Two of the six GCC states, the UAE and Saudi Arabia, introduced VAT on 1 January 2018. With Bahrain, Qatar, Kuwait and Oman in the process of organising their VAT implementation, the experiences in the UAE and Saudi Arabia provide an indication of issues that businesses in the GCC may face when VAT is rolled out across the rest of the region.

Main challenges

One overriding challenge observed in both the UAE and Saudi Arabia was that businesses typically underestimated the scope and level of effort required to implement VAT. The combination of dealing with a new tax, coupled with the significant business and systems changes that were required, put a lot of pressure on companies to adapt.

To their credit, most organisations got there in the end, but as our survey shows, 77 per cent felt that they could have started the process at least three months earlier.

Our survey also revealed that 90 per cent of those in the consumer business sector found it took longer than three months to implement, and more concerning, all in the technology sector said it took them longer than six months.

Creating, drafting and implementing tax law is a challenging task. Even though the intention to implement VAT was announced more than a year before the go-live date, detailed legislation was understandably and for a variety of reasons released relatively late in the process in both countries. Both the UAE and Saudi Arabia took a considered view that good tax law cannot be rushed.

Unfortunately, a number of companies were hesitant to commence implementation projects until after the release of the VAT legislation and the timeline for registration for VAT purposes was announced, leading to truncated implementation and delays in the commencement of projects.

Implementation assistance

As time grew closer to the VAT implementation date, there was a significant increase in requests for assistance from external advisors, some as little as two months or less prior to 1 January 2018.

Many businesses tendered out extensive implementation projects simultaneously, despite a tender process taking up valuable time. Most projects faced a scarcity of qualified and experienced resources, both from external service providers and their internal pool of suitable candidates.

For historical reasons, particularly in the UAE, there was also a lack of in-house tax experience. Very few businesses had tax departments to begin with, and for obvious reasons, even fewer had dedicated VAT resources. As a result, projects were generally left for the finance team to deal with in addition to undertaking their routine tasks.

While most finance teams have some experience in conducting financial transformation projects, few, if any, would have dealt with a project of the breadth or scope of a VAT implementation, which involves easily overlooked touch points throughout an organisation’s wider operations.

Businesses that started the implementation projects early also faced some challenges, including uncertainty regarding the expected VAT treatments applicable to certain supplies. In the real estate sector, 64 per cent cited the lack of knowledge of the VAT rules as a factor delaying their implementation. It was difficult for many businesses to finalise their VAT accounting treatments in their IT systems until late in the project.

ERP system

In particular, many struggled in identifying whether their enterprise resource planning (ERP) systems would be able to cope. Common issues included old or legacy systems that were not supported and where ‘patches’ or upgrades could not be easily applied.

Others found that although they had a core ERP that was VAT capable, the sale, procurement, HR or other essential systems within the ERP package were not compatible, and in some cases were so highly customised that they could not be amended in time with any sense of confidence.

Finally, in Saudi Arabia, an added complexity for businesses was the requirement to issue invoices in Arabic. Many global ERP systems do not have this functionality, making the businesses prima facie non-compliant with the tax invoice requirements, or requiring them to create workarounds that were often manual.

As with any new laws, they take a while to bed-in and the experience in the UAE and Saudi Arabia is not unexpected. VAT presents a unique challenge when compared to other forms of taxation. Unlike corporate income taxes or direct taxes, where filings are generally done on an annual basis, VAT filings are typically monthly or quarterly.

As VAT is also a transactional tax, decisions need to be made in real time. Supply chains are sometimes difficult to unravel and understand (even for professionals with years of experience) and with the best will in the world, tax authorities cannot issue guidance to cover every scenario.

Some areas of uncertainty have been clarified in the subsequent release of guidelines, but there is still some way to go for businesses to understand and address the impacts of certain provisions.

Impact on operations

Overall, businesses need to ensure that they can deal with a new business model that incorporates VAT into systems. This means addressing processes and procedures, the risk management and compliance approach, plans for dealing with their supply chain, as well as commercial strategies, such as pricing.

VAT is a tax that impacts on the full supply chain, and requires businesses to interact with the third parties that they contract, whether on procurement or sales. This requirement to interact forces businesses to engage with their supply chain in order to make decisions required to cope with the imposition of VAT.

To achieve a successful outcome in an implementation project, a business should, as a first priority, establish a project structure, and identify a steering committee consisting of members with a deep understanding of the day-to-day operations of the business and an effective project management function.

The steering committee, using the skills and experience of outside advisors, should develop a full understanding of the impact that VAT will have on the business, so that it can move to address all the relevant touch-points.

Pitfalls to avoid include turnover in staff or project team members, which can be problematic throughout the project, so alternatives for departing team members should be identified at an early stage.

Where interpretation of the law is unclear, which is often the case even late in the project, options should be considered for a plan B. Due to the uncertainties, businesses should try to avoid setting unrealistic timelines and deliverables. At the same time, the day-to-day running of the business needs to proceed without interruption.

Starting early

While it is clear that uncertainties exist around the VAT implementation in the remaining member states, globally VAT systems tend to have more similarities than differences. Thus, together with the experience of the UAE and Saudi Arabia, there is a lot that businesses can do to prepare well before local legislations are issued.

The key thing we would advise businesses is that they cannot start soon enough in this respect. Our experience suggests it can often be a false economy to delay an implementation, especially as the journey for each company varies.

In addition, a simple risk management approach would suggest that the first step of understanding the likely impact of VAT on the business’s operations is essential, as is determining what constraints appear on the critical path to a successful implementation. Without that foundation, business is doomed to make the same mistakes as others before them have made.

By Michael Camburn and Bruce Hamilton

Michael Camburn (left) is Deloitte’s indirect tax leader of Bahrain and Saudi Arabia based in Riyadh, while Bruce Hamilton (right) is partner, indirect tax, based in Dubai