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Preparing for VAT in the Gulf

FOCUS: The six Gulf Cooperation Council (GCC) states may have finally reached agreement on a VAT framework, concluding discussions that have gone on for over 10 years.28 Jul 2016

Details of the final VAT framework document look likely to be published by late 2016, to be followed by the publication of detailed country-specific VAT regulations.

A tax rate of between 3% and 5% is likely, with exemptions expected for healthcare, education and a number of food items, and introduction could be as early as 1 January 2018 in some states.

Problem areas

VAT is not a straightforward tax for any business, but certain areas are particularly difficult and costly to manage. The financial services sector in particular has its own set of complexities with uncertainty around the VAT status of income, and the ability to reclaim VAT on purchases. Subject to the details of the published regulations there may be implications for both outsourced service arrangements and internal legal structures.

Real estate transactions are another area where VAT causes difficulties, and it is uncertain what impact this will have on the burgeoning real estate market in the region.

Long term contracts across the whole construction sector have the potential, if not managed correctly, to result in significant additional unplanned costs.

What should businesses do to prepare?

The introduction of VAT will affect every aspect of a business, requiring an update of accounting systems, the review of existing and new contracts with both customers and suppliers, and the development of supporting documentation and procedures. The identification of internal VAT ‘champions’ who can project manage the change will be critical to success.

Until draft regulations are published there is a limit to the detailed planning that a business can undertake. However this does not mean that businesses should ignore the introduction of VAT in the region. Many businesses have already established VAT implementation teams to develop an early view on what it will mean for their businesses. Preparing for VAT is a complex and time-consuming exercise and should not just be left to finance teams.

Some businesses may need to restructure their operations to ensure they will not be incurring significant amounts of irrecoverable VAT once the new tax is introduced. Any restructuring will also need to consider other potential tax reforms in the region.

Ian Anderson and Darren Mellor-Clark are tax experts with Pinsent Masons, the law firm behind Out-Law.com.