The tax is coming and everyone needs to be fully prepared
Don't let conjecture on VAT delay lead you down the garden path
The GCC-wide implementation of value added tax (VAT) is likely to be delayed.
You can almost hear the choruses of “told you so”, “what have I always said?” and “just mark my words” that have greeted the comment of an IMF official.
While the response in some quarters is eminently predictable, it might also be misguided.
The IMF is talking about GCC-wide implementation, not implementation in individual member states of the GCC. It has only spoken of the likelihood of delay. VAT has not been taken off the table, and even some postponement is not certain.
Don’t let this announcement lead you down the garden path and into a VAT fool’s paradise.
Remember that the UAE VAT Law has already referred to “implementing states”; in other words, those GCC states that are implementing a tax law. That expressly contemplates there might be some who are not (or, more accurately are not yet) implementing such a law.
The Ministry of Finance (MoF) and Federal Tax Authority (FTA) saw this possibility from a long way off,
In short, there is nothing to stop the MoF/FTA in the UAE and the general authority of zakat and tax (GAZT) in Saudi Arabia, from pressing ahead with VAT implementation on January 1, 2018.
Given that both the UAE and Saudi Arabia can keep to their present timetable if they want to, a much more nuanced question then arises: Should they do so?
The question can be approached from three different angles: the national perspective; the regional perspective; and recent lessons that can be learnt from the international perspective.
The national perspective favours sticking to the January 1 implementation date. The UAE has published its Tax Procedure and VAT Laws. Indications are that the accompanying VAT Executive Regulation has been finalised and awaits only highest-level approval.
The MoF/FTA have undertaken an extensive training and public information programme. The VAT e-portal is open to enable businesses to register. So, why stop the bandwagon?
The regional perspective is more equivocal. As the IMF official said, the GCC member states are “moving at different paces”, calling into question whether a “harmonious introduction” can be achieved.
Those observations are undoubtedly accurate but they only hint at the more fundamental issues at stake.
Those boil down to two value judgements and one legal one, which can be summed up in the following questions: how important is GCC unity of action (here, lockstep implementation of VAT)?; would the GCC be impaired in functioning as a customs union (and if so, to what extent) if VAT were implemented sequentially by individual member states?; to what extent does effective implementation, even within individual GCC states, depend on further GCC-wide action under the GCC Unified Agreement on VAT, for example, on further steps by the ministerial committee?
The first two questions involve a range of competing considerations. For present purposes, it is unnecessary to provide answers and sufficient only to pose such questions to justify the conclusion that the regional view is a mixed picture.
The introduction of the nationwide goods and services tax (GST) in India in July takes us to the international perspective, and provides an opportunity to learn lessons from others’ experiences.
A GST is VAT by another name. India’s version is much more complex than the GCC model, having four levels of “standard rate”, depending on the nature of the goods or services in question.
A multi-level VAT will result in several undesirable consequences, notably intense sector-lobbying for some goods or services to be rated as low as possible, anomalies in tax ratings between similar goods or services and, for those and other reasons, the need for widespread re-categorisation.
Those problems have been compounded by India’s decision requiring online-only VAT registration and filing of returns, in which IT glitches and website crashes caused by high user volumes have caused substantial practical difficulties and dented business confidence.
India has been contending with such problems over the past few months since GST implementation, prompting prime minister Narendra Modi to observe “it is like building the ship while sailing”.
Because of the relative simplicity of the GCC VAT model, it is unlikely that member states will experience difficulties of the same nature, or to the same extent, as those encountered in India. That said, it is improbable that there will be no teething troubles associated with the introduction of VAT.
It must surely be better to build the ship as well as possible in dry dock before launch rather than, going by Mr Modi’s comment, “while sailing”.
That is not to say that the vessel should not still undergo sea trials – but that should be an exercise in trimming a couple of sails, not in stemming a leak or two.
It is notable that the IMF official expressed his opinion that “preparatory and coordination work may not be completed on time”.
Preparatory work is a matter for each member state and it is clear that both UAE and Saudi Arabia are well advanced in that regard. Coordination work, on the other hand, involves cooperation amongGCC states.
Thus, while the UAE and Saudi Arabia may have vessels fit to navigate coastal waters, it is becoming clear that the whole flotilla might not be ready to set sail on the high seas.
For the UAE and Saudi Arabia, it must be tempting to loosen the cables on the slipway. Either country should delay only if more time would result in higher confidence of seaworthiness and/or a better quality fit-out.
Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE