Bahrain sees pre-VAT splurge while UAE and KSA companies can expect audits

Consumers in Bahrain have splurged on big-ticket items in the lead-up to the Kingdom’s VAT roll-out, with car sales reportedly up by as much as 20 percent. Meanwhile, professional services firm EY says businesses in the UAE and Saudi Arabia can expect full-scale tax audits in the year ahead, as local authorities move more confidently beyond the implementation period.

Retailers in Bahrain have experienced an unprecedented sales surge in the final days of the year according to local reports, with luxury items such as jewelry together with everything from vehicles, furniture and home entertainment systems flying out the door ahead of the new 5 percent VAT tax which has been applied from the start of this year – the third GCC nation to implement the tax following the UAE and Saudi Arabia in 2018.

With car and jewelry sales said to be up by as much as 20 and 40 percent, EY MENA’s VAT implementation lead and international expert David Stevens told the Gulf Daily News such a rush was expected – as had been witnessed in the UAE and Saudi Arabia to some extent before the VAT roll-out in those jurisdictions at the start of last year. Unfortunately for retailers, spending is likely to dip in the coming months as price inflation begins to kick in.

“From what we have observed in Saudi Arabia and the UAE, there is likely to be a pull forward of some discretionary spending ahead of the VAT commencement date that will then see a decline in such spending after the tax is introduced,” Stevens forecast previously, despite the modest 5 percent VAT being applied for the time being. The standard average VAT rate across most of Europe for example currently stands at above 20 percent. Meanwhile, Stevens, who was a senior government advisor during the implementation of the tax in Australia, has warned taxpayers in the UAE and Saudi Arabia that they can expect official audits in the year ahead, as local authorities settle into the new system. “These businesses need to prepare themselves to be able to completely justify all of their numbers, all of their data, all of their statements, all of their payments, all of their invoices, all of their record-keeping, and all various other aspects of their VAT compliance that will come under increased scrutiny by the authorities as we go into the second year of operation.”

Still, concerns remain that many businesses have yet to achieve compliance, while regulatory issues persist. “The authorities will be launching audit activity while there are some areas with unclarified rules, so they won’t know how to enforce them,” added Stevens. “The pressure falls on the authorities to resolve any unsettled, non-clarified or disputed areas of interpretation. They need those clarified so that auditors can do their job and taxpayers need that to make sure they are fully compliant.”

Recently, EY MENA’s Tax Services leader Sherif El-Kilany urged the states of the GCC to move toward automisation of the tax system, a move tipped by Stevens to occur in the near future, with local states not bogged down by legacy systems. “It wouldn’t surprise me if over the next 12 months we start to see announcements about the future of the VAT regime in this part of the world going towards a world-class, more digitised, electronic-based approach to compliance as well… In many ways they can go to these cutting-edge developments quite quickly,” Stephens stated.

On the flip-side, El-Kilany noted part way through last year that the implementation of VAT in the region was driving wider moves toward digital transformation, with almost all of the tax professionals surveyed by the firm stating that they were in the process of or had already digitalised operations – in anticipation of government movement. “So in addition to being a significant revenue stream, the roll out of VAT is now clearly seen as a means of modernising the economy and putting the digital journey on the speed track,” El-Kilany said.

Related: Deloitte introduces Arabic-language version of VAT app for the GCC.