VAT Whitepaper Volume 2 PDF

Value Added Tax in the GCC
Insights by industry | Volume 2

Ninety years in
the Middle East
Deloitte Value added Tax in the GCC | Insights by industry
Deloitte | Value Added Tax in the GCC | Contents
Contents
05 06 12
Introduction Chapter 1 Chapter 2
Real estate and Tourism industry
construction industry VAT and the tourism industry –
The property development a complex formula
and construction industry –
building with VAT in mind
18 24 32
Chapter 3 Chapter 4 Chapter 5
Oil and gas industry Structure of a VAT function VAT technology
Extracting VAT from the oil and Changes and challenges of Technology considerations –
gas supply chain – who will building the needed Indirect Tax using technology to automate
bear the burden? department – a European VAT compliance
benchmark to guide GCC
businesses
03
04
Introduction
With the progressive implementation of indirect tax recruiters Beament Leslie VAT is often described
as being cost-less for
Value Added Tax (VAT) throughout the Thomas (BLT). In addition, this volume
GCC from January 1, 2018, the time does discusses technology considerations with
appear to be upon us all to start looking the aim to reduce the uncertainty for businesses. While as a
general statement this
in detail at the potential impacts it will businesses and to highlight the key areas
have on businesses, whether from an that organizations should focus on as they
organizational, operational, commercial embark on their journey to VAT readiness. may have an element of
or financial perspective. VAT is often
truth, in many (though
not all) cases it is not cost-
described as being cost-less for The first volume provided an overview of
businesses. While as a general statement how businesses should go about shifting
this may have an element of truth, in many from thinking to implementing, and less from the perspective
of a business preparing
(though not all) cases it is not cost-less putting themselves in a position to submit
from the perspective of a business accurate, on-time VAT returns. Moreover,
preparing for change and managing their it looked at the retail, automotive, MICE for change and managing
new obligations. (meetings, incentives, conferences and
events) and financial services industries.
their new obligations
To help businesses in the GCC The third volume will contain insight into
understand the potential impacts of the impacts of VAT on telecommunications
the implementation of, and operation and internet businesses, exporters, family
under, VAT, Deloitte Middle East has offices, and finally the outcome of our VAT
been issuing short papers in a number survey.
of volumes designed to provide a greater
understanding of the impacts of the tax Contacts
on specific industry types. We try, where Should you have any questions about
possible, to outline the scenarios which these papers or just want to speak to us,
are most likely together with possible please feel free to contact anyone in our
responses to them, in order to give a fuller VAT team. If you want us to consider your
flavor of the changes to be expected. particular industry as part of our series,
we would be pleased to take your
This second volume contains insight suggestion.
into the impacts of VAT on the real estate
and construction, tourism, and oil and Justin Whitehouse
gas industries, and provides key Indirect Tax Leader
considerations for the appropriate Tel +971 (0) 4 3768888
structure of a VAT function based on a jmwhitehouse@deloitte.com
European benchmark developed in
collaboration with the specialist global
05
Deloitte | Value added Tax in the GCC | Real estate and construction industry
The property
Chapter 1: Real estate and construction industry
development
and construction
industry – building
with VAT in mind
06
07
The scale of many A quick look at court cases concerning VAT some extent this was inevitable; the
businesses operating in
matters around the world would confirm gestation of the VAT project in the region
that amongst some of the most regularly has been somewhat erratic to a number
the sector, and the cost heard issues are those that concern the of observers and some businesses have
and revenue throughput

application of VAT to the property planned for that status quo to remain for
development and construction industry. some time. Clearly that is no longer the
that they manage, by case.
nature creates an Why, you might wonder, is this the case?
environment of risk
The industry has been around for a long The issue associated with the duration of
time, so surely this is one aspect of VAT contracts drawn up in the sector is that
associated with poorly that must be well and truly settled by many will not, at the time of drafting, have
understood or managed
now? Unfortunately that is not the case. included any of the normal terms and
Simply put, the range of transactions conditions relating to VAT which one
VAT obligations underpinning the planning, construction would ordinarily expect in jurisdictions
and sale of commercial or residential real where the tax has been implemented.
estate are varied and often highly complex
which, necessarily, creates the need for an For the contractor in such instances, will
extensive suite of bespoke VAT rules to they be in a position to charge VAT in
cope with these challenges. addition to their normal contract price? On
the face of it this appears to be a simple
The development and construction sector question, but in reality, it is often not.
is of huge importance to the GCC as a
whole. It supports large numbers of Payment for VAT purposes is generally
livelihoods as well as delivering the considered to be inclusive of VAT. That
necessary infrastructure, commercial and means that in our case the contractor will
residential spaces that are so important to need to agree with their customer that
the continued development of the region. they can charge VAT in addition to the
The introduction of VAT by the GCC price previously agreed in order to avoid
member states is not an attempt to the charge becoming a cost they have to
harm those future prospects; indeed, bear themselves.
governments want the sector to thrive and
make a positive tax contribution, bearing Bearing in mind that contracts in the
in mind the sums involved. region are generally struck on a tax-
inclusive basis, making this change may
Equally, however, the scale of many not be as straightforward as one would
businesses operating in the sector, and hope, regardless of the position of the
the cost and revenue throughput that customer vis a vis VAT recovery.
they manage, by nature creates an
environment of risk associated with poorly Furthermore from a pricing standpoint,
understood or managed VAT obligations. it is unlikely that the market (after the
introduction of VAT) would simply reprice
1. Construction sector challenges itself to cover the VAT charge in full.
Lead times on major projects Indeed, customers may well look to their
Lead times are common in most demand- suppliers to cover some of the VAT charge
led industries, but in the case of major themselves anyway.
construction projects they can be
extremely long. It is almost certain that a There may well be some sort of a
large number of the major projects due to transitional regime granting suppliers the
be delivered over the next few years will right to “grandfather” existing tax-inclusive
not have had VAT factored into them, contracts into the new VAT environment.
either on the cost or revenue side. To However whilst such approaches have
08
been seen elsewhere, it remains to be An issue arises when one addresses the There are two ways to give a relief – one is
seen whether that would be the case in construction and supply of residential to allow a refund of VAT by the developer –
the GCC. properties. Many governments attempt to this obviates the need to give a relief at
create a level playing field between the the contractor level on the grounds the
This is, therefore, a major area of potential supplies related to new residential developer can recover the VAT charged by
risk for any contracts agreed before the premises and those of ‘second hand’ the contractor. The second is to relieve the
implementation of VAT but which will be residences (which are normally supplied actual supply of construction services, so
executed or delivered after, the purchaser by unregistered persons, and are that those services themselves are not
and vendors are unlikely to simply therefore not subject to VAT). Driving this subject to VAT. Both approaches are used
concede their respective positions easily process are other factors such as the around the world to differing degrees
given the cost of VAT must fall on one of perceived requirement of giving some though the latter approach achieves little
them. preferential treatment to costs of basic without supplementary reliefs for the
living necessities likely to affect the lower developers.
Registration of subcontractors
In the normal course of the application

Another commercial issue that contractors
will need to confront is the fact that many
of VAT, the construction and supply of

smaller subcontractors will either not
be registered, or not required to be
commercial, industrial and retail

registered for VAT for the simple reason
that they fall below the registration
properties, in addition to the

threshold. As a result of not being
registered those businesses will be
construction of infrastructure, is
unable to recover VAT incurred on costs.
treated as subject to VAT at standard

This being the case, it might cause the
industry to seek to restructure to some
rate
degree, in order to prevent the blockage
stemming from businesses unable to
claim VAT refunds from unregistered
sub-contractors; any such blockage
would result in an element of VAT being income households. In order to achieve
included in the costs of construction. this outcome, some countries will treat the In either case, allowing such a relief would
For subcontractors that fall below the first supply of residential properties as have the effect of supporting the local
mandatory registration threshold, but are being exempt or zero-rated rather than construction industry, which, as
entitled to register voluntarily, they may standard rated. mentioned previously, is very important to
well need to consider that option, as the GCC economy. The effectiveness of
failing to do so could make them It must be said that this relief is by no any relief in the construction sector is of
uncompetitive compared to registered means a given – and each GCC country course tempered by the treatment of
subcontractors that will charge VAT that may well end up with different rules. supplies of the real estate made by the
the contractor can recover. Certainly in Europe there are countries developer – there is little point in zero-
that charge VAT on homes and this is rating construction services, if the sale of
Treatment of residential versus often, but not always, a substitute for the villa itself is standard-rated. There are
commercial property transfer/stamp taxes. It is hoped that in essentially two choices here – zero-rating
In the normal course of the application the GCC, given the pressure on new or exemption.
of VAT, the construction and supply of housing and in particular on prices, that
commercial, industrial and retail this will not be the case. If the first sale of residential premises is
properties, in addition to the construction zero rated, then the VAT incurred during
of infrastructure, is treated as subject to So if there is a relief, what relief? the construction process will be
VAT at standard rate – i.e. 5% as expected recoverable, and there should be no
in the GCC. impact on the costs of construction.
09
As a result there is not a need to relieve amounts that are reflected on the pro It is possible that the
supply of commercial real
the construction work itself as the VAT is a forma invoice.
pass through (deductible by the
developer). Another area that could cause some estate either by way of
sale or letting of real
differences in treatment would be the
If, however, the first supply of residential manner in which retention payments
property is treated as exempt, this will are ultimately dealt with. Once again, estate will be treated as
mean that the developer will not be able differences between what is stated in the
taxable at the standard
rate of VAT in most, if not
to recover any VAT incurred during the contracts as compared to the industry
construction of residential property, practice could result in the incorrect
but will generally seek to recover that amount of VAT being accounted for, or all of the GCC
additional cost as well as its normal the treatment of the VAT occurring in the
margin if it can when the property is incorrect tax period.
either sold, or leased out. This in turn
means that a relief at the contractor level 2. Property development sector
is much more effective (as the developer challenges
avoids paying VAT that would otherwise be It is possible that the supply of commercial
a cost). real estate either by way of sale or letting
of real estate will be treated as taxable at
As a result of the above, the ability for a the standard rate of VAT in most, if not all
construction company to pass on the full of the GCC. Charging VAT on the supply of
impact of VAT to property developers will commercial buildings should only create
very much depend on whether those an additional cost to taxable persons and
developers will be eligible to claim a full other bodies which are not able to recover
input VAT credit. A developer’s VAT VAT in full, for example, because those
recovery position will be determined by persons perform exempt or non-business
reference to the VAT treatment of the real activities. Consequently, vendors should
estate transactions that the developer be sensitive to this during price
enters into. negotiations. In the context of commercial
leases, landlords may wish to consider
Industry practices undertaking fit-out works on behalf of
Other operational issues will arise through exempt tenants to incentivize them to
existing industry practices and the manner occupy properties. That said, many larger
in which they tend to interact with the VAT institutions that are treated as exempt
law. might incorporate taxable supplier entities
to act as the landlord in respect of
Examples of this would include dealing property used by the exempt supplier.
with the time of supply where work done While this does not have the effect of
on construction is subject to certification. ridding them of the VAT burden, it can
Typically a pro-forma invoice is issued, but have the effect of delaying the timing of
this is in reality just the start of a process the negative effects of VAT on businesses
of negotiation as to what work is ultimately that are not able to recover the VAT as an
agreed as having been done. However, if input tax credit.
not documented carefully, and not dealt
with contractually, this could have the Supplies of bare land are often treated
effect of bringing forward the recognition as VAT exempt (regardless of whether
of supplies that could well be in dispute, the land is intended for commercial or
with the result that the VAT payable could residential use or development), in order
be substantially different from the to control the potentially inflationary
10
impact of taxing such transactions (which Therefore, it is critical for the business to proportionate input tax credit for each
are in essence often a form of investment, perform a comprehensive impact accounting period. Any lapses in such
and so charging VAT serves to tax assessment and determine the additional calculations will make VAT an additional
investment by private individuals). This cash flow requirement, as this will have an cost for the business, impact its
also reflects the fact that any value that impact on its working capital requirements. competitiveness and may give rise to
may be added on the supply of bare land penalties.
is often merely an indication of the Barter transactions
inflation of the value rather than any Property transactions often involve Construction work
process by which the value may have consideration other than, or in addition to, The provision of construction services
been enhanced. It also removes the money, which can cause complex VAT (including materials) is normally subject
possible need for private investors to problems. By way of example, an exchange to VAT at the standard rate.
register for VAT purely as a consequence of of property interests, such as a surrender
their involvement in such transactions. of an old lease in exchange for the grant of Subcontractors are also likely to be
a new lease, or a sale and leaseback impacted. This is because many
Finally, as discussed briefly above, transaction, may take place without any subcontractors are likely to fall below the
transactions in residential real estate tend exchange of money. These are barter registration threshold and therefore they
to require special treatment. Residential transactions and it is important to analyze will seek to pass on the cost of their
property development is a capital intensive the VAT implications for each party and to irrecoverable VAT. This could then lead to
business and allowing refunds is often ensure that there are no unexpected VAT a change from contracts for the supply of
desirable, on the other hand, charging costs by appropriately documenting the goods together with a service, to that of
VAT on residential property is not always transactions. Failure to recognize these a service alone, in order to ensure that
sensible given the impact on pricing. As a transactions could result in penalties. materials are purchased by the head
result it is not uncommon for residential contractor, which is then able to recover
developers to be entitled to claim zero- Lease incentives the VAT.
rating on the sale of properties – in order It is relatively common for property
to recover VAT on costs whilst developers, particularly in the retail, office There will also be pressure for registered
simultaneously not impacting prices due and industrial markets, to offer rent-free subcontractors to provide VAT invoices to
to the absence of VAT on the sale. Often periods and other lease incentives to head contractors on a timely basis to
this zero-rating is limited such that other prospective tenants. This could trigger a enable swift VAT recovery. To this end,
residential property sectors, such as the VAT liability for both the tenant and some countries have sought to introduce
secondhand or leasing market, are exempt landlord if it is determined that something special regimes for subcontractors, such
from VAT (thus suffering a VAT cost on has been supplied in return for the as reverse charge rules, or self-billing
expenses). These are complex policy inducement (e.g. building works). Further, arrangements, to facilitate higher levels
options and it remains to be seen what some jurisdictions deem a market value for of compliance.
choices the GCC governments will make. rental during a rent-free period requiring
the landlord to account for VAT, even It is clear from the selection of issues
Notwithstanding these broader challenges, though this may not apply to leases explored above that this is a complex
a range of other considerations now face between arm’s-length parties where the area, and while the VAT itself is still under
the sector: rent-free period is effectively subsidized by construction, those involved in the area
the higher rental received during the would do well to review what it is that they
Cash flow remaining term of the lease. currently do, and consider undertaking
One of the biggest areas of concern for the risk mitigation steps in order to protect
property development sector will be Mixed-use properties themselves.
planning for its cash flows. The sector, For companies engaged in the supply of
which can operate on thin margins, could both exempt (e.g. residential) and taxable
be under pressure in terms of meeting the (e.g. commercial) units, often referred to
additional requirement of paying 5% VAT as mixed-use properties, the impact could
on the purchase of goods or services each be significant as there will typically be
month or quarter on an accrual basis. complicated calculations for recovery of
11
Deloitte | Value added Tax in the GCC | Tourism industry
VAT and the tourism

Chapter 2 – Tourism industry
industry – a complex
formula
12
13
Those involved in the tourism industry will consider if they are acting as a principal Agent versus principal
know that it is not an industry that can be in reality, while referring to themselves By way of example, if a domestic tourist
packaged together easily from a VAT an ‘agent’. This will be an important enters into a transaction with a travel
perspective. There are many very distinct distinction as it will have a huge impact ‘agent’ for an overseas travel package,
functions that are loosely categorized as on the manner in which VAT needs to be and in accordance with which that
part of the tourism industry, including accounted for. ‘agent’ arranges the overseas flight, the
airlines, travel agents, tour operators, accommodation, tours and transport
accommodation and other local service The impact of the geographical aspect, is overseas, the services would likely be
providers. Each of these will be affected in that the tourism industry will be dealing treated as zero-rated from a GCC
one way or another by the application of with both domestic tourism activities as perspective as the underlying supply
VAT within the GCC. well as international tourism – both will actually occur offshore (typically by
inbound and outbound. This results in businesses that are based offshore and
Given the complexities inherent across complexities over the ‘place of supply’ – would not be registered for VAT purposes
these businesses and the Gulf region, which country VAT is due in – and the in the GCC). The treatment of the charges
the broader tourism industry in the GCC applicable rate. As an example, domestic made by the ‘agent’ for his services, might,
could well prove to be one of the more tourism will typically be subject to VAT at however, depend on whether the ‘agent’
challenging areas in terms of addressing the standard rate. Inbound tourism will is acting in the capacity as agent or as a
the impact of VAT. most likely also be subject to VAT in the principal in its own right.
respective GCC state at standard rate.
A complex industry with many facets In this case, it is the movement of the
The reason for this complexity is that Outbound tourism, may, on the other tourist that in many ways determines
VAT is, in many respects, both a tax on hand, be partially subject to VAT in the whether a supply will be zero-rated or
transactions as well as a tax that applies GCC at standard rate, and partially subject subject to VAT at standard rate, rather
within a geographical area. to VAT at zero-rate (or completely outside than the travel agent’s VAT status. In this
the scope of GCC VAT). Indeed, outbound respect, it could be seen as counter-
The impact of the former is that not only tourism can in some respects be likened intuitive that although the agent’s services
is it necessary to identify the various types to an export of services, in that the supply may occur in the relevant GCC country,
of transactions that may be undertaken of the tourism-related activity will occur and indeed payment may occur here,
within the industry, but also the offshore and probably be subject to VAT in the services (being the air transport,
relationships that arise as a result of the the country in which the tourism actually accommodation, tours etc.) will occur
transactions, ie. are the parties acting as occurs. To an extent, this will also depend offshore, and are likely to be subject to
‘agent’ or ‘principal’? Many tourism on which functions are conducted in the VAT there. Agents will be required to
businesses describe themselves as an GCC state and the capacity in which that carefully review each travel package to
‘agent’, but these businesses must function occurs. determine the correct VAT treatment.
Given the complexities inherent across

As for the agent’s own services, while they
physically occur in the GCC, the normal
these businesses and the Gulf region,

legal or contractual relationship will be
between the ‘agent’ and the offshore
the broader tourism industry in the GCC

service provider – ie. the hotel, car hire
company etc. The agent is normally paid
could well prove to be one of the more

by them (rather than by the traveler), and
as such it is the agent’s services to those
challenging areas in terms of

providers that could be subject to VAT at
zero-rate, as it is those services that are
addressing the impact of VAT

being ‘exported’. Of course, if the ‘agent
is contracted to the onshore ‘tourist’
(possibly a company that is operating
onshore and arranging to send employees
overseas for work purposes) then those
14
services may well be subject to VAT, but conditions of the hotel have the potential It is possible that hotel
providers will be required
this would depend upon a number of to render either one of those instances to
other factors that need to be considered. have triggered the ‘time of supply’ for VAT
purposes prior to the date on which the to account for VAT to the
authorities before full
Operations of an accommodation supply is considered by the hotel operator
provider (hotel, motel etc.) to have occurred. Indeed, it is possible
The organizational structure of hotels that hotel providers will be required to payment is received or
varies according to the size of the hotel account for VAT to the authorities before
before revenue is
recognized
and the services offered, and the full payment is received or before revenue
sources of revenue and expenses in the is recognized.
operations are likely to vary according to
the range of activities provided. Other issues that may need to be
considered include those identified in
It will generally be common to most hotels our earlier article on the MICE industry in
for their revenue streams to include Volume 1 of the whitepaper, particularly
accommodation (room revenue), food relating to the booking of events,
and beverage or F&B revenue, conferences and exhibitions that may
telecommunication (both telephones, have long lead times, and contracts that
TV/movies, and internet revenue), may pre-date the implementation date
recreation revenue (weddings and other of VAT.
functions) and other rentals (conferences,
exhibitions, etc). The VAT implications of Tour operators
each revenue stream will need to be The treatment of VAT for tourism
considered and separately itemized for operators can vary from being relatively
invoicing and accounting purposes. simple to being a lot more complex than
operators may be able to feasibly handle.
One of the interesting issues for hotels This complexity may drive some operators
will be the recognition of the time of to make changes to the way in which they
supply for VAT purposes. Traditionally, do business.
hotel operators tend to recognize income
from room revenue at the date of the In its simplest form, tourism operators
guest’s arrival at earliest, although many will generally find that, assuming they
also recognize it at date of departure, breach the threshold for being required
based on the premise that prior to that to register for VAT, they will need to charge
time, the booking may have uncertainties VAT on their fees. This will be despite the
associated with it (the guest may depart fact that a significant percentage of their
earlier or later than their booking may client base will be tourists from offshore,
initially indicate). and also that many of the tours may
in fact be booked while the tourist is
This can cause issues from the physically situated outside the country.
perspective of establishing when the The reality is that the authorities are
‘time of supply’ occurs for VAT purposes, likely to take the view that the service
particularly based on the fact that many is supplied in the respective GCC state,
hotels will take a ‘swipe’ of the guest’s and that it should therefore be subject
credit card on arrival. Time of supply in to VAT there.
relation to the supply of services is usually
based on the earliest among payment, At a more complex level, a tour operator
invoice, or completion of the supply by may find that the tours that it currently
the service supplier. The question then offers will take tourists between two, or
becomes whether the terms and more of the GCC states. This may then
15
The issues and require some form of apportionment arise will occur when it becomes one of
complexities that arise

between the standard rating of the the treatment of the supply of the various
supplies in the GCC state that it is rewards that may be provided, and also
typically do so as a result registered in as a primary operation and the treatment of the possible supply of
of the various ‘non-airfare’

zero-rating for the ‘international’ element. participation ‘points’ to banks, financial
It may also require registration and VAT institutions etc. that use them as
charges made to reporting in multiple GCC states. Balancing incentives for customers to spend money
customers, and other against this added complexity and the using branded credit cards etc.
fringe operations that

requirement to charge VAT to foreign
customers, the tour operators should be An interesting area for airlines will be
airlines often engage in able to recover VAT they have incurred on around the ‘time of supply’, particularly in
outside of their core

costs as input tax, but once again there relation to the sale of airline tickets. The
may be a need to split those costs normal rules for a service of this nature
operations of between GCC states. Some countries would require the VAT recognition date to
transporting people do offer special arrangements for tour be the earlier among payment for the
and goods around

operators to alleviate certain challenges service, the issuing of an invoice, or the
(in Europe, the so-called “Tour Operators actual completion of the supply of the
Margin Scheme”), but it remains to be service.
seen if this will be offered in the GCC.
The issue here is that the supply of the
Airlines airline booking is typically only completed
This is an area potentially deserving of on payment (whether actual payment, or
its own article due to the possible the ability to charge an amount to the
complexities. The VAT treatment for a traveler/the traveler’s employer for the
large portion of sales would appear flight). However, this needs to be
simple, given that there are few, if any, considered in the context of the fact that
domestic flights undertaken with the GCC the underlying supply (the travel from A to
(with those within Saudi Arabia and Oman B) will only occur if, and when the traveler
being the obvious exception). As a result, arrives at the airport, gets on the plane,
most flights would be expected to be and then eventually arrives at the
zero-rated on the basis that they are destination.
international flights.
Matters have the ability to become
The issues and complexities that arise confused where the traveler either does
typically do so as a result of the various not arrive at the airport (and therefore
‘non-airfare’ charges made to customers, does not actually travel), or arrives at the
and other fringe operations that airlines airport to find that the flight is overbooked
often engage in outside of their core - and therefore is not able to fly, or is
operations of transporting people and offered either an alternative flight or
goods around. On the revenue side, one some other arrangement, including
of the more obvious examples would be ‘compensation’ in some form.
their participation in frequent flier
programs. Clearly, in the former situation, the service
of the flight has not been delivered, so a
While the treatment of these in relation potential issue to consider is whether
to points accruing to fliers is generally there is some other form of service that
relatively uncontroversial, the issues that has been delivered – and if so what that
16
service is. If a separate service has in fact first imported, the VAT on importation, and
been delivered, could this be viewed as the consequent potential for an outflow of
inextricably linked with the zero-rated VAT, followed by the delay in any refunds,
flight that it also should be zero-rated? In this cost could at best be considered as
the second case, where the traveler is daunting.
wait-listed, has the service been delivered?
This question has a significant VAT Conclusion
reporting effect if wait-listing occurs at the The tourism industry contributes
end of the tax period, and if the actual significantly to the Gulf economies and
replacement flight occurs during the next offers immense opportunity for individual
month. operators throughout much of the GCC,
but all such operators will face major
This is one small example of the complexities in the manner in which they
complexities that will be faced by the will need to address the implementation
airline industry. of VAT.
Another area where airlines will have It is clear from the subjects discussed in
issues is in the recovery of VAT incurred this article, that we have merely scratched
locally on fuel, services and capital assets. the surface as to the potential
This has the potential to impact complexities. To give sufficient time to
significantly on their cash flow, and hence resolve complexities and be ready for a
working capital depending upon the successful introduction of VAT, the players
precise treatment afforded claims for within the industry would do well to begin
refunds. Ignoring the prevalence of leasing their implementation processes earlier
of capital assets for one moment, if one rather than later.
considers the value of a new aircraft when
Another area where airlines will have

issues is in the recovery of VAT incurred
locally on fuel, services and capital
assets. This has the potential to impact
significantly on their cash flow, and
hence working capital depending upon
the precise treatment afforded claims
for refunds.
17
Deloitte | Value Added Tax in the GCC | Oil and gas industry
Extracting VAT from

Chapter 3 – Oil and gas industry
the oil and gas

supply chain – who
will bear the burden?
18
19
Many in the sector The oil and gas sector remains an apply; there are varying potential forms of
anticipate that there may

important and significant part of each of relief which may have significantly different
the Gulf states. Businesses in the sector financial and operational implications.
be a VAT relief applying to include large national oil companies and Based on international models, some of
the oil and gas sector in

their associated entities, international oil the potential treatments and their
companies with local operations (or implications are explored below.
some form – but even if trading in the area) – both in ‘upstream’
this is the case, VAT is still exploration and production activities and a. The standard position – VAT is
anticipated to have an
‘downstream’ marketing activities, and charged on all transactions (taking
service companies providing specialist place within the territory)
impact on all businesses resources and expertise to the sector. Many jurisdictions do not apply any
The introduction of VAT will have differing special VAT treatment to upstream or
impacts for each type of industry downstream activities: VAT is in theory
participant. charged at the standard rate on sales of
products and on services provided to oil
Many in the sector anticipate that there companies. Despite this, in practice the
may be a VAT relief applying to the oil and international nature of the industry – both
gas sector in some form – but even if this for extraction activities and sales of
is the case, VAT is still anticipated to have crude/product - often result in VAT not
an impact on all businesses. We explain being applied under standard VAT rules.
below some common avenues for VAT For example, a zero rate generally applies
relief applied on oil and gas activities for products exported outside of a
internationally, and how these affect country, and exploration activities outside
businesses across the supply chain. We of a country’s VAT territory.
explore the effect of VAT on cash flow –
which looks to be an important issue Applying VAT in this way is conceptually
across the sector – and look at some straightforward – but businesses must
complexities of international operations. deal with international complexities of
Finally, we explore two practical issues for their operations (discussed further below),
companies in the upstream sector. and additional cash flow requirements
where VAT does arise in the supply chain.
Potential avenues for VAT relief in the Most European jurisdictions follow this
sector model.
Whilst the fall of oil prices has had a
significant effect on the sector, oil and gas b. A zero-rate applies to sales of
remains an important industry in each of certain extracted products, or more
the GCC states. Many expect that widely across the sector
governments will not apply VAT across the Some countries apply a specific zero
entire sector, but will instead provide percent rate to sales of certain products in
some form of relief (such as an exemption the sector (such as South Africa). For the
or zero-rate, for example) to lessen the supplier of zero-rated goods, this
burden of companies working in the preserves their eligibility to claim an input
sector. tax credit for VAT incurred on their
purchases, whilst no VAT needs be
Even if a VAT relief of some form does charged on sales. For this reason a zero
apply, this is unlikely to mean that VAT will rate is often viewed as a favorable position
have no effect on industry participants. for these suppliers. Businesses making
Industry participants should be careful to predominantly zero-rated supplies must
understand any special rules that may however anticipate cash flow effects of
20
paying VAT to suppliers – values of which

The cash flow implications of VAT need
to be considered and planned upfront
can often be significant for capital and
operational expenditure used in the
by all businesses working in the sector.

sector - and seeking VAT refunds from
authorities.
The scope of any zero rate must be

Businesses making predominantly
zero-rated supplies or supplies not
carefully considered. It is uncommon for
a specific VAT relief to apply to domestic
subject to VAT can expect to be in a

consumption of oil and gas. A distinction
may therefore exist to restrict the zero
regular VAT refund position, as credits

rate to certain products or certain
upstream activities. Businesses must
for VAT on purchases will exceed VAT

carefully examine to what extent they
are covered by any such relief.
c. A sector-wide exemption applies

to specified oil and gas companies collected on sales.
A different type of VAT relief involves
providing full exemption from VAT for
sales. Even at a 5% rate, the impact of VAT
companies operating in the oil and gas
will be significant for large commodity
sector. Unlike the standard VAT
transactions and on capital expenditure.
exemption, which results in a restriction
The timeframes for monetizing VAT
to VAT recovery, a full sector exemption as
receivable balances will depend on
applied in some countries – particularly in
individual tax authority practices; will a
Africa – allows oil and gas companies to
taxpayer need to file a refund claim with
not have VAT charged on their purchases.
supporting documentation, or will there
Often, this requires oil and gas companies
be a standard timeframe allowed for
to provide certificates to eligible suppliers
authorities to verify or audit a VAT
to allow purchases without VAT. The
repayable position?
certification process introduces additional
administrative process and tax authority
International supply chains bring
scrutiny to the supply chain. Improper
complexity
certification can result in VAT being
Oil and gas companies have traditionally
suffered in the supply chain, despite a
faced challenges in understanding and
sector exemption applying in theory.
managing VAT obligations across
international supply chains. The sale and
Cash flow effects will be a key
purchase of crude and refined products
consideration in the sector
gives a technical VAT obligation in the
Whether one of the forms of sector
country where each transaction takes
relief described above applies or not,
place. This can often result in unexpected
the cash flow implications of VAT need
VAT registration requirements or
to be considered and planned upfront
obligations to charge VAT where products
by all businesses working in the sector.
are purchased and sold in overseas
Businesses making predominantly zero-
jurisdictions. Businesses must ensure they
rated or non-VAT liable supplies (e.g.
understand the VAT landscape and their
under a VAT relief sector, or making sales
obligations in any country where they have
for export) can expect to be in a regular
operations, and also in any countries
VAT refund position, as credits for VAT on
where they transact.
purchases will exceed VAT collected on
21
Whilst the concept of a zero rate for the VAT recovery position during this offshore rig outside the VAT territory), the
exported products in international phase is likely to be a matter dependent VAT treatment for the bundle of services
practice generally reduces VAT costs on the specific rules in each country. If an may revert to the default ‘taxable’ position.
for international movements of products upfront registration is not possible in a Upstream companies involved in joint
or equipment, exporters must take care particular country (and this was certainly venture agreements should review their
to collect and maintain commercial an issue in Malaysia when they introduced contractual position and ensure that the
documentation to support zero-rating in VAT), then businesses should explore agreements in place remain fit for
the case of tax authority scrutiny. This what steps may be possible to ensure purpose upon the introduction of VAT.
process should be sufficiently robust to be exploration and development costs are
able to have timely access to documents, incurred by a company (or group) that Conclusions
even where another party (such as a is able to recover the VAT. In any case, The oil and gas sector has a number of
freight agent or a customer) is responsible forecasts for projects may need to include complexities – and the introduction of VAT
for carrying out the export formalities. contingencies for irrecoverable VAT. across the GCC will doubtless add extra
considerations for businesses across the
The VAT treatment of cost-sharing

supply chain. Whilst VAT is not intended
to be an overall cost to businesses, it is
arrangements can often be unclear

almost certain that industry participants
will feel a cash flow effect and will be
where a charge is made for a share in

required to comply with additional
administrative obligations. Practically, VAT
a bundle of costs
inefficiencies may result in a cost being
borne at some part in the supply chain.
Upstream and downstream businesses
should examine their operations and
Exploration phase – recovery and Cost sharing in joint venture existing arrangements to determine how
registration arrangements VAT may affect them, and to ensure they
The oil and gas lifecycle may involve a Many exploration projects are carried out are ready for the new world of VAT.
long period of exploration and upfront as joint venture agreements, with multiple
investment until the asset (e.g. the oil or entities holding interests in the eventual
gas field) is in production phase - and first production, and contributing their share in
oil or gas is extracted. Until this time, the the development and operating costs of
business is unlikely to make any supplies the projects. The sharing of costs between
from that asset which would give a entities in this way (whether within a group
corresponding right to VAT registration or between third parties) is likely to be
or recovery of VAT on costs. viewed as a set of separate transactions
Internationally, many jurisdictions allow on which VAT should be charged, unless
businesses to be VAT registered, and an exemption applies. The VAT treatment
to recover VAT incurred during these of cost-sharing arrangements can often
preliminary phases – otherwise, VAT be unclear where a charge is made for a
incurred could form an additional share in a bundle of costs; even when a
irrecoverable cost and discourage majority of costs might not be liable for
investment in future projects. Ultimately, VAT in nature (e.g. work carried out on an
22
Deloitte | Value Added Tax in the GCC | Structure of a VAT function
Changes and challenges

Ch. 4 – Structure of a VAT function
of building the needed

Indirect Tax department –
a European benchmark to
guide GCC businesses
24
25
As a transactional tax, VAT will have Businesses in the GCC recent survey we found that the size of the
are already planning

significant impact across a business’s tax function varied by industry, but
entire operations – including the VAT followed the general trend of increasing
function itself. Businesses in the GCC dedicated resources to with company turnover. We expect the
oversee VAT advisory and

must ensure relevant employees have the same to apply in the Gulf region.
appropriate VAT skills and knowledge for
their roles, and this process may identify compliance activities. This There is a trend toward greater focus on
a need for a specialist in-house VAT
requires consideration of indirect tax expertise in the market: our
the appropriate size and

resource. This will influence tax research indicated that the total volume of
recruitment in a region where there has VAT specialists has increased, matching
traditionally been little or no need to have make-up of a VAT the developing complexity of indirect tax
function.
tax specialists as dedicated resources over the years. Similarly, the proportion of
in-house. Businesses in the GCC are the VAT population working in-house has
already planning dedicated resources to also dramatically increased since the mid
oversee VAT advisory and compliance companies/organizations as internal VAT 1990s.
activities. This requires consideration of experts, with the remaining 56% as
the appropriate size and make-up of a professional advisers. Further, separate
VAT function. benchmarking looking at the broader tax
Dedicated indirect tax staff
advisory market suggests that it is

In order to determine the size of the team
6%
common for businesses to have a
that businesses in the Gulf might need,
10%
dedicated tax team in-house. Therefore,
the European market provides a useful businesses in the GCC may wish to
benchmark. The Deloitte Tax practice in consider establishing dedicated resources
the Middle East has collaborated with Guy to oversee VAT advisory and compliance
Barrand at the specialist global indirect tax activities with the introduction of the new
recruiters Beament Leslie Thomas, (BLT) VAT scheme, and continuing on an
51%
(www.blt.co.uk), to provide those ongoing basis.

benchmarks by looking at the data and
trends from the United Kingdom (UK). The The number of in-house VAT specialists
33%
UK is now into its fifth decade of typically varies in size depending on the
administering a VAT system, and is industry and size of the business. In a 1 Between 2 and 5 5+ No answer
therefore a great example of a mature VAT
system.
Average Tax Full Time Employees (FTEs) by industry
Using the UK and European market

practice as an example, we will outline the
Other
different elements of a VAT function and

Business and professional services
what a VAT function typically looks like – Construction

focusing on in-house teams and touching
on alternative models such as co-sourcing
Technology, Media and Telecoms
and outsourcing. Manufacturing
Consumer business
Accessing the VAT population
Based on the research conducted by BLT,
Public sector
there are currently approximately 1,800 Financial services
VAT specialists employed outside of the

government in the UK. Of these
Energy and resources
specialists, 44% are employed by

Life sciences
0 5 10 15 20
Tax Functions FTEs (Globally)
26
Average tax FTEs by turnover
40
35
Tax function FTEs (Globally)
30
25
20
15
10
0
Group turnover (Euros)
Less than 99.9 million 350-479.9 million 1-2.49 billion 5-9.9 billion
100-349.9 million 750-999.9 million 2.5-4.9 billion 10 billion or more
The bulk of the VAT specialists working Number one priority for indirect tax function
outside of the professional services firms
in Europe operate in advisory or strategic
10%
capacities. In the very largest (and/or most

4%
complex) global businesses based in the 5%
UK, the increasingly regulated

environment of the last decade has led to 7%
greater scrutiny on how best to manage

the VAT compliance burden. In fact, most
respondents in the Deloitte indirect tax
11% 63%
survey named compliance as the number

one priority of their indirect dedicated
resource. Compliance Improving Systems
According to BLT, this increased scrutiny

Reducing tax paid Cash flow management
Dealing with Her Dealing with VAT in
on the compliance burden has resulted in Majesty’s Revenue other countries
global VAT compliance activities migrating

and Customs
away from the traditional provenance of

(tax authority)
localized accounting departments, and the The approach to VAT compliance has
establishment of internal teams with the changed significantly with time – and
sole purpose of effectively managing the businesses in the GCC are in a good place
global VAT compliance burden. A related to follow these global developments and
trend is greater awareness of how the use to implement ‘best in class’ compliance
of cutting-edge technology can assist in from the outset. This may include
the compliance process. Indeed, in recent centralized and specialized delivery, an
years we have observed a noticeable effective internal framework and
increase in requests for specialist indirect management oversight, and maximizing
tax technology expertise. efficiencies through automation and
technology.
27
Common operating models • Availability of specialist knowledge and

We have observed that tax operating technical expertise;
models of large organizations are • Complexity of the business;
increasingly focused on indirect tax risks • Process design and integration into the
and obligations. Many businesses have core business activities;
moved further to introduce specific VAT or • Governance and risk management
indirect tax operating models, defining procedures to be implemented
and controlling how VAT is managed within and monitored;
the business. • Potential technology support required;
• Data gathering, validation and processing
Unsurprisingly, most VAT operating requirements;
models are compliance-centric. • Compliance monitoring.
Compliance work in a business is usually
performed: Typically, most in-house VAT functions
• By an in-house dedicated VAT team; have a specialist dedicated resource with a
• As a co-sourced solution between an in- focus on compliance as well as supporting
house team and an external provider; or the wider business with technical advice.
• Externally in full – where it is completely Leading class functions will be fully
outsourced to a third party provider. integrated into the wider business areas
such as procurement, finance and IT to
We expect that businesses operating in ensure both proactive and reactive
the GCC jurisdictions will follow this trend approaches to transactions.
and prioritize compliance above strategic
VAT management in the short term. Where The diagram below illustrates a
there are no other senior tax staff, such as comprehensive leading class approach to
a head of tax, for example, we would indirect tax function in a business and the
expect the senior VAT manager to take types of activities that we would expect
more of a strategic role. the function to perform globally and in
the GCC.
In-house VAT functions
As mentioned in the “Preparing for Strategy
Change” article in Volume 1 of the
whitepaper, a VAT transformation project
Governance
Level 1
needs to be approached in a structured

Strategic direction Roles and responsibilities
way, taking into account the need to keep

the wider business appraised of the Group tax Finance SSC Business
developments and changes relevant to
Division 1
them, and for the business to engage in

Indirect tax processes
the process. This requires comprehensive

Level 2
Influence and
Key indirect tax and Planning VAT/GST, etc.
planning, design, implementation and post
Division 2 lobbying
reporting activities
implementation monitoring of the VAT Indirect tax Customs duties, Audits and
process within the relevant business.

reporting excise duties enquiries
In considering the introduction of an in-

Division 3
house VAT function, considerable thought

should be given to issues such as:
• Resourcing constraints within the
Level 3
organization;
Supporting Organization People Data Systems Risk
infrastructure
28
Level 1 – Strategic Direction – senior Typical roles we would expect to see in- A tax strategy is likely to
be a new addition for
members of the tax and finance teams, house include:
including head of VAT/ head of tax or, • Head of indirect tax / VAT director –
where applicable, senior finance members primarily responsible for managing and most boards to consider
as part of their
will own the strategic direction of the providing support to the business’s key
function. This will include ownership over stakeholders, setting strategic direction
the governance activities and roles and and managing the relationship with tax governance activities
responsibilities. authorities.
• VAT manager – managing day-to-day VAT
Level 2 – Key Indirect Tax and Reporting risk, overseeing the operational day-to-
Activities – the majority of the tax team or day activities including the compliance
finance team members will undertake the process, implementing the VAT strategy,
core activities listed. A shared service and supporting and training the business
center (SSC) is a common vehicle to assist • VAT analyst or accountant – preparing
in compliance activities. and calculating the compliance, working
alongside finance / the shared service
Level 3 – Supporting Infrastructure - center, and understanding the end-to-
underpinning the operation of an in-house end system flow
VAT function are the people, technology,
processes and risk management Shared service centers are increasingly
frameworks developed to support the becoming the preferred option for tax and
activities above. Each of these in turn will financial reporting within indirect tax, as
be impacted by the introduction of VAT evidenced by recent responses from
and potentially will require improvements businesses below.
to provide the appropriate support.
As noted, this is a comprehensive
approach to in-house VAT. In most cases
Do elements of your tax or financial reporting
function sit within shared services
we expect some of this activity to be co-
sourced or outsourced to third party
100%
providers who are able to provide the

90%
requisite specialist knowledge and support 80%
such as VAT advisory or planning. 70%

60%
We expect that the strategy and other
governance activities will be developed in
50%
most cases where a tax strategy has

40%
previously not been required. The UK

30%
recently required large businesses to 20%
publish their tax strategy statements on 10%

the internet for the purposes of 0%
promoting greater transparency in tax Indirect Direct Statutory
reporting. While we do not expect the GCC

tax tax financial
to progress to such a requirement as an

reporting
immediate priority, a tax strategy is likely

No - it is mainly run in-country
to be a new addition for most boards to

It is mainly outsourced
consider as part of their governance

No - but planning to move to shared
activities.
services in future
Yes - it sits mainly within shared services
29
Outsourcing is common Co-sourcing Outsourcing
for many businesses:

Co-sourcing tends to suit most businesses Outsourcing is common for many
that are able to have some tax resource businesses: larger organizations choose to
larger organizations in-house but lack the specialists skills outsource compliance and advisory
choose to outsource
required for some activities (for example, matters to utilize specialist knowledge and
compliance in other jurisdictions, expertise in a cost-effective way. Smaller
compliance and advisory planning, technology support). Co- organizations often choose outsourcing
matters to utilize sourcing usually means the business will because there is no business need for
specialist knowledge and

outsource some activities to a third party having a full-time tax role. We do not
provider for completion. This typically expect a large number of businesses in
expertise in a cost- means that the business still maintains the the GCC to fully outsource all VAT
effective way. Smaller

final review and sign-off activities without obligations from the introduction date.
investing time and resources to more However, we expect that some – especially
organizations often consuming activities such as data those global businesses with an effective
choose outsourcing gathering and processing. outsourced compliance model – could
because there is no
look to implement a full outsourcing in the
The compliance process can be GCC in the medium term, once VAT is
business need for having summarized in most jurisdictions to implemented.
a full-time tax role.

include the activities below. Varying levels
of judgement and skill are required in Companies with the best indirect tax
each stage of the process, and this will compliance usually have a designated
determine how the steps are split among owner of the indirect compliance process
the resources within the organization and – their role is to have ultimate
with external providers. Whilst the right responsibility for the end-to-end
solution will depend on each business’s compliance process, to regularly review
individual needs, we expect co-sourcing to and update the process and, most
be a popular approach for large importantly, ensure that all the various
businesses managing VAT compliance teams in their organization (AP, AR, local
across the Gulf region. finance, group tax) know their roles in the
Stakeholder Process
reporting Planning
Submit
& archive Data
collection
Review
& sign off Data
validation
Return Data
preparation processing
30
process and carry these out effectively (be business’s activities and support functions. challenges in its own right, with the
this an in-house model, a co-sourcing It is important to keep stakeholders and appropriate support and expertise it is
model or a fully outsourced model). management across the business in mind possible to plan a smooth transition and
when completing the rollout. minimize the day-to-day running of
Dealing with global indirect tax organizations.
Indirect taxes in their different forms have In established VAT markets Deloitte has
been around for decades in many performed varying reviews of tax functions Preparing for success
jurisdictions around the world, and this and identified a number of similar trends VAT implementation is likely to be a
trend is continuing with more countries and common issues among the less significant challenge for most businesses
introducing new VAT systems. More often mature VAT functions. in the GCC, and a sensible first step is to
than not, multinational businesses choose quantify the impacts and communicate
to have decentralized compliance of Common issues for developing VAT these across the business. Deloitte has
indirect tax due to the availability of local functions can include: worked to perform many impact
expertise and nexus to the transactional • Unclear roles and responsibilities; assessments in this area, and to then
activity. It is not uncommon, however, to • Inadequate resources and limited access recommend processes and frameworks
see centralized management of indirect to training; which support compliance requirements
taxes in some organizations. This may be • Little understanding of the data used in and business objectives.
common where the business has few, the process;
simple indirect tax filing obligations or • A number of manual processes including We are working within the Gulf region to
where local expertise is not available. calculation and reporting of returns; support businesses to respond to the
Some businesses will prefer a • Inadequate technology support; impacts and challenges of VAT, and to
combination of the two in a co-ordinated • No controls in relation to VAT on sales prepare for the upcoming changes in
approach. and purchases; the most effective way. Our full VAT
implementation process addresses many
of the considerations discussed in this
article – and includes VAT function
Global operating models - the 3 methods
operating model design, solution

implementation, compliance readiness
and more.
Method 1 Method 2 Method 3
Decentralized Co-ordinated Centralized
The foundations of a VAT function -

whether designed on an in-house, co-
Local delivery Central delivery sourcing or outsourcing basis - will provide
the basis of a successful transition to the
VAT system. We would encourage
organizations to start planning their
Delivered and Delivered locally, Delivered and approach and desired outcomes early to
ensure the necessary projects can be
managed locally managed centrally managed centrally
deployed in time to meet compliance

deadlines. We expect the process for full
Common challenges of less mature • No system controls relating to VAT implementation will typically span at least
VAT functions liability determination; two to three years to be fully effective -
The potential impact of implementation • Little input into the business process; and businesses that fail to prepare in
and operation of a VAT system is expected • No formal risk identification procedure adequate time will inevitably be under
to be significant for all large businesses in place; pressure to comply during the transition
operating in the region. As the tax is • Missing filing deadlines with no overall period.
indirectly levied on a transactional basis, plan on how to manage filings.
the effects of VAT – and the ongoing
obligations for effective compliance – Whilst the implementation of a brand new
will touch on a very broad section of a regime in the GCC region will bring unique
31
Deloitte | Value Added Tax in the GCC | VAT technology
Technology
Chapter 5 – VAT technology
considerations – using
technology to automate
VAT compliance
32
33
Deloitte’s VAT readiness in VAT is characteristically embedded Revenue
the GCC survey shows

throughout a business’s entire supply Businesses above a minimum taxable
chain. The strength of a business’ VAT supply threshold (this is normally sales
that 61% of organizations compliance function is highly dependent income – but for VAT purposes may
feel that they need more

on the processes in place, the capacity of include other activities) must register for
the technology system, and the knowledge VAT. Thus, before making any decisions in
than six months to of VAT within the finance and tax regards to change, it is crucial to check the
prepare for the

departments. The right approach to VAT applicability of VAT to your business in a
will ensure control over compliance while particular jurisdiction.
introduction of VAT reducing error, risk and cost.
Nature of business
With the formal announcement of VAT in The complexity of a specific VAT solution
the GCC, businesses need to focus on the will depend on the nature of the business.
practical implications of updating their The kind of purchases and sales a
systems to manage this tax. Deloitte’s VAT business makes could fall into three
readiness in the GCC survey shows that categories for VAT purposes:
61% of organizations feel that they need 1. Standard rate (predicted to be 5% in the
more than six months to prepare for the GCC) – the majority of goods and
introduction of VAT. As such, there is an services are expected to fall within this
immediate need for executive teams to category for most retailers and law
work closely with their technology firms.
partners to agree and implement the 2. Zero rate (0% but still a taxable supply
right VAT technology architecture. for VAT purposes) – this will apply to the
export of goods, for example.
Further, nearly half of the surveyed 3. Exempt from VAT (i.e. no VAT charged
organizations indicated that the top two but no VAT recovery on purchases) –
stumbling blocks to a successful this is typically applied to many services
introduction are technology and a lack of offered by banks and other financial
knowledge regarding the VAT rules. This institutions.
highlights an issue between the need to
begin preparing now and a lack of Furthermore, the location of the supply
certainty as to what businesses are plays an important part in determining
preparing for. within which jurisdiction the VAT needs to
be accounted for and by whom. Under
In this chapter, we aim to reduce the normal rules the place of supply in a
uncertainty and highlight the key areas business-to-business supply of services
that organizations should focus on as they transaction is where the customer is
embark on their journey to VAT readiness. located.
Your current operational landscape For example, when a consultant in Dubai

GCC businesses need to take a number of provides processional advice to a business
commercial, process and systems factors customer in Oman, the place of supply is
into account when preparing for the move likely to be treated as Oman and as such
to VAT, as outlined below. the Dubai-based consultant would not
34
charge VAT. Instead, the business in Oman High Complexity architecture – functionality into the project scope should
would self-account for Oman VAT under Multiple systems are being used, including be looked at by the management.
the reverse-charge mechanism. older linked finance systems, and the
systems have multiple interfaces with the IT knowledge
Extent of integration of current financial management and accounting The extent of knowledge of existing IT
business processes systems. Additionally, the VAT capability systems within the organization can make
GCC organizations, especially the small- (calculation and reporting) is non-standard a big difference when implementing the
and medium-sized businesses, have often across the systems and may be limited. functionality critical for VAT.
managed many of their wider financial Older finance systems may not offer the Organizations which have highly
processes such as employee expenses, automated VAT determination customized finance solutions are often
inter-company invoices and petty cash functionality required and therefore may very dependent on the ‘in-house’
transactions outside their core need to be updated as part of a systems knowledge or long-term service partner
transactional finance system. The upgrade project. The use of many ERP relationships. Therefore, it is important to
introduction of VAT is very likely to systems multiplies the configuration and include the right stakeholders when
encompass these types of transaction effort required when establishing the VAT planning to implement major VAT changes
and so you may have more than just your system logic. Furthermore the work that will impact many business processes
main accounting system to think about. required around process flows and the at the same time.
points of data integration will be similarly
Existing IT architecture increased. It is important to
determine the extent of
The complexity of your existing IT
architecture is going to have a large Ongoing or planned IT projects
influence on how straightforward it is to Any ongoing or planned IT projects that VAT process automation
that an organization
update for the introduction of VAT. Below could potentially impact the VAT processes
are typical scenarios: should be re-assessed in the context of
Simple architecture – One mainstream the timing of the introduction of VAT, as wants to achieve
immediately (at the
ERP (e.g. a recent implementation of implementation plans may need to be
Oracle/SAP with existing VAT capability adjusted. There are different ways that VAT
from another jurisdiction) with minimum could be implemented in view of existing beginning of the VAT
mandate) and the level
customization being used for all the and planned projects with the most
processes impacted by VAT introduction. common scenarios being:
Updates will be focused on enabling or Pause and implement VAT – The IT of automation desired
over the long term
customizing the existing tax determination project interferes with the VAT
and reporting functionality. implementation (e.g. updating a new
Medium complexity architecture – billing system). In this case, a business
Two or three systems are being used for may choose to pause the effort and Automation of VAT processes
all the processes impacted by VAT resume only after VAT is implemented. It is important to determine the extent of
introduction, or the VAT capability Complete and implement VAT – The VAT process automation that an
(calculation and reporting) of the existing project is near completion and so it may organization wants to achieve immediately
systems is limited. More system be most efficient to complete the project (at the beginning of the VAT mandate) and
configuration time and effort is required and then subsequently implement the the level of automation desired over the
where there is more than one system in changes required to enable or build VAT long term. As an example, an organization
use. Care must also be taken to ensure capabilities. may be focused on automating the
that the VAT configuration of each existing Re-plan an ‘in flight’ implementation majority of processes as part of an initial
system is consistent. of VAT – If the project is in a nascent implementation but may defer automation
phase, then the option of bringing VAT of more complex transactions that
35
The complexity of an demand increased resources until current Balance automated and manual
organization may mean

processes have been fully established. effort
Successful VAT implementations will
that some configuration Options for technology enablement appropriately balance the automated and
of the finance system is

Invest in existing systems manual effort in end-to-end processes.
The majority of current ERP systems offer When automating a process, businesses
required, but it is automated VAT determination and should weigh up the cost of automation
important to recognize
reporting functionality and we expect that against the perceived benefit. In many
using this native functionality will be the cases where there are one-off or complex
that customization will most common approach for companies in transactions, manual processes may be
increase the maintenance

the GCC to enable their finance systems to more beneficial and cost effective than
deal effectively with the new VAT system. attempting to automate.
burden compared to a
more standard approach
When enabling VAT functionality in existing Make use of tax specific third party
systems, it is preferable to use the solutions
standard, ‘out of the box’ functionality Third-party providers are preparing to
where possible. The complexity of an offer ‘bolt-on’ solutions that integrate with
organization may mean that some native finance systems to support tax
configuration of the finance system is determination and calculation. Solutions
required, but it is important to recognize are also available which assist with tax
that customization will increase the compliance and reporting obligations.
maintenance burden compared to a These solutions can provide automation
more standard approach. capability beyond that available within
typical finance systems.
Older finance systems may offer less
inbuilt functionality for automated indirect Third-party solutions offer an interesting
tax determination and this should be alternative to investing in existing systems
factored into preparations for change. but careful consideration is recommended
to determine whether a ‘bolt-on’ solution
Take advantage of planned is suitable and necessary before
investment or upgrades in finance implementing.
systems
Where finance system projects are Consider leveraging adviser
underway in the business, there is an relationships
opportunity to include tax in the work plan Outsource providers typically have
such that VAT is included alongside the standard methodologies and technologies
other activities of the business. A project for consolidation, processing and
to implement a new financial system or reporting of VAT information. Businesses
additional system functionality can take can choose to leverage this approach as
advantage of the economies of scale an alternative to investing internally in a
provided when similar activities are taking compliance and reporting solution.
place in other areas of the business.
36
Businesses will still need to provide the − Business should have a clear view on the
source transactional data to an outsource processes needed to support the
provider and ensure that sensible tax systems implementation.
decisions have been made, so it is still
likely that GCC businesses will need to During implementation
invest in existing systems. − It is important to ensure that the right
skills and knowledge are available at all
Don’t underestimate the overall VAT stages of implementation.
reporting process, i.e. the time taken to − Ownership of the various stages of an
consolidate, test and get comfortable with implementation should be agreed
the figures extracted from finance systems upfront (e.g. design, build, and testing).
that will be submitted to tax authorities. − Communicate clearly and regularly with
the process owners and any other
Managing an effective VAT stakeholders that will be impacted at
implementation different stages of the implementation.
An effective implementation for VAT in the
GCC relies on a number of factors. The After implementation
relative importance of these will vary − Training and support has to be provided
depending on how far the implementation so this should be planned for in
has progressed but, in our experience, all advance.
consistently feature in a successful − Business should strive for continuous
implementation. improvement of the system, whether
through improved automation
Before implementation processes or better supporting
− Ensure that you fully understand the processes.
requirements and these have been − The ownership for system and data
communicated to all relevant maintenance should be communicated
stakeholders. and managed within tax, finance and IT
− Understand whether the finance system departments.
will be customized in any way.
It is important to ensure that

the right skills and knowledge
are available at all stages of
implementation
37
Hallmarks of an effective implementation

Businesses in the GCC
should think about what
success looks like for
them before they
The right skills to consolidate and test data, submit returns, adapt systems
and handle relationships with wider business, professional advisers and the
proceed with any system

local tax authorities.
implementation for VAT

Strong technical and systems knowledge needs to be embedded into the
business. Ongoing training is essential to keep teams' knowledge current
and this typically falls to the 'tax team.'
Clearly communicated process underpins the success of finance systems, if the

systems are not utilized correctly, their full potential will not be realized.
Technology solutions can provide greater efficiency and accuracy where

automation of tax decision is enabled. Tax reporting and compliance solutions
can provide further assistance.
Lessons learned from our experience
Always consider the 'end-to-end' Don't underestimate the

process and solution timescales and skillsets required
Balance of automation and Communication, training and

end user flexibility change management are key
Conclusion the business and you’re looking for further

Businesses in the GCC should think about efficiencies; both of these should be given
what success looks like for them before weight when decisions regarding the
they proceed with any system implementation are taken. The
implementation for VAT. There is likely to development of strong processes and
be a subtle distinction between the view of controls alongside a new finance system
success immediately after a system goes will help businesses in the region,
live on day one of VAT being set up and ensuring both views of success are
the view of success after the new VAT achieved.
processes have been embedded within
38
This publication has been written in general terms and therefore cannot be relied on to cover
specific situations; application of the principles set out will depend upon the particular
circumstances involved and we recommend that you obtain professional advice before acting
or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.)
would be pleased to advise readers on how to apply the principles set out in this publication to
their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any
loss occasioned to any person acting or refraining from action as a result of any material in this
publication.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company
limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and
each of its member firms are legally separate and independent entities. DTTL (also referred to
as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about
for a more detailed description of DTTL and its member firms.
Deloitte provides audit, consulting, financial advisory, risk management, tax and related
services to public and private clients spanning multiple industries. Deloitte serves four out of
five Fortune Global 500® companies through a globally connected network of member firms in
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Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is
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presence since 1926.
Deloitte provides audit, tax, consulting, and financial advisory services through 26 offices in
15 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the
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Value Added Tax in the GCC

Insights by industry | Volume 2

and revenue throughput

nature creates an Why, you might wonder, is this the case?

In the normal course of the application

of VAT, the construction and supply of

commercial, industrial and retail

properties, in addition to the

treated as subject to VAT at standard

VAT and the tourism

Given the complexities inherent across

these businesses and the Gulf region,

the broader tourism industry in the GCC

could well prove to be one of the more

challenging areas in terms of

addressing the impact of VAT

complexities that arise

of the various ‘non-airfare’

fringe operations that

outside of their core

and goods around

Another area where airlines will have

Extracting VAT from

the oil and gas

anticipate that there may

the oil and gas sector in

paying VAT to suppliers – values of which

by all businesses working in the sector.

The scope of any zero rate must be

subject to VAT can expect to be in a

regular VAT refund position, as credits

for VAT on purchases will exceed VAT

c. A sector-wide exemption applies

The VAT treatment of cost-sharing

arrangements can often be unclear

where a charge is made for a share in

Changes and challenges

of building the needed

are already planning

oversee VAT advisory and

the appropriate size and

advisory market suggests that it is

(www.blt.co.uk), to provide those ongoing basis.

Using the UK and European market

different elements of a VAT function and

what a VAT function typically looks like – Construction

and outsourcing. Manufacturing

there are currently approximately 1,800 Financial services

VAT specialists employed outside of the

specialists, 44% are employed by

Average tax FTEs by turnover

capacities. In the very largest (and/or most

complex) global businesses based in the 5%

UK, the increasingly regulated

greater scrutiny on how best to manage

survey named compliance as the number

According to BLT, this increased scrutiny

global VAT compliance activities migrating

away from the traditional provenance of

Common operating models • Availability of specialist knowledge and

needs to be approached in a structured

way, taking into account the need to keep

them, and for the business to engage in