GCC corporates face multiple VAT challenges
 
, Posted on 17-Feb-2017


GCC corporates face multiple VAT challenges

The plan to introduce value-added tax in Gulf Cooperation Council member states could create operational risks for companies and put pressure on EBITDA and cash flows in some industries as markets adjust, Fitch Ratings says. Collecting and remitting VAT to the government will have notable set-up and compliance costs. Businesses with VAT-exempt goods and highly competitive sectors could find themselves, rather than customers, taking on this additional cost. 

VAT implementation could be as soon as early 2018 according to media reports, which would create a very tight timetable in a region with little history of taxation of any sort. This will introduce greater uncertainty and operational challenges for GCC corporates than for companies in other regions with established tax cultures that have introduced VAT or reformed their tax systems. However we expect GCC governments to recognise these challenges and show a degree of flexibility during the initial implementation. 

Companies will have to replace or update IT systems, implement new procedures and train staff before VAT is introduced. This will be particularly burdensome as it will add to costs when low oil prices and lacklustre economic growth are weighing on corporate performance, particularly for SMEs. Companies involved in supplying goods and services between GCC members, or those operating within or between free zones, are likely to face additional complexities, as agreements between individual GCC members could vary.

In theory, VAT is ultimately paid by the end consumer, so if a company does not fall into that category the planned 5% rate should not have a direct impact on financial performance. Some goods or services may be assigned a zero rate, meaning the business will charge VAT at 0% on sales and will be able to reclaim VAT on purchases. But if the goods or services a company sells are VAT exempt then they will not be able to reclaim VAT on purchases and will have to bear this cost themselves. So it will be important to know the VAT treatment for sectors like healthcare, and education, which could face profit margin erosion if they are VAT exempt and are unable to increase prices to compensate.

Even with no VAT exemption, highly competitive sectors or those with thin margins could face a cash flow burden from having to meet the cost of paying VAT on purchases before it can be reclaimed. Fierce competition in some sectors may also put pressure on companies to cut pre-tax prices and absorb some of the cost themselves. This is most likely in sectors like telecommunications, consultancy and contracting and will vary by country.

The need to renegotiate previously agreed contracts and conditions with customers would pose additional challenges in some industries. The introduction of VAT, alongside other government initiatives to cut spending, could also reduce disposable incomes, weakening demand in more discretionary corporate sectors. 

We believe the lack of any significant historical taxation means it will take time for companies to fully pass on costs, but that they will be able to do so eventually. The main long-term risk from the introduction of VAT is therefore the potential for errors in collecting and accounting for the tax that could leave companies liable for the cost themselves. This impact will not be clear until each member state establishes its own national legislation to enact the agreement, which could make the timetable even tighter.

 

 

Bashar Al Natoor, Global Head of Islamic Finance, Fitch Ratings


Related News

Today's weather in Bahrain
Feb 24

Today's weather in Bahrain

Manama : The Meteorological Directorate forecasts cold and partly cloudy weather on today, dusty in the early morning. Northwesterly wind 7-12 Knots increasing to reach 22 Knots as the day progresses. Maximum temperature is 19 Celsius and minimum 13 Celsius. Sea waves rise 1-3 feet inshore and 3-5...

Read More
Today in Bahrain
Feb 24

Today in Bahrain

THE SECRET POLICE LIVE IN CONCERT  Time : 11:30 pm  Venue: The Gulf Hotel Bahrain Convention & Spa- Manama  THE SECRET POLICE Live in Concert back from the UK by popular demand at Sherlock Holmes!! Thursday 23 Feb, 2017 starting at 9:00pm and Friday 24 Feb, 2017 starting at...

Read More
Police deal with 546 violations
Feb 24

Police deal with 546 violations

Manama : General Director of Muharraq Governorate Police announced that the police services office at Hidd Police Station has dealt with 546 cases on Road 29 in Arad area. The office stated that the violators were warned to stick to traffic rules. However, violators who continue to break the law will face traffic...

Read More
Tenders awarded  for various projects
Feb 24

Tenders awarded for various projects

Manama : Works Affairs Undersecretary Eng. Ahmed Abdul Aziz Al Khayyat has revealed that tenders invited and awarded during January 2017 included various roads, sanitary and construction projects, covering different areas in the Kingdom. Al Khayyat explained that the awarded tenders in the roads sector covered...

Read More
Indian author to arrive in Bahrain today
Feb 24

Indian author to arrive in Bahrain today

Manama : Paul Zacharia, Malayalam short-story writer, novelist and essayist, will be attending a book release event at the KCA hall in Segaiya at 8pm today, according to organising committe chairman Sudheesh Raghavan.  Paul Zacharia will release Meinkampf, a Malayalam novel based on expat life in the...

Read More
Driver jailed for traffic violations
Feb 24

Driver jailed for traffic violations

Manama : A heavy truck driver set a new record in jumping red lights in one year, ignoring signals on 12 occasions. He was sentenced to three months by the Lower Criminal Court along with BD500 fine.  The Asian man, aged 31, was serving a local transportation company, driving a big truck, according to...

Read More
GPIC takes part in Garden Show
Feb 24

GPIC takes part in Garden Show

Manama : The Gulf Petrochemical Industries Company (GPIC) is taking part in the 12th edition of the Bahrain International Garden Show, being held at the Bahrain International Exhibition and Convention Centre. The participation comes as part of GPIC’s support of environmental programmes and creation of...

Read More
Cop gets jail for assaulting Turkish man
Feb 24

Cop gets jail for assaulting Turkish man

Manama : The High Criminal Court has sentenced a police officer to two months behind bars for assaulting a Turkish man for alleged sexual affair with a Filipino maid. The verdict issued against him, however, was suspended for a BD100 bail, pending the outcome of his appeal. The defendant is reported to have...

Read More
One-stop crossing on King Fahad Causeway
Feb 24

One-stop crossing on King Fahad Causeway

Manama : As part of the directives of His Royal Highness, Prince Salman bin Hamad Al Khalifa, Crown Prince, Deputy Supreme Commander and First Deputy Prime Minister, and HRH Prince Mohammed bin Naif bin Abdulaziz Al Saud, Saudi Crown Prince, First Deputy Prime Minister and Interior Minister during the recent...

Read More
 Estiqlal Highway to be partly closed for maintenance
Feb 23

Estiqlal Highway to be partly closed for maintenance

Manama : The Ministry of Works, Municipality Affairs & Urban Planning said that as part of the maintenance works on Estiqlal Highway near Sanad Intersection, one and two of the road lanes will be closed on stages for the north-bound traffic leading to Isa Town. In Stage One, two lanes will be closed from today...

Read More