Tax compliance as a regulatory requirement is fast changing and for the better. The western world have streamlined their tax regimes for quite some time now and the remaining countries in the world are quick to catch up. The Gulf Cooperation Council or GCC have planned for introduction of Value Added Tax or VAT with a planned date of 1st January 2018 for implementation although there has been recent developments which lead us to believe this date might be pushed by a bit. So, the big question is, what can we expect? With not a tremendous amount of pressure from the government, are we looking at a relaxed attitude from most organizations or are they gearing up to tackle a monster they have not met before? Remember, these countries did not have any kind of tax before.
We can definitely look at a few other countries who have recently gone through the same process. The latest of these being India, we can look towards this country as a precedence. Having said that, even though both are introductions to new tax regimes, the context in India is quite different from that in the Gulf Countries. GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. Herein lies one of the largest differences – VAT in GCC countries are going to be implemented by 6 different countries whereas in India it was being implemented within the country – of course the central government still had to deal with the individual states – 29 of them – and that’s not counting the 7 union territories. Like The Economist once pointed out, “India is a continent masquerading as a country”.
Most of the delay and the political debate in India was due to struggles between the central and state governments to come to a decision on the split for GST or Goods and Services Tax. In the middle east however, the six countries control their tax separately and can create their own policies within the proposed framework. Having said that, we are probably looking at very similar policies from all of these countries with a couple of them leading the way.
The other major difference, and this is mostly from a system perspective, is the fact that India was already under a tax regime – they shifted to a different type of tax. Whereas for GCC, this is the first kind of tax which is being introduced. This means two things. Firstly, the complexity of implementation from a system perspective would be much more. Some banks would assume that this means opening up their core systems and making changes to it which is a risky business and will consume a lot of resources from both money and people perspective. Secondly, since the understanding of the tax regulations is still evolving, there will be frequent changes in the laws which needs to be accounted for while implementing the system – the system should be flexible enough to quickly bring around changes to the existing processes, something which hard-coded core systems are often not able to handle.
So, what is it that banks in GCC countries ought to be looking for. As discussed before, scalability and flexibility should be the primary focus with major consideration for business continuity.
As mentioned before, the tax laws are still evolving in the GCC countries. Once we see them implemented through 2018, my prediction is that, the regulators will look at how these can be further enhanced and sharpened to better serve the end customer while at the same time maintain revenue for the government. This means frequent changes in rules – including products which are excluded from VAT in the current regime, changing the way VAT is calculated, and finally newer laws as to how customers are taxed for more complex products where multiple suppliers (who are also paying VAT) are involved. These changes need to be addressed fast – not only from a compliance perspective, but also from a competitive one – your competitors should not be able to offer some products faster just because they can implement the new rules sooner. Flexibility of the system that you choose now will go a long way in addressing these ‘updates’. Also, it will help if the changes can brought about from the UI itself through configuration rather than going back and changing code each time – this will ensure business can make the changes themselves and need not reach out to IT each time, thereby incurring delays.
Currently, each country is defining their own tax rules. Therefore, whatever systems the banks land upon will need to address only these laws. However, since some of the banks also have operations in multiple GCC countries, there will soon be the need to extend the solution to other countries as more of them start implementing. Also, tax between countries becomes a factor once all the countries are on board and possibly have some differences in the way they are setting up tax rules. A scalable solution which can handle multiple installations or can service multiple countries through a central installation becomes of great importance here.
Nobody can predict the future. The changes in regulations that we are seeing are just the first steps – it would slowly unfold into a complete tax regime but the final shape and form is for anybody to comment on. I believe these are important considerations for a bank looking to think strategically and from a long-term perspective. Just don’t leave it till the last moment!!!