KUWAIT: Having made presentations to a total number of 1400 -1500 clients of BDO in each of the 6 Gulf GCC states over the past four weeks and having fielded about 130 individual questions from the participants, Ivor Feerick, Indirect Tax Partner at BDO stated that he is in no doubt that the proposed introduction of a Value Added Tax (VAT) system into the region will present significant challenges for the local government authorities.
Although it is widely expected that VAT rate will be 5 percent, there has been very limited official information released regarding the specifics of how the VAT system to be introduced will operate. Ivor expects that the GCC Countries will replicate a lot of the features of the European Union VAT System, particularly bearing in mind the similarity between the six country cooperation in the Gulf and a28 Country cooperation in Europe.
Furthermore, Ivor expects that certain Educational and Healthcare services will be purely ‘Exempt’ from VAT with no entitlement to VAT recovery on costs by the related service provider, whereas the provision of Basic Foodstuffs (e.g. bread, milk, fruit & vegetables, meat etc.) will most likely be ‘zero-rated’ (exempt with credit, thus enabling the suppliers of basic foodstuffs to recover VAT on their operating costs etc.).
Bearing in mind the close cooperation between the six GCC States and their shared interest in ensuring that the system to be introduced in their individual countries is as closely aligned as possible, Ivor said that he will be very surprised if most of the countries do not opt for the 1 January 2018 implementation date as this will help avoid any potential distortion of completion arising from VAT related considerations and will also help embed the system across the region in possibly ‘one full swoop’.
It is also Ivor’s view that in considering what kind of a VAT system would be best to introduce, GCC Governments will invest a considerable amount of time and effort reviewing VAT systems in place in majority of the countries across the Globe including the current 28 European Union (EU) Member States (Note the UK is not due to leave the EU until 2019) which have VAT Legislation in place, with a view to ensuring that the system to be introduced is ‘ effective’, ‘efficient’ and ‘best in class’ to serve the needs of the GCC region.
In summary this means that the VAT regime to be implemented will result in the early collection of as much VAT Tax as possible, as early as possible, with the least possible inconvenience to businesses operating across the GCC as unpaid tax collectors on the Governments’ behalf!.
One of the challenges in introducing a VAT system in a depressed market place is that many hard pressed consumers, who will have experienced decreases in their household income due to cutback arising from the halving of the price of oil as well as increases in oil related products, are disinclined to spend due to lack of confidence in their personal financial circumstances.
Needless to add, increasing the price of most goods and services by 5 percent will act as a further disincentive to consumer spending so in the early days following the introduction of the new VAT system it is likely that retailers may reduce their profit margins and absorb some or all of the VAT costs with a view to maintaining the sales volume required to sustain their businesses.
