The vast drop in the oil price has convinced the GCC’s leaders of the need for value-added tax. The UAE, one of the Middle East’s main hubs, looks certain to welcome VAT in 2016, but how will CFOs and consumer spending be affected? VAT

For the shopping aficionados among us, it couldn’t last forever. The introduction of value-added and new corporate taxes across the GCC were arguably inevitable, and promise a degree of change for the region’s finances.

Although the two are not totally entwined, the collapse of the oil price to less than $50 per barrel has been undeniably influential in the suggested introduction of VAT. GCC countries, encouraged by the International Monetary Fund (IMF) and motivated by their own long-term national interests to diversify their economies, have been reliant on oil for decades.

With over 130 countries having implemented VAT or goods and services tax laws, the systems are some of the most widely-used indirect tax systems in existence. The drop in oil prices has made VAT an attractive solution for the UAE, with its implementation arguably overdue. The six countries comprising the GCC have studied the introduction of VAT for years, but have always failed to reach agreement on details, halting progress. However, at least in the UAE, the tax now looks certain to be introduced. The country is facing its first budget deficit – the IMF forecasted a 2.3 percent shortfall for 2015 – since 2009, and change is in vogue. Time is on the region’s side, with an 18-month adjustment period on the cards once laws are officially announced.

On the back of these upcoming changes, the GCC’s Chief Financial Officers will be keeping a watchful eye on how their organisations will be impacted. Although consumer spending may not take a direct hit, the impact will be felt in other areas. One challenge that will certainly require creative solutions on behalf of CFOs is sourcing of the right talent to solve VAT issues. With the region facing a relative shortfall in terms of finance resources, finding personnel with the relevant levels of expertise in tackling VAT processes and compliance will be key. Further, the CFO will have to oversee these processes. While finance leaders of international banks and oil and gas firms will be all too aware of corporate taxes that already exist on such organisations, these could also soon impact other sectors as a knock-on effect of VAT.

Nilesh Ashar, Partner and Head of Tax, KPMG UAE, acknowledges that although certain measures may be premature as legislation has not yet been introduced, it is nonetheless prudent to consider potential outcomes. “It is difficult to suggest that anyone should make radical changes to their systems and business models in response to an unpublished law,” he says. “However, CFOs could start to assess the impact on their pricing models and cost base using a hypothetical scenario of a VAT levy at or around 5 percent, the rate suggested by IMF. Moreover, the cost of implementing systems to comply with tax reporting and filings will result in overall increase in the cost base for UAE businesses.”

Sherif El-Kilany, MENA Tax Leader, EY, does not anticipate a huge impact on bottom lines, but is mindful of contractual issues that could cause problems for CFOs. “The tax cost impact to most trading operating companies is likely to be minimal,” he says. “However, CFOs need to understand the likely impact of VAT on the company’s contractual trading terms relating to both sales and expenses, and take appropriate action for VAT tax laws and compliance requirements.” El-Kilany goes on to add that potential procedural issues will also need to be taken into account. “The company’s financial systems and processes will also need to be adapted to ensure efficient, timely and accurate VAT compliance. Businesses should not underestimate the costs of implementing IT process to deal with VAT billing and accounting, and also the initial VAT training and compliance costs.”

Although it may not have been a pressing need for GCC countries, many will say that the introduction of VAT until late 2015 is belated. Although its effects will not be earth-shattering, those adopting VAT policies will be forced to adapt to the changes, which may cause temporary operational disruption for businesses.

“There is a school of thought that VAT should have already been introduced on a gradual basis – at lower rates and higher thresholds – even if the government did not need or seek to rely on tax-related revenues,” Ashar says. “This is so they could have set up tax administration, and ensure that businesses and individuals were accustomed to VAT laws, so that the coverage could be expanded and rates increased if required based on the economic demands of the country.”

El-Kilany meanwhile, believes that a desire to avoid fuelling the fires of political and economic instability served as an inhibitor for change. “In reality, markets in the GCC have been faced with challenges arising from the global financial crisis and the Arab Spring,” he says. “They prompted governments to delay measures that could have been perceived as adding to inflationary pressures in the region.”

However, it is widely felt that for VAT to be introduced, policies will have to be introduced across the GCC to sustain competition between economies. The region holds many unique advantages that should ensure consumer spending is not too heavily affected, the UAE an especially attractive prospect. Its free trade zones, political stability and status as a hub for the Middle East should ensure that VAT will be relatively covert, and Ashar is confident there will be minimal disruption. “In the current business environment, companies are looking for a lot more than tax-free status,” he says. “As long as tax rates are competitive, the tax rules and the audit process is transparent and fair, and key sectors and essential goods and services are provided complete or with partial relief through tax incentives, the UAE will continue to attract businesses and end customers. Keeping these zones exempt from VAT would be a good way of ensuring that interest in the business community in the UAE stays high.”

This optimistic outlook is shared by El-Kilany. “VAT is likely to make a substantial contribution to UAE’s revenue base, with significant tax collections reducing the country’s dependence on revenues from petroleum exports,” he says. “Overall, it will strengthen the country’s economy and financial stability.”