GCC VAT experience has valuable insights for Oman


Saudi Arabia’s experience in implementing Value Added Tax (VAT) — thus far a mixed bag of results — should provide instructive insights on how Omani authorities and businesses should get their act together and avoid some of the pitfalls faced by their Saudi counterparts, a key expert has pointed out.
The Sultanate is expected to introduce VAT at the start of 2019, although fellow GCC member states United Arab Emirates (UAE) and Saudi Arabia already rolled out the new tax from January 1, 2018.
A report of Saudi Arabia’s (KSA) experience over the first 60 days of VAT implementation has important takeaways for Oman as the Sultanate’s gears up to embrace this new levy in less than nine months. Published by multinational professional services EY, it collates the responses of around 500 business leaders who participated in a survey on VAT conducted by the company in the Kingdom.
The findings underscore potential challenges that await authorities and businesses in the Sultanate when VAT becomes part of the national taxation regime. “The effective implementation of VAT in KSA proved challenging for both the Tax Authority and the business community,” said Alkesh Joshi (pictured), Partner — Business Tax Advisory Services at EY Oman.
“From the Tax Authority’s perspective, the key challenges varied but ultimately fell into three broad areas: legislation, technology and people. Of the three it has been a significant exercise for the Tax Authorities to identify the right people to manage and administer the tax as the pool of VAT experts with the appropriate level of experience is limited. The KSA implementation also underlined the importance of communication between the tax authority and businesses, in order to aid awareness and ultimately help ensure compliance.”
But there were some positives too. Businesses, for example, were given the chance to provide input on the legislation through consultation. Guidance material on VAT implementation was proactively published by the authorities, while local accountants were invited to attend awareness sessions.
One key shortcoming was the absence of uniformity in VAT implementation across various jurisdictions in the GCC, according to Joshi. “The lack of uniformity in the basis and timing of roll out across GCC has led to a number of challenges for both the sale of goods and services. For example, we have noticed that a number of invoices for exported goods from the UAE to Oman have 5 per cent UAE VAT applied which often is not the correct VAT treatment. Further, we notice that Omani businesses are being charged 5 per cent UAE import VAT in order to clear their imports which pass through the UAE which has resulted in some Omani businesses either suffering a VAT cost, or trying to find solutions to recover the VAT,” the EY consultant explained.
Besides, Saudi and UAE laws also include provisions to override place of supply rules, to apply VAT on services which are provided to non-residents but consumed locally — with particular uncertainty in the KSA around the practical application and effective scope of these provisions, he noted. Significantly, businesses also reported their inability to generate VAT compliant invoices which links back to a lack of completeness in their system setup and an over-reliance on manual processes, said Joshi.
“It is clear that a number of businesses focused on gearing their systems to be able to determine the correct VAT rate on a particular transaction without mapping each transaction for a particular reporting treatment. This meant that the reports generated from the system at the end of the period were not detailed enough for reporting purposes. In addition the Arabic language requirement for documentation in the KSA caused particular difficulties,” he stated.
Also of concern for businesses was the impact of VAT on cash flow, said Alkesh. “Cash flow is certainly a key area where businesses have had to consider their exposures especially given there is a culture of extending generous credit terms to customers in the region due to the market conditions. For those in net repayment positions, such as exporters, cash flow is even more of a concern as it remains to be seen how quickly tax authorities will allow refunds — especially as the risk of fraudulent or incorrect claims is higher in the months following implementation.” Furthermore, as part of their efforts to develop their own Tax Function, businesses are also hiring an experience VAT resource, the consultant said.
“Businesses tend to favour hiring individuals with a wide VAT experience covering advisor and compliance rather than somebody just to handle compliance matters. This is because the effective implementation of VAT is an on-going process and business functions are increasingly demanding support from the tax function especially in relation to tax advice on prospective transactions. Again it depends on the nature of the business and its organisation, a VAT impact assessment should usually be completed to give an idea of the level of complexity and requirement for experienced VAT resource.”
As for the key takeaway from the survey, Joshi stressed: “Businesses (in Oman) should start their preparation as soon as possible and should focus their VAT Implementation strategy around meeting their ongoing periodic filing requirements.”