don't have the legacy of the past, so in many ways they can go to these cutting-edge developments quite quickly and that is where the authorities will go. The journey is just beginning for the transformation of VAT in the economy here," he said.