Expanding beyond oil-based revenues has been a growing need for nearly all Gulf Cooperation Council (GCC) states with oil-dependent economies, and the recent oil-price deadlock has further intensified the need. Despite the short-term disruption it will entail, value-added tax (VAT) is a huge opportunity for growth, change, and transformation, not only for the UAE economy, but also for businesses at large. And businesses need to be ready to adapt to this change, which can cascade into benefits for everyone.
Emerging technologies and an emphasis on sustainability are driving rapid changes in our world. As a sign of things to come, several large global automotive markets are moving towards the use of electric vehicles and electric grids, expanding the percentage of sustainable sources in their basket.
In this rapidly transforming scenario, economies that have traditionally relied on their oil and gas resources will need to reimagine themselves. The governments of the GCC countries, too, are preparing for a future that reinvents their economies. The VAT regime, which will expand the tax intake of the governments of the region, is a step towards investing in future prosperity through diversification of the economy. However, like all new measures – especially in taxation – the change will generate some disruption. But in reality it is the region’s first step towards a creative transformation
But what about businesses? How will VAT impact their efficiencies? And can they be VAT-ready, to optimally harness its various benefits?
Balancing globalization and localization
Globalization has been at the core of the massive growth we have seen in industry and business. But to be global, you need to be a local player. This balance of being global and acting local is a critical one, as local laws, product availability, and sensitivities need to be effectively balanced with international laws and standards.
Introduction of VAT is a classic example of this. While it will trigger a whole new era of change and growth, at this point it has created gaps that need to be plugged within business’ operational and product strategies. So today, software that is world-class and cutting-edge cannot be efficient in UAE if it is not VAT-compliant and ready function within the necessary parameters.
For the Gulf countries, implementation of VAT is akin to a globalization move. Diversification and following international law are the only routes to becoming part of a global marketplace. Additionally, taxation can also serve as a new source of revenue.
So how can we prepare for this colossal change? A simple checklist and a positive outlook can ensure compliance as well as optimized benefits.
Readiness is about a shift in mindset
Introduction of a new tax regime is a major change, and enterprises have always worried about it. That said, the region’s tax-free status for a prolonged period makes VAT seem like an even greater challenge.
Let’s look at readiness first. Some important aspects that a business needs to consider are:
- The key question: Are you covered by VAT? (AED 370,000 onward is mandatory)
- Understand the industry you are in and find out tax exemptions and taxable categories
- Conduct a VAT assessment exercise to identify and classify relevant parts of your business
- Find out about the requirements of VAT on your accounting structure
- Determine your readiness from an accounting perspective regarding input and output tax
- Make sure your team and organization understand the added role of tax accounting
Now let’s talk about the shift in mindset that is most critical when preparing for change. Taxation needs to be viewed as a positive change. When you pay taxes, they are routed toward a healthy platform for business. Infrastructure projects and new laws supporting foreign investors are basically routes to redirect investment back into the country for the benefit of the country and its people.
From an enterprise point of view, as a global executive involved in standardizing global policies with local compliance, I personally don’t see much impact on the consumer – except the shock effect, which might last a few months. There will definitely be a decrease in the power of buying until things settle down into a way of life. Also, I would expect retailers and trading companies to become more innovative.
Looking at the positives
If we talk about the scope and extent of taxation, the 5% VAT being implemented (in general) is low compared to global figures that range between 15% and 25%. Also, the simplicity of the market means fewer complications for everyone. This is a greenfield market, where the law is very simple and straightforward.
Innovation is another great tool to prepare and support this transformation. As we operate in several global markets with existing tax regimes, we have to help our customers further by making the system not just tax-ready, but also configurable. Delivering preconfigured solutions makes their lives easier. Updates and patches, along with tax-return statement options, should become part of solutions to support VAT implementation.
Readiness also means accepting the transformation in roles that a VAT regime will trigger. Many traditional roles will be redefined, and new meaning can be found in the way line-of-business staff deliver value to businesses. Take the role of an accountant, for instance. Their purpose is no longer just to compute VAT. That is a system job. Their real purpose will be to monitor, validate, and protect your organization against noncompliance.
Enterprises to become stakeholders in transformation
One of the challenges of VAT is that it falls under a transactional or dynamic type of taxation, which means it requires constant monitoring and reporting. For the smooth implementation of VAT, enterprises will need to understand their industry at a deeper level than previously.
VAT will require businesses to identify and classify their functions, earnings, and expenses. A prepared and engaged enterprise will be able to maximize any benefits it can accrue through exemptions and claims. The new tax regime will present opportunities as well as compliance requirements. Enterprises can take four approaches to be an active participant in the region’s creative transformation:
- As an active agent, an enterprise can lead the transformation in business models and collaborative relationships. An enterprise can reinvent itself and, in the process, alter the industry it is part of.
- Through strategic evolution, enterprises can gain advantages through financial models optimized for the new tax regime.
- By taking ownership of the initiative, an enterprise can be at the forefront of accurate and timely compliance. Through their efforts, enterprises can generate streamlined processes and help create a new normal.
- Through focused innovation within the new regime, an enterprise can drive process evolution and the creation of new synergies.
With change comes opportunity
Tax restructuring is one of the most fundamental reorganizations that an economy can go through. This is even more important when the restructuring is being pursued in the interest of reinventing the economy itself. Rarely do businesses get the opportunity to stake out entirely new ways to operate and to implement fresh strategies to this extent. The VAT implementation in the UAE represents a chance for businesses to align with a new vision, diversify markets and opportunities, and, ultimately, leverage a much wider array of avenues for growth.