With the implementation of Value-Added Tax (VAT) less than two years away in the UAE and no more than three years in the rest of the GCC, private businesses have started gearing up for the new taxation regime.
Dubai Exports, an agency of the Government of Dubai’s Department of Economic Development, recently co-hosted a business seminar along with tax consultancy KPMG to highlight how recent developments in the regional tax landscape could impact GCC businesses and investments.
In addition, Deloitte, a business consultancy, has created an online guide about VAT, which discusses key VAT principles and specific business issues aiming to provide an overall understanding of VAT.
The consultancy says it held seminars in Dubai and Abu Dhabi during the last week of February to provide companies with a general understanding of VAT and its likely impact on their businesses.
In February-end, Obaid Humaid Al Tayer, UAE Minister of State for Financial Affairs, confirmed that the UAE was planning to implement VAT by 2018.
“As per the GCC Supreme Council resolution, VAT [in the UAE] will be implemented as of January 1, 2018,” he told reports on the sidelines of a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF), in Dubai.
“VAT implementation will be a major business issue and businesses would be well advised to consider the impact it may have on short to medium term business plans,” said Justin Whitehouse, Indirect tax leader at Deloitte Middle East.
“Moreover, they need to consider pricing and working capital issues,” he said.
A key theme that emerged from the discussion was transfer pricing and how it could impact business, says KPMG. At present, there are no UAE-applicable transfer pricing regulations but the UAE’s evolving tax regime could potentially change this, it noted.
With that in mind, businesses in the UAE now have less than 22 months to put in place the necessary infrastructure for collecting the tax from their customers and passing it on to the relevant authorities.
The potential lag between the implementation of VAT in the UAE and the rest of the GCC will affect firms that operate on as GCC-level and, until now, had not had to contend with the issue of taxation on transfer pricing.
“Transfer pricing is the price at which goods and services are sold between legal entities within the same company, and is at the core of international trade. Any business operating in more than one country must keep up to speed with emerging transfer pricing rules,” explained Nilesh Ashar, a tax partner with KPMG, said:
“National tax policy decisions are having an immediate and major impact on the competitiveness of businesses, which is why a number of high profile companies have restructured themselves – in part to leverage the lower tax rates offered by different jurisdictions,” said Ashar.
The Middle East Tax group at Deloitte says it has created a free of charge bilingual online introductory guide about VAT to support and provide guidance to firms throughout tax reforms.
Among other things, the guide discusses the drivers for implementing tax reform in the Middle East, key VAT principles and specific business issues aiming to provide an overall understanding of VAT.
“VAT is simple conceptually but in practice very complex and we hope our training is a first, small step, to helping local businesses address the implications of VAT implementation on their businesses in the GCC,” said Whitehouse.
“The Organisation for Economic Co-operation and Development (OECD) has agreed an action plan on base erosion and profit shifting (BEPS) that will close many, if not all, international tax loopholes,” added Shabana Begum, who heads KPMG’s transfer pricing function across the Lower Gul.
“Transfer pricing documentation needs to be more transparent. We expect many companies will review the use of representative offices within global business operations and consider restructuring to reduce any potential impact on post-tax revenues.”
The OECD’s Action Plan on BEPS is designed to close gaps in existing international rules that allow corporate profits to be significantly reduced or artificially shifted to low tax environments, where companies have little or no economic activity.
According to Anuj Kapoor, a regional director with KPMG’s Middle East & South Asia practice, “Related party transactions have always been a critical path for regional tax audits. We are about to see significant fiscal change across the GCC. Global developments, such as BEPS, also impact tax developments across the region. Businesses that understand the implications and consequently align their business with the BEPS model should minimize the impact of inevitable inefficiencies caused by any uncertainty.”