bdo bahrain value added tax (vat) -...

VAT in the Gulf - October 2016

BDO Bahrain Value Added Tax (VAT)

Arshad Gadit – BDO Bahrain, Partner Assurance and Business Advisory Services Tuesday 18th October 2016 BBBF, Bahrain

Value Added Tax

• VAT systems currently exist in more than 150 countries worldwide including all (current) 28 European Union Member States

• Generally introduced at relatively low rates (10% in UK in 1973) and then increased thereafter (UK now 20%)

• Each 1% increase in the VAT rate in the UK generates c. £5 billion additional tax revenue for Her Majesty's Revenue and Customs (HMRC)


Why are Governments focusing on Indirect Tax as opposed to Direct Taxes (i.e. Personal/Corporate Taxes) as a means of raising additional tax revenues?

• Less controversial – effectively consumers have a choice not to buy goods or services so can avoid paying VAT, etc.

• Indirect Tax rate increase can generate significant additional tax revenues compared to similar increases in Direct Tax rates

• Personal Tax increase can act as disincentive to productivity as employees pay higher taxes as a result of working longer hours


What is Value Added Tax (VAT)?

• Consumption tax on supplies of goods (tangibles) and services (intangibles)

• Most businesses charge VAT and are generally entitled to reclaim most if not all of the VAT they incur which relates to their business activity

• VAT is ultimately payable by the end consumer (i.e. private individuals and entities not entitled to recover VAT)

• Consumers pay VAT as a net cost whereas businesses usually pay VAT and have to manage the related negative cash flows pending recovery of that VAT from the Tax Authorities


VAT - How does it work?


Example of Operation of VAT

Supplier - Sells

$10,000 plus 5% VAT

Raw Materials

Manufacturer - Purchases $10,000 plus

5% VAT - Sells

$18,000 plus 5% VAT

Retailer - Purchases $18,000 plus

5% VAT - Sells

$24,000 plus 5% VAT

Consumer - Pays

$25,200 VAT Inclusive

- $1,200 VAT paid on total sales price

Supplier VAT Sell $10,000 $500 VAT payable on value added margin: $500

Manufacturer VAT Sell $18,000 $900 Purchase $10,000 $500 Margin $ 8,000 $400 VAT payable on value added margin: $400 ($8,000 x 5%)

Retailer VAT Sell $24,000 $1,200 Purchase $18,000 $ 900 Margin $ 6,000 $ 300 VAT payable on value added margin: $300 ($1,200 - $900)

Total VAT payable = $500 + $400 + $300 = $1,200


Accounting for VAT

a) Invoice Basis VAT has to be accounted for by supplier based on the date of issue of an invoice, even if the invoice has not been paid before the VAT filing deadline for the VAT period during which the invoice was issued.

b) Cash/Monies Received Basis Regardless of the date of issue of a sales invoice, the VAT liability arising only crystallises based on the date/ VAT period in which the related payment is discharged.


VAT Registration Thresholds

• Each country sets its own VAT registration thresholds and if the annual trading income (turnover) of a business is less than the threshold set, there is no obligation on that business to register for or charge VAT

• Sometimes different VAT registration thresholds arise for; a. supplier of goods, b. supplier of services, and/ c. businesses not established in the country of registration (Generally NIL threshold)


VAT Registration Thresholds

• In some countries businesses whose income is less that the registration threshold set can “elect” to register

• Following on from an “election”, VAT is chargeable and reclaimable similar to a business that has been obliged to register

• Businesses who are not registered, cannot charge VAT on sales nor can they reclaim VAT on purchases


VAT Exempt vs VAT Exempt with Credit (Zero Rated Supplies)

• VAT systems often exempt certain banking, insurance, financial services, medical and education services This means no VAT is chargeable by suppliers of any such services nor is any related VAT incurred reclaimable

• The supply of certain basic foodstuffs (e.g. fruit, vegetables, meat, bread, milk, etc.) is sometimes zero rated/VAT exempt with credit and VAT is fully reclaimable by businesses making any such supplies


Import of Goods

• Generally VAT at appropriate rate is payable at the time of import of goods – Correct paperwork is necessary to enable claim of VAT credit/refund.

• Customs duties also need to be considered and if payable are generally not reclaimable


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Buying in Services from Abroad

• In most countries, a business buying in services from abroad is obliged to “self-account” for any VAT arising, as opposed to the services supplier having to register for and charge VAT

• This is known as the Reverse Charge procedure under which the recipient of the service accounts for VAT based on the rate of VAT applicable on the service in the country in which the business is established. Credit for this VAT can be taken subject to normal rules

• Special rules apply to services relation to immovable goods/property


• The GCC States reached an agreement on a Treaty that was held in an extraordinary meeting on 16 June 2016 in Jeddah and approved in principle the Value Added Tax (VAT) and Excise Tax treaties. The treaties will form the basis for the issuance of national VAT and Excise Tax legislation by each GCC Member State).

• Each GCC State would still have authority to implement its own specific provisions in certain areas.

• Global average generation of revenue from VAT as share of GDP is 7.5%.

• According to the IMF estimates, the potential revenue from the implementation of 5 percent VAT is almost 1.6 percent of GDP for GCC countries.


Value Added Tax (VAT) in Gulf

Proposed Introduction of VAT in the GCC Countries

• Likely rate of VAT: - 2% - 5% rate expected to be introduced in all 6 GCC Countries

• Dates on which VAT will be introduced: - 1 January 2018 confirmed as date for both UAE and Kuwait - Bahrain, Oman, Qatar & Saudi Arabia can introduce VAT at any time between 1 January 2018 and 1 January 2019


Likely Effect on Economies in GCC Countries and Consumer Behaviours • Introduction of a VAT system could slow economic growth, but the

lower the VAT rate, the less likely this will arise

• Increase in prices to consumers could dent confidence, thus resulting in a reduction in consumer spending so in the initial stages of a VAT system, businesses sometimes absorb all or part of the VAT cost

• Increases in prices can also have potential to lead to demand for increase in wage/salary levels and thus increases overall rate of inflation


Trading with the other Gulf Cooperation Council States

• The coordinated approach to the introduction of VAT in the GCC Countries is likely to ensure that a reasonably level playing pitch is maintained and that distortion of competition arising as a result of domestic VAT legislation will be minimised

• Co-operation between GCC Countries is likely to lead to a similar (and hopefully simplified) approach to cross border supplies of goods and services


Trading with the other Gulf Cooperation Council States

• Reverse charge/self-accounting for VAT by businesses acquiring goods and services is likely to be a feature of the VAT system and *MAY be used to facilitate trading; a. Across borders between businesses in GCC Countries b. In free zones

*Details not yet announced


Timeframe for Additional Detail

• As experience shows, it takes a lot of time to prepare for the introduction of a VAT system. It is likely that clarification of the outstanding detail of the VAT system to be introduced will be provided within 6-9 months at the latest

• Announcement of date of implementation of VAT systems in Bahrain, Oman, Qatar, & Saudi Arabia will probably be made by 31 December 2016 to allow sufficient time to prepare for a possible 1 January 2018 commencement date


VAT Business Impact

Compliance

Supply Chain

Accounting and

reporting

Technology refresh

Focus Group connection

Governance, Change

Management and training

VAT Business Impact


From our experience of the implementation of VAT over the last few decades in other countries, there are some key areas need to be consider...

Assess the impact of policy changes

Develop proposals with focus group

Establish connect and make representations to the government

Organisations have to put in place the right governance mechanism which can drive efficient and effective execution

Managing change such that there is minimal disruption to business.

Training employees on changed process and technology

VAT registrations Computation of tax

credits/set offs Filing of returns Payment of taxes Maintaining Statutory

records

Assess impact of VAT on supply chain network & process Develop supply chain

operating model to suit the VAT regime

Revising Enterprise Resource Planning (ERP) systems to ensure that they can cope with the charging and recovery of VAT

Ensuring the relevant books and records are maintained in the appropriate manner by a business Revising accounting

manual for VAT processes Changing invoicing

templates to comply with VAT regime

Key issues and VAT Readiness Tips

#1 Review all legal agreements relating to supplies of goods and services to ensure that they are updated to include an “excluding VAT” clause ASAP If a contract has no VAT clause, the consideration receivable by the vendor will be deemed to be inclusive of VAT, thus meaning that net consideration receivable is reduced from $10,000 to $9,523.80 + $476.20 VAT if the VAT rate is 5%. #2 Consider how your business is going to cope with the issue and receipt of VAT invoices, credit notes, etc. Identify a suitable software package that works well for your business and liaise with the supplier to ensure that it is being updated to take account of introduction of VAT


#3 If your customers are consumers, identify a suitable Point Of Sale (POS) software that will be able to accurately calculate VAT on sales, etc. #4 Depending on the size of your business, consider the necessity to send certain key staff on an external VAT training course or to have a bespoke VAT training course prepared #5 Appoint a “VAT champion” in your organisation as the primary person to ensure that your business is “VAT Proofed” and that there are no unpleasant surprises at a later stage



#6 Take the opportunity to discuss the introduction of a VAT system with your suppliers and customers to ensure that any potential misinterpretations of the related consequences are ironed out at early stage and that good relations are maintained #7 Stay close to your local BDO Advisory team who will be actively monitoring all ongoing VAT related developments



How BDO Can Help…… STAGE 1 STAGE 2 STAGE 3

Impact assessment Implementation Post implementation support

Review and identify taxability on sales and recoverability of VAT on purchases.

Impact of VAT on Inter GCC transactions and inter company transactions.

Review of the current limitations and mapping of the associated risks and opportunities.

Review of Sample Suppliers / Customers Contracts from VAT perspective and advising requisite change.

Review of information systems and human resources to assess the training needs and challenges to implement VAT.

Setting up VAT related procedures and policies.

Staff trainings.

To advise on the system and reports to be generated.

Testing of the VAT version of the IT Systems for efficacy thereof.

To advise the information which should be mandatorily incorporated in the sub-modules such as Customer Management Systems and Vendor Management Systems.

Ensuring that the Compliance Mechanism is fully adhered to under the VAT Scenario.

Ensuring that any issues/ queries/challenges under the VAT scenario are quickly addressed.

Ensuring that the requisite implementation steps for maximising the efficiencies and minimising the potential future ax risks are put in place.

Ensuring that books and records are maintained for any potential VAT audit.

Ongoing training of staff.

2016-2017 2018-2019 POST 2016


• VAT systems are generally a very effective and efficient means of collecting significant tax Revenue around the world

• VAT is a Self-assessment system under which businesses are obliged to submit correct returns and pay liabilities in timely manner

• Very limited detail regarding the new VAT system announced to date

• Whereas 15 months seems a long time to prepare, it is very important to put a process in place as soon as possible to cope with the introduction of VAT

• The GCC Countries will have reviewed VAT systems & practices from across the globe so they are likely to introduce efficient VAT systems heavily dependent on technology to ensure efficiency

• VAT rate at 5% is likely to increase with the passage of time VAT in the Gulf - October 2016

OUR TEAM OF SUBJECT MATTER EXPERTS

Regional Leaders

Arshad Gadit

Lead Client Service Partner

Nath Venkitachalam

Lead Engagement Partner

Ivor Feerick Chair of the BDO International

VAT Centre of Excellence

John Wonfor

Global Head of Tax for BDO International

Global And Regional Subject Matter Experts

Gavin Brown

Resident Vat / Tax Leader

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