UAE was the first region across the GCC to levy a 5% Value Added Tax (VAT) starting 1st Jan 2018 with other countries likely follow suit in the coming year. Although unlike corporate taxes, VAT applies to the supply of goods and services with end consumers lifting all the burden, this new introduction will have implications for all businesses, big and small. This article broadly covers what VAT is, how it will affect your HR and why you should care.
What is VAT?
VAT is an indirect tax that is charged on the supply of goods and services. VAT is generally perceived as a potent reform in mobilizing tax revenues whilst causing minimal economic disruption yet there is still a lot of ambiguity over its effects on a business’s operations and compliance. It has a structure that defines taxable and exempt supplies, points of taxation, compliance requirements, tax returns and methods of the audit. This makes it important to understand the structure to determine whether your business is required to be VAT registered and how your product pricing and demand will depend on its regulations, among other things.
How will it influence businesses in the UAE?
It will certainly not shake the very core of a business, but it will require significant changes in procedures and practices when VAT implementation strategies kick in. Lessons from indirect tax reforms being implemented across the globe and most recently in Malaysia revolve around the same notion: the more preemptive preparation your company makes for a VAT/GST tax reform, the better. Here are some aspects that are likely to change:
Organizational Design: You’ll need people to initiate and maintain all VAT-related activities. This could be done in-house by training people in the tax division if you have one or creating one from scratch. You could also delegate the work to employees working in another function. The other more costly options include outsourcing the work to external agencies or consultants. Either way, your organizational design will require changes.
Pricing Policies: Since prices of goods and services are likely to increase with the imposition of VAT, a lot hinges on how price elastic the demand for your products/services is. You should strategize your pricing policies to remain competitive in the light of the classification of your product and your target customer base.
Inventory Management: The imposition of VAT will lead to the accounting of tax charged on sold inventory. Registered businesses will also get tax deductions on purchased inventory. This is crucial information in developing a VAT implementation strategy because it calls for changes in re-order levels and prioritizing the removal of old stock and getting fresh one and striking the optimal balance continually.
Reconfiguring ERP Systems: You need your ERP for all those executive reports that help in decision making and with VAT in the picture, you need experts to redesign the system to make it VAT ready. Each process in the business cycle needs to be evaluated for possible tuning with Inventory Management, Purchase to Pay and Production being some examples.
The role of HR in all of this
So far, we discussed how procedures and systems will require an overhaul post VAT imposition but it’s essential to note that systems are ultimately made up of and run by people. This is where HR becomes monumental in ensuring that people across the organization receive adequate training on the structural changes occurring at all levels along with the importance of their compliance. Although governments are likely to host VAT-specific workshops, these sessions will not be tailored to each company and the departments within. To ensure maximum adoption and minimum resistance, it is important for all employees to be given basic information about the new tax, how it affects your business operations and what every employee needs to do to keep things smooth sailing. Department-specific training like those in production, supply chain, procurement, and finance will be crucial to dealing with the day to day impact of VAT in the company along with its grander business implications.
Recruitment is another important facet although it depends entirely on whether you plan to add VAT specialists to the company. In case you do require tax talent, getting hold of credentialed candidates can be a challenge due to the limited number of professionals in the GCC region with relevant skills. Possible alternatives include looking for candidates from Europe that are seeking employment in the GCC, reaching out to candidates from recent VAT adopting countries like Malaysia, India, and China or hunting for people from those countries in the GCC that have already imposed some indirect tax (Egypt, Lebanon, Jordan).
With prices of the commodities experiencing a marginal increase, you can expect employees to negotiate for a pay raise. Although tax exemptions on essential food commodities, healthcare and education will mitigate for some of the inflation, it is not entirely unreasonable for people to ask for such accommodations. Although no immediate actions are in order, you should consider adjusting company-wide salaries for VAT imposition in the long run if you plan to stay competitive and retain your star players.
Next Steps
The key to riding the VAT wave instead of letting it ride you is staying agile and well-informed of the upcoming regulations. There may still be a lot of ambiguity around the mechanics, just as there is around any new tax reform, but don’t let the confusion make you passive. To make a smooth transition from the old practices to the new, your company needs to be proactive in managing potential risks and contingencies by taking the entire workforce onboard in the successful handling of VAT within the business.
