Value Added Tax in the GCCInsights by industry | Volume 2

Ninety years in the Middle East

32

Technologyconsiderations – usingtechnology to automateVAT compliance

Chapter 5 – VAT technology

Deloitte | Value Added Tax in the GCC | VAT technology

33

Deloitte | Value Added Tax in the GCC | VAT technology

34

VAT is characteristically embeddedthroughout a business’s entire supplychain. The strength of a business’ VATcompliance function is highly dependenton the processes in place, the capacity ofthe technology system, and the knowledgeof VAT within the finance and taxdepartments. The right approach to VATwill ensure control over compliance whilereducing error, risk and cost.

With the formal announcement of VAT inthe GCC, businesses need to focus on thepractical implications of updating theirsystems to manage this tax. Deloitte’s VATreadiness in the GCC survey shows that61% of organizations feel that they needmore than six months to prepare for theintroduction of VAT. As such, there is animmediate need for executive teams towork closely with their technologypartners to agree and implement the right VAT technology architecture.

Further, nearly half of the surveyedorganizations indicated that the top twostumbling blocks to a successfulintroduction are technology and a lack ofknowledge regarding the VAT rules. Thishighlights an issue between the need tobegin preparing now and a lack ofcertainty as to what businesses arepreparing for.

In this chapter, we aim to reduce theuncertainty and highlight the key areasthat organizations should focus on as theyembark on their journey to VAT readiness.

Your current operational landscapeGCC businesses need to take a number ofcommercial, process and systems factorsinto account when preparing for the moveto VAT, as outlined below.

RevenueBusinesses above a minimum taxablesupply threshold (this is normally salesincome – but for VAT purposes mayinclude other activities) must register forVAT. Thus, before making any decisions inregards to change, it is crucial to check theapplicability of VAT to your business in aparticular jurisdiction.

Nature of businessThe complexity of a specific VAT solutionwill depend on the nature of the business.The kind of purchases and sales abusiness makes could fall into threecategories for VAT purposes:1. Standard rate (predicted to be 5% in theGCC) – the majority of goods andservices are expected to fall within thiscategory for most retailers and lawfirms.

2. Zero rate (0% but still a taxable supplyfor VAT purposes) – this will apply to theexport of goods, for example.

3. Exempt from VAT (i.e. no VAT chargedbut no VAT recovery on purchases) –this is typically applied to many servicesoffered by banks and other financialinstitutions.

Furthermore, the location of the supplyplays an important part in determiningwithin which jurisdiction the VAT needs tobe accounted for and by whom. Undernormal rules the place of supply in abusiness-to-business supply of servicestransaction is where the customer islocated.

For example, when a consultant in Dubaiprovides processional advice to a businesscustomer in Oman, the place of supply islikely to be treated as Oman and as suchthe Dubai-based consultant would not

Deloitte’s VAT readiness inthe GCC survey showsthat 61% of organizationsfeel that they need morethan six months toprepare for theintroduction of VAT

Deloitte | Value Added Tax in the GCC | VAT technology

35

charge VAT. Instead, the business in Omanwould self-account for Oman VAT underthe reverse-charge mechanism.

Extent of integration of currentbusiness processesGCC organizations, especially the small-and medium-sized businesses, have oftenmanaged many of their wider financialprocesses such as employee expenses,inter-company invoices and petty cashtransactions outside their coretransactional finance system. Theintroduction of VAT is very likely toencompass these types of transaction and so you may have more than just yourmain accounting system to think about.

Existing IT architectureThe complexity of your existing ITarchitecture is going to have a largeinfluence on how straightforward it is toupdate for the introduction of VAT. Beloware typical scenarios:Simple architecture – One mainstreamERP (e.g. a recent implementation ofOracle/SAP with existing VAT capabilityfrom another jurisdiction) with minimumcustomization being used for all theprocesses impacted by VAT introduction.Updates will be focused on enabling orcustomizing the existing tax determinationand reporting functionality.Medium complexity architecture –Two or three systems are being used forall the processes impacted by VATintroduction, or the VAT capability(calculation and reporting) of the existingsystems is limited. More systemconfiguration time and effort is requiredwhere there is more than one system inuse. Care must also be taken to ensurethat the VAT configuration of each existingsystem is consistent.

High Complexity architecture –Multiple systems are being used, includingolder linked finance systems, and thesystems have multiple interfaces with thefinancial management and accountingsystems. Additionally, the VAT capability(calculation and reporting) is non-standardacross the systems and may be limited.Older finance systems may not offer theautomated VAT determinationfunctionality required and therefore mayneed to be updated as part of a systemsupgrade project. The use of many ERPsystems multiplies the configuration andeffort required when establishing the VATsystem logic. Furthermore the workrequired around process flows and thepoints of data integration will be similarlyincreased.

Ongoing or planned IT projectsAny ongoing or planned IT projects thatcould potentially impact the VAT processesshould be re-assessed in the context ofthe timing of the introduction of VAT, asimplementation plans may need to beadjusted. There are different ways that VATcould be implemented in view of existingand planned projects with the mostcommon scenarios being:Pause and implement VAT – The ITproject interferes with the VATimplementation (e.g. updating a newbilling system). In this case, a businessmay choose to pause the effort andresume only after VAT is implemented. Complete and implement VAT – Theproject is near completion and so it maybe most efficient to complete the projectand then subsequently implement thechanges required to enable or build VATcapabilities. Re-plan an ‘in flight’ implementationof VAT – If the project is in a nascentphase, then the option of bringing VAT

functionality into the project scope shouldbe looked at by the management.

IT knowledge The extent of knowledge of existing ITsystems within the organization can makea big difference when implementing thefunctionality critical for VAT. Organizations which have highlycustomized finance solutions are oftenvery dependent on the ‘in-house’knowledge or long-term service partnerrelationships. Therefore, it is important toinclude the right stakeholders whenplanning to implement major VAT changesthat will impact many business processesat the same time.

Automation of VAT processesIt is important to determine the extent ofVAT process automation that anorganization wants to achieve immediately(at the beginning of the VAT mandate) andthe level of automation desired over thelong term. As an example, an organizationmay be focused on automating themajority of processes as part of an initialimplementation but may defer automationof more complex transactions that

It is important todetermine the extent ofVAT process automationthat an organizationwants to achieveimmediately (at thebeginning of the VATmandate) and the level of automation desiredover the long term

Deloitte | Value Added Tax in the GCC | VAT technology

36

demand increased resources until currentprocesses have been fully established.

Options for technology enablementInvest in existing systemsThe majority of current ERP systems offerautomated VAT determination andreporting functionality and we expect thatusing this native functionality will be themost common approach for companies inthe GCC to enable their finance systems todeal effectively with the new VAT system.

When enabling VAT functionality in existingsystems, it is preferable to use thestandard, ‘out of the box’ functionalitywhere possible. The complexity of anorganization may mean that someconfiguration of the finance system isrequired, but it is important to recognizethat customization will increase themaintenance burden compared to a more standard approach.

Older finance systems may offer lessinbuilt functionality for automated indirecttax determination and this should befactored into preparations for change.

Take advantage of plannedinvestment or upgrades in financesystemsWhere finance system projects areunderway in the business, there is anopportunity to include tax in the work plansuch that VAT is included alongside theother activities of the business. A projectto implement a new financial system oradditional system functionality can takeadvantage of the economies of scaleprovided when similar activities are takingplace in other areas of the business.

Balance automated and manualeffortSuccessful VAT implementations willappropriately balance the automated andmanual effort in end-to-end processes.When automating a process, businessesshould weigh up the cost of automationagainst the perceived benefit. In manycases where there are one-off or complextransactions, manual processes may bemore beneficial and cost effective thanattempting to automate.

Make use of tax specific third partysolutionsThird-party providers are preparing tooffer ‘bolt-on’ solutions that integrate withnative finance systems to support taxdetermination and calculation. Solutionsare also available which assist with taxcompliance and reporting obligations.These solutions can provide automationcapability beyond that available withintypical finance systems.

Third-party solutions offer an interestingalternative to investing in existing systemsbut careful consideration is recommendedto determine whether a ‘bolt-on’ solutionis suitable and necessary beforeimplementing.

Consider leveraging adviserrelationshipsOutsource providers typically havestandard methodologies and technologiesfor consolidation, processing andreporting of VAT information. Businessescan choose to leverage this approach asan alternative to investing internally in acompliance and reporting solution.

The complexity of anorganization may meanthat some configurationof the finance system isrequired, but it isimportant to recognizethat customization willincrease the maintenanceburden compared to amore standard approach

Deloitte | Value Added Tax in the GCC | VAT technology

37

Businesses will still need to provide thesource transactional data to an outsourceprovider and ensure that sensible taxdecisions have been made, so it is stilllikely that GCC businesses will need toinvest in existing systems.

Don’t underestimate the overall VATreporting process, i.e. the time taken toconsolidate, test and get comfortable withthe figures extracted from finance systemsthat will be submitted to tax authorities.

Managing an effective VATimplementationAn effective implementation for VAT in theGCC relies on a number of factors. Therelative importance of these will varydepending on how far the implementationhas progressed but, in our experience, allconsistently feature in a successfulimplementation.

Before implementation− Ensure that you fully understand therequirements and these have beencommunicated to all relevantstakeholders.

− Understand whether the finance systemwill be customized in any way.

− Business should have a clear view on theprocesses needed to support thesystems implementation.

During implementation− It is important to ensure that the rightskills and knowledge are available at allstages of implementation.

− Ownership of the various stages of animplementation should be agreedupfront (e.g. design, build, and testing).

− Communicate clearly and regularly withthe process owners and any otherstakeholders that will be impacted atdifferent stages of the implementation.

After implementation− Training and support has to be providedso this should be planned for inadvance.

− Business should strive for continuousimprovement of the system, whetherthrough improved automationprocesses or better supportingprocesses.

− The ownership for system and datamaintenance should be communicatedand managed within tax, finance and ITdepartments.

It is important to ensure thatthe right skills and knowledgeare available at all stages ofimplementation

Deloitte | Value Added Tax in the GCC | VAT technology

38

Deloitte | Value Added Tax in the GCC | VAT technology

Businesses in the GCCshould think about whatsuccess looks like forthem before theyproceed with any systemimplementation for VAT

Always consider the 'end-to-end'process and solution

Don't underestimate the timescales and skillsets required

Balance of automation and end user flexibility

Communication, training andchange management are key

Lessons learned from our experience

ConclusionBusinesses in the GCC should think aboutwhat success looks like for them beforethey proceed with any systemimplementation for VAT. There is likely tobe a subtle distinction between the view ofsuccess immediately after a system goeslive on day one of VAT being set up andthe view of success after the new VATprocesses have been embedded within

the business and you’re looking for furtherefficiencies; both of these should be givenweight when decisions regarding theimplementation are taken. Thedevelopment of strong processes andcontrols alongside a new finance systemwill help businesses in the region,ensuring both views of success areachieved.

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 thesystems 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.

The right skills to consolidate and test data, submit returns, adapt systems and handle relationships with wider business, professional advisers and the local tax authorities.

Hallmarks of an effective implementation

This publication has been written in general terms and therefore cannot be relied on to coverspecific situations; application of the principles set out will depend upon the particularcircumstances involved and we recommend that you obtain professional advice before actingor 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 totheir specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for anyloss occasioned to any person acting or refraining from action as a result of any material in thispublication.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private companylimited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL andeach of its member firms are legally separate and independent entities. DTTL (also referred toas “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/aboutfor a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and relatedservices to public and private clients spanning multiple industries. Deloitte serves four out offive Fortune Global 500® companies through a globally connected network of member firms inmore than 150 countries bringing world-class capabilities, insights, and high-quality service toaddress clients’ most complex business challenges. To learn more about how Deloitte’sapproximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterruptedpresence 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 theGCC region since 2010 (according to the International Tax Review World Tax Rankings). It hasalso received numerous awards in the last few years which include best employer in theMiddle East, best consulting firm, the Middle East Training & Development Excellence Award bythe Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSRintegrated organization.

© 2017 Deloitte & Touche (M.E.). All rights reserved.