Dean Kern, Middle East Tax and Legal Services Leader, PwC, on VAT implementation: Viewpoint

As a business centre for the region, the UAE continues to be highly relevant and attractive for investors for a number of reasons, including infrastructure, logistics and access to skilled labour. According to the PwC and World Bank “Paying Taxes 2016” study, the UAE is ranked joint first in the world in terms of the ease of paying taxes. In a region where more than 50% of government revenues come from oil and gas, the current reduction in oil prices and the associated budgetary pressures have led to increased speculation that taxation reform will take place. At this stage a corporate income tax does not appear likely, but the UAE Ministry of Finance recently stated that a value-added tax (VAT) will be introduced in 2018.

VAT is an indirect tax on the consumption of goods and services, and it can provide a sustainable approach for governments hoping to increase revenue, while at the same time being neutral for business and limit distortions in the economy. The GCC states, including the UAE, have been studying the potential implementation of a VAT system and are in the process of agreeing to a common framework which can be adopted at a national level in the next two to three years. Although from a business perspective VAT should not create an additional tax cost, businesses should still prepare to comply in terms of charging, collecting and paying VAT to governmental tax authorities. As VAT will impact the whole business, there are several factors that should be considered for a successful VAT implementation.

The main issue is ensuring that the correct systems and processes are in place to manage VAT in an efficient way – applying the correct VAT treatment and generating the required documentation. It will be easy to underestimate both the additional workload and resources that will be required for implementation, and the strain that this may place on tax and finance departments. Investment in technology or upgrading existing systems to automate tax processes will need to be a part of the implementation strategy, as this will improve accuracy while saving time and money.

Alongside investment in technology there also needs to be further development in employee training in all the necessary business units. It will be important to ensure an effective plan is in place to manage the additional compliance requirements.

In a region which has historically seen less investment in tax functions, the introduction of a VAT will likely prove a catalyst not just for additional resourcing, but also from having an appropriate tax framework to manage tax risks, incorporating governance, tax strategy, tax risk registers and improved systems.

For the government there is an opportunity to build a globally best-in-class tax administration. The more they can provide clarity in the application of the laws and use new systems to reduce compliance burden and new models for conducting audits, the greater the success of any VAT implementation.

For companies which are headquartered in the UAE and operating globally, the increased attention given to corporate taxes in Europe, US and other parts of the world does mean careful consideration needs to be given on how taxes are managed. One example is the recently introduced country-by-country (CbC) reporting requirement resulting from the G20-OECD Base Erosion and Profit Shifting project. This entails the preparation and filing of an annual CbC report which includes the disclosure of detailed information about group companies on an entity-by-entity basis. This is another reason why there needs to be effective processes and people in place to deal with this level of reporting for the management of taxes.

Globally, tax management has never been more prominent in corporate, government and public interest circles, a situation that is increasingly reflected in the UAE. Through appropriate frameworks, systems and resources by the government and companies, the ease of paying taxes can be helped considerably.