Need to tackle hurdles, become ‘VAT-ready’ by the end of 2017 – ‘Tough times ahead for businesses in Kuwait’

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KUWAIT CITY, Nov 21: Businesses in Kuwait need to take on the challenges of implementation in order to become ‘VAT-ready’ in 14 months, Ernst & Young (Al Aiban, Al Osaimi and Partners) officials urged at a conference held at the JW Marriott Hotel on Monday morning, that looked at the proposed introduction of Value Added Tax (VAT) in the Gulf Cooperation Council (GCC).

VAT is expected to be introduced in all the GCC countries from January 2018 at the standard rate of 5 percent with some exemptions in basic food and medicine as well as a zero rating for some goods and services.

The conference featured EY VAT and Indirect tax experts and was attended by almost 200 participants from the Ministry of Finance, banks, insurance companies, oil and gas and oilfield service companies, telecommunication companies, as well as those from retail, trading and other sectors.

EY is working closely with the GCC secretariat to facilitate the signing of the Framework Agreement. Alok Chugh, head of EY’s Tax Department in Kuwait, was confident that the Framework Agreement between the GCC states would be signed in a matter of weeks.

While the master framework will be an overarching legislation that will provide a broad overview, he shared that each member state will transpose its provisions into their own domestic VAT law. He informed that VAT is a transaction based tax that will impact every transaction that takes place in Kuwait from Jan 2018 and pointed out that since the registration threshold is most likely to be brought down from US$ 1 million to US$ 100,000, every entity will be impacted unless there is a specific exemption or the transaction is considered falling outside of the scope of the VAT system.

Finbarr Sexton, EY’x Tax Partner and the EY VAT lead for the GCC countries, provided a background and surveyed the economic impact of the impending measure. He shared that the implementation of VAT had been on the government agenda for the past decade as a means of replacing custom duties and furthering free trade agreements.

The dip in oil prices brought the VAT issue front and centre again and on an accelerated path of implementation, as governments are keen to diversify their revenue sources. Sexton shared that according to conservative estimates by the IMF, Kuwait expects to collect 1.4 percent of GDP in the first year of implementation and so the imposition of VAT is a welcome source of revenue. Saudi Arabia with a strong domestic market can expect to collect 1.6 percent of GDP in VAT. He pointed out that the broad framework had been agreed upon 18 months ago and finer points were being discussed at present, noting that it will be an immense challenge for businesses and tax administration to get everything ready in the short period of 14 months. He shared that it is likely that there will be a 12-14-month lead time for businesses to become compliant from the date of announcement of the introduction of GCC VAT. He pointed out that while some countries like UAE and Oman were more vocal and had accelerated their public awareness campaign on the issue and ready to publish their VAT plan, most countries will be working to implement the law at the same time in order to avoid distortions among intra-GCC trade. He urged to ready themselves by adopting a project timeline that includes VAT impact assessment, planning and implementation, Transition and Output testing and Post implementation assistance.

Jennifer Sullivan, EY’s VAT Director, explained VAT fundamentals to participants and its application. She defined VAT as a tax levied on the supply of goods and services made by a taxable person in the course of the furtherance of business, the tax is borne by the end use consumer and is transaction and not profit based. Sullivan pointed out that the supply of goods and services inter-company and groups would also be subject to VAT unless businesses formed a back group.

While tax exemption, as in the case of corporate tax, is considered a boon, VAT exemption would be a tax cost to businesses as those exempt could not charge others in the supply chain. Within the supply chain, intermediaries and businesses dealing with end consumers would be in a net payable position by receiving input credit. She stressed that return on VAT was not a revenue for businesses but an amount operated and collected on behalf of the government.

While VAT activities are not a tax cost to businesses, there are other implications and associated costs in terms of cash flow, compliance, penalties and interest and even failure to redeem input VAT or recoverable VAT. She delved into the implication for import and export supplies, and pointed out that intra-GCC supply would follow the reverse charge method modelled after the EU system that will facilitate free movement of goods and services within the GCC. She touched upon the topic of VAT on property highlighting the issues which may arise depending on the final domestic VAT law.

Tuhin Chaturvedi, Executive Director in EY Tax, reiterated the salient features and scope of VAT, registration provisions that include a tax identification number, VAT group registration, suppliers of exempt goods and services, and exempt governmental bodies, and other issues. He drew attention to areas of concern that include the ability to obtain VAT refunds, dominance of government bodies, tax exemptions for businesses wholly owned by GCC nationals in some GCC countries and their first introduction to taxation concomitant with a uniform application of the Framework Agreement and permitted derogations, resourcing within the respective Ministries of Finance and cooperation and exchange of information between them, distortion of competition on the global markets, free zones along with the challenge of administrative complexity and susceptibility to fraud in a multi-jurisdictional VAT system.

EY officials also discussed VAT automation, VAT management and leading practices, as well VAT fraud, while putting forth EY’s VAT solutions for SMEs. The conference concluded with three break-out sessions relating to Oil and Gas and Power, Financial Services, and Retail and Technology sectors attended by industry specialists to understand how VAT would impact their respective industry.

By Cinatra Fernandes Arab Times Staff

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