Since 1 January 2018, VAT has been a normal part of our daily lives in Saudi Arabia. Consumers are accustomed to the thought of paying an additional 5 per cent on the majority of their purchases with few complaints. This is quite an achievement given the virtual absence of wider taxation in the kingdom.

The relative efficiency with which the General Authority for Zakat & Tax (GAZT) managed the implementation of VAT played a major part in its fairly uneventful adoption.

Not only has the GAZT implemented VAT successfully, but it has commenced auditing taxpayers (a key element of effective tax administration); attended to a multitude of taxpayer queries; issued more than 25 VAT guideline publications on the website (the most recent guides concern telecommunications, recreation and entertainment); and refunded VAT to taxpayers that have submitted claims.

Tax risks

It was often said during the early days of VAT implementation that the tax would “settle down after a year or two” and that managing the tax risks would become routine. Indeed, a frequent comment was that these risks would fall away as the GAZT and taxpayers became more knowledgeable and proficient.

My response to this type of statement was always to push back on the idea that VAT would gradually cease to pose a major tax concern once implementation had been completed. The global experience with VAT continues to be that, once implemented, the burden of administering and managing the tax increases in terms of complexity and risk.

A year on, this view has been vindicated because, as time moves forward, more and more taxpayers in the kingdom have become aware of the financial and reputational risks that can arise if the approach to managing VAT is not best in class.

VAT administration

The market is already witnessing the greatly improved awareness of VAT technical and industry issues by GAZT officials and their increased capacity to understand, audit and analyse client data.

The activities of the GAZT are supported by a clear realisation by government that effective taxation raises material amounts of revenue, which must be protected by strong administration. The fact that the collection of taxes is critical to the realisation of Vision 2030 should not be underestimated.

In this respect, the GAZT is, sensibly, following the well-trodden path of more established tax authorities globally. Improvements to tax policies, procedures, dispute resolution, audit techniques, training and so on are all on the way – as is the likely expansion and update of the tax regime in general. Two examples of this trend are the recent publication of draft transfer pricing and zakat regulations for review and comment.

Data analytics

Where the GAZT approach to VAT administration is likely to differ to its global counterparts is in the rapid adoption of technology to audit taxpayers by using data analytics tools to review large data sets to detect and quantify transaction errors through exception reporting and system testing.

GAZT already has the authority to request detailed accounting information and frequently attempts to reconcile financial and accounting data to VAT and customs reports and working papers. At the moment, this can be difficult because of the volumes and complexity of the accounting data. Data analytics tools currently available enable the tax authorities to conduct thorough and detailed analysis of taxpayers’ accounting.

All taxpayers that registered for VAT from 1 January 2018 are in a ‘post-implementation’ phase. One year’s worth of transaction data should provide a good picture of the state of the taxpayer’s VAT accounting. Taxpayers are aware that now is the right time to take stock and seek assurance that their implementations were effective in optimising accounting and reporting.

Post implementation

Improved management of the VAT control environment has become a major goal. Identifying and fixing any implementation problems should be a priority – before GAZT has the opportunity.

Our experience of engaging with clients about their experiences in the post-implementation phase and in conducting our own analysis has revealed some interesting findings that can be characterised as relating to system/data-driven issues and matters that relate to processes and controls that are outside the system.

We have found instances where critical master data is incomplete, tax decision logic is flawed, system configuration is incorrect, processes for collecting and capturing key information are missing or not followed and there is no control to identify such failures. All of this can impact materially on the reliability and accuracy of tax reporting.

As VAT and, more generally, the tax environment becomes more developed in the kingdom, the tax function is becoming integral to the future financial wellbeing of businesses.