Ask any person in the GCC and they should be able to tell you that the standard VAT rate is five percent. From a consumer perspective, it all seems relatively straightforward. The introduction of VAT has increased final prices paid by consumers in the UAE and Saudi Arabia and is almost certain to do the same in Bahrain and the other GCC countries once they implement VAT.
However, the impact for businesses is significantly more complicated. Beyond VAT’s immediate financial impact, what kinds of hidden risks can VAT pose for businesses?
The VAT rules for Saudi Arabia and the UAE contain onerous penalty provisions for non-compliance. Penalties apply to a wide range of things, including issuing incorrect documentation, failing to register for VAT when required to do so, not retaining records, incorrect reporting of supplies and purchases and late filing of VAT returns. Often, penalties are larger than the tax amounts so it makes commercial sense to invest in the implementation process to make sure you are getting VAT right.
Also, if you do not have a pricing strategy in place, the introduction of VAT is likely to affect your profit margins. Have you considered how a one-off increase of 5% on your prices will affect sales? Adjusting your prices gradually well before the introduction of VAT may soften the impact of VAT on profit margins, especially if you operate in a price-elastic market.
Keep your stakeholders informed of any changes to your business processes, policies and systems that will affect them. Not doing so may damage your relationship with them and negatively affect your business’ reputation.
Your customers will want to know what will happen to sales that span the implementation date, as well as what will happen to your prices in the lead-up to implementation. Unexpected changes in prices, or prices that are perceived as unfair, could damage your relationships with your customers.
If you are going to amend vendor policies – such as requiring valid tax invoices before payments are processed – informed your suppliers well in advance so that they have sufficient time to meet those new requirements.
Non-compliance with VAT legislation could potentially cause issues with other regulatory requirements. For example, in Saudi Arabia, GAZT refused to renew zakat certificates until March 2018 VAT returns had been filed and paid. As VAT impacts financial and accounting records, material VAT inconsistencies may cause issues from an audit perspective.
These are first, not final, steps
Accounting for VAT on your taxable supplies is only the first step. When assessing the impact that VAT will have on your business, and deciding how much time and effort you intend to invest in getting ready, make sure you also factor in the other risks and exposures for not being fully compliant.
This is the last in a series of thinkpieces about VAT by Keypoint, which has Bahrain’s largest specialist VAT team. To better understand how – and when – your business should prepare for VAT, contact firstname.lastname@example.org or call +973 1720 6879.