Execs prepare for VAT in Gulf nations; Deloitte breaks down potential industry outcomes

Execs prepare for VAT in Gulf nations; Deloitte breaks down potential industry outcomes
Execs prepare for VAT in Gulf nations; Deloitte breaks down potential industry outcomes | Courtesy of Shutterstock

At the beginning of 2018, a new value-added tax (VAT) is going into effect for many Gulf Coast countries.

That has executives and others looking closely at what it will mean for multinationals and other businesses that have to navigate this new tax system in their Middle Eastern operations.

According to a press release on Oct. 5, Deloitte is putting out white papers and other informative resources to help companies with these difficult types of deliberations.

“The progressive implementation of VAT throughout the GCC from Jan. 1, 2018, marks the start of some of the most exciting, dramatic and far-reaching socioeconomic changes in the region since the discovery of oil reserves in commercial quantities during the 1960’s,” Deloitte Middle East VAT Leader Justin Whitehouse said in a press release. “The time does appear to be upon us all to start looking in detail at the potential impacts it will have on businesses, whether from an organizational, operational, commercial or financial perspective.”

Deloitte went on to break down some of the consequences for various industries.

In retail, analysts suggest, many businesses might want to eat some of the new VAT costs, instead of passing them all onto customers, to remain competitive in terms of price.

The automotive field, analysts say, is a little different -- experts warn businesses about a potential huge spike in demand at the end of 2017, previous to VAT implementation, as customers try to avoid getting stuck with a significant surcharge.

Then there’s the financial industry, where the VAT is simply going to result in a more significant burden when it comes to transaction handling, tax documentation and more.

Reports like these suggest that handling a new VAT tax is much more complicated than simply recognizing the higher costs, and marking up products and services accordingly.

Joe Carella is assistant dean of executive education at the University of Arizona.

“When a VAT system is introduced, it is important that the three main actors in the system find a reasonable balance among them,” Carella told Gulf News Journal. “The government will need to be worried that companies and consumers cooperate in the collection of VAT so that the money collected can go towards infrastructure investment and public programs.” 

Carella suggested that in a VAT tax system, companies become “de facto tax collectors.”

“As such, they can decide how best to pass on the increase; whether they should incentivize consumers by absorbing the new tax or passing this on,” he said.

Either way, Carella believes executives will be making complex decisions about what is fair financially.

“Using this as an opportunity to increase prices can backfire tremendously, in the era of transparency where price checking is so easy to accomplish,” he said. “Finding instead a way to absorb the increase or to manage the transition in a transparent way can lead to greater trust and greater long term brand loyalty. Ultimately, as in all situations where we encounter systemic change, we will always remember those who helped us along the way, and those who instead chose to take advantage of us.”