Introduction of VAT in the GCC – New Case of Y2K Challenge? Business Landscape
Back in 1999, Y2K or the Millennium Bug, as it was known, was big news, in both the IT industry and the popular press. For those too young to remember, this was the fear that between 31 December 1999 and 1 January 2000, many, if not all, IT systems would fail.
At that time, no one was sure what would happen at the change of the year, with many forecasting dire outcomes. In the end, at the New Year, there were no major issues and no recorded cases of widespread applications failing or critical infrastructure not working. Rather than celebrate the success and congratulate the industry on the measures taken to combat Y2K, there was some skepticism and a feeling that sections of the industry had hyped what was a genuine concern into an imminent impending disaster.
Fast forward to 2017 - with the planned introduction of VAT in the Gulf Cooperation Council (GCC) there are some parallels starting to appear. The principal belief is that the professional services industry is overhyping the impending introduction. Another belief is that dealing with VAT is just a question of making sure that the ERP can add 5% to invoices and nothing needs to be done now. While understandable, these assumptions are incorrect.
Alert enterprises have already studied the impending change in the tax system and conducted some form of initial impact assessment. Based on the findings from this exercise, they have obtained an initial budget and started to prioritize the design efforts required. They have established a working group or steering committee to oversee the required activities and provide the sort of visible sponsorship that a successful and time-critical regulatory-driven business change program requires.
There are a number of areas to assess in order to make relevant decisions. These include:
- What are the process areas affected and what changes will be required? Particular emphasis needs to be given to new business process requirements in the area of compliance reporting and submission of returns.
- How will the business treat the tax liability - will it be absorbed or passed on in the form of a price rise?
- Should invoicing and payment cycles be modified to optimize cash flow? This is particularly important for businesses that have a mix of exempt and VAT-able trades.
From the business process side, there will be changes to accounting processes and new processes needed around calculation and payment of VAT returns. Changes to the finance operating model may also be required and should be investigated. Assessment of business process aspects should also be used an opportunity to expand the use of workflow automation.
Technology aspects include assessing what changes will be required to the ERP system and whether the required taxation module is implemented and configured. Other areas not to be overlooked should be how new reporting requirements will be met with the existing financial systems. Also, aspects of data architecture should be looked into - Impact of VAT on Master Data Objects needs to be assessed and worked through.
From a staffing perspective, the nature and extent of training and education has to be determined. Excise taxation will be a new and unfamiliar concept to many finance staff, especially the less experienced. Apart from the training required for the initial implementation, new staff, required as part of the organizational change management response, have to be trained. The introduction of VAT will demand changes to some existing roles as well as new VAT-specific posts will be created.
One feature that was a significant part of dealing with the Y2K challenge was the need to develop and execute a comprehensive testing program. This is equally valid in 2017. To demonstrate to the steering group and internal stakeholders that the required changes have been made and successfully tested, details of the testing regime will be required. This should include the test strategy, plan, conditions tested and results - much of this information will be required for audit and potential regulatory review and approval.
So what will happen to the underprepared or those who do not complete the preparations in time? Their first statutory filing will be late and will attract a fine from appropriate regulatory authorities. Apart from this, finance and IT operations will be impacted. Incorrect tax deductions will affect cash flow with increase in costs and dissatisfaction. Additional funding will have to be obtained from either shareholders or banks.
As was the case with Y2K, the fact that systems did not fail was not due to luck but rather a reflection of the hard work and management focus that had been applied in advance. The same should be true now with CIOs and CFOs to ensure that their systems, processes and most importantly, their people are ready and in place for January 2019. If not, they can expect a difficult and potentially expensive start to 2019.