Integral approach and technology key for VAT implementation, says KPMG

22 January 2018

The introduction of a 5% VAT will lead to a string of changes in Bahrain’s business landscape, according to experts from KPMG. Preparing for the change requires an integrated approach, from strategy and finance through to technology, with the latter considered a make or break factor. 

“Bahrain has always been known as a tax-free economy although levies and charges have always been present. The introduction of a consumption tax on most goods and services will inevitably require an updated approach to the way of interacting with business partners and final consumers,” said Jamal Fakhro, Managing Partner of KPMG in Bahrain. 

As part of wider development reforms, stated to support the transition to a more modern public infrastructure, the Gulf Cooperation Council (GCC) member states signed a framework agreement to introduce Value-Added Tax (VAT) on the supply of goods and services at a standard rate of 5%*. While some member states have implemented the change on 1 January 2018, Bahrain’s policy makers have opted to effectuate the new legislation, which comprises 15 chapters and 79 articles, by mid-2018.

The implementation of the new tax will according to KPMG, a global accounting and consulting firm, have implications for the entire business landscape, spanning businesses and new taxpayers, both in Bahrain and abroad, directly and/or indirectly.

Levied on a ‘taxable person’ (someone or an entity that carries out economic activity that requires VAT registration), the VAT is then remitted to the tax authority. There will be a right for businesses to claim a credit for VAT paid on their expenditures, relating to their business activities.Bahrain to introduce a 5% VAT rate in the second half of 2018 Preparing for the new regulation is critical, said Fakhro, “There is continuous risk for business disruption and reputational damage if VAT is not managed effectively prior to introduction and beyond go-live.” Philippe Norre, Head of Indirect Taxes at KPMG in Bahrain, added that for large organisations with wide-ranging operations, managing VAT throughout the entire commercial chain will prove a challenging task. “Managing accounts and monitoring VAT in all transactions is not an easy task.”

Meanwhile, the 5% VAT rate is unlikely to deter investment into Bahrain, or the surrounding region, according to a previous analysis by KPMG. In a white paper titled ‘Analysis of the GCC VAT Framework Agreement’, the authors of the consultancy concluded, “GCC’s appeal stretches much further than its current low-tax status. Infrastructure development, access to high-potential growth markets in Africa and Asia, free-trade zones, competitive labour costs, few trade barriers and economic and political stability are all factors which add to the region’s appeal. In addition, VAT will have a neutral impact on registered businesses when managed efficiently.”

Integral approach and technology are key

Given the wide-reaching impact of VAT, businesses are advised to take a “holistic point of view” in their execution endeavours, said Fakhro and Norre. Analysis by KPMG shows that it will impact operations across areas including business processes such as finance, order-to-cash, procure-to-pay and record-to-report, accounting systems (e.g. new tax codes, updating vendor and customer master data), supply chain (e.g. revisiting the finance optimised flows of goods/services), procurement (e.g. contracts and purchase orders), sales & marketing (e.g. product pricing) and treasury (e.g. revising cash flow forecasting). 

Fakhro highlighted that although go-live will take place in the second half of 2018, it is vital that organisations utilise the time they have to evaluate the impact of VAT on their operations and take all measures to ensure a smooth roll-into VAT throughout the whole services’ supply chain. He recommends following a line-by-line analysis of the business areas that are likely to be affected by the regulations, either directly or indirectly. 

Looking at pricing is one major component. Central question: what is the impact of VAT on the prices of services/products the business offers? Will VAT result in increasing demand, if prices are to rise? How will VAT affect a business's pricing strategy? Will there be an impact on business customers in the same way as individual customers? The analysis should be tied to financial metrics, such as cash flow and profitability, to gain an understanding of bottom-line impact. For instance, some businesses may face a large time-frame between paying VAT on purchases and receives payments from customers or claiming VAT back.

Quote - Jamal FakhroThe overall transition, added Norre, can in practice only be handled efficiently through a tailored Control Framework and specific VAT procedures and processes, “that are adhered to by all stakeholders in the business, and not just Finance.” 

The role of technology herein is paramount – leveraging the opportunities provided by automation, businesses can streamline the process of implementation and monitoring. Norre: “Having a technology-enabled processes, whether by upgrading existing Enterprise Resource Planning (ERP) systems or carefully rolling out add-on tools embedded in the overall digital strategy of the organisation, is a must-do to ensure accurate tax reporting, avoid financial penalties and navigate government requirements.” 

To support organisations with their VAT transitions, KPMG in Bahrain has established a team of experts from across its business units. Craig Richardson (Partner) and Ali Al Mahroos (Senior Manager) are experts in taxation matters, while Sumit Pandey and Arvind Sharma (both Senior Managers) bring in audit and financial capacities. The advisory side of change, including operating model redesign and change management, are covered by among others Padmanabhan Nurani, Ramesh Gajula and Amit Parab – all three Indian-origin consultants being Associate Director at the Big Four firm.

Across the Middle East, KPMG has approximately 7,500 professionals based in 32 offices. The region recently reported 12.7% growth in aggregated revenues

* Member states have some flexibility to apply a 0% rate to some goods and services – for instance medicines and medical supplies and valuable metals such as gold, silver and platinum (0% rate) and financial services carried out by authorised banks and financial institutions (VAT exemption).


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

04 January 2019

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