Over the past five years, value-added tax (VAT) has been implemented in a number of GCC states and this has resulted in a number of challenges and opportunities for businesses. The introductory article in the new series, MENA Tax Technology Series, reflects on the common technology-related issues businesses have experienced and more importantly, how to mitigate them.
In theory, VAT should be cost-neutral for organizations (excluding certain sectors such as financial services and real estate), however, the introduction of VAT has had a large functional and financial impact on organizations. The largest issue most organizations faced has been the compilation of data for the VAT return, primarily because most organizations did not take into consideration cross-business impacts, which in turn meant what should have been a relatively simple task became very complex.
Where these impacts were not previously considered, this has led to scenarios where organizations were unable to plan and budget for technology systems appropriately. It is essential that VAT implementation projects are considered across all business functions of an organization. Many organizations have had to introduce a tax function which they have previously not needed.
Analyzing common technology issues
Most organizations implemented their IT systems long before new taxes such as VAT was introduced. As a result, the tax technology in place may be insufficient, inadequate or generally unable to handle tax complexities. In addition, over the years, IT systems have gone through multiple customizations leading to a very complex IT landscape, which can make upgrades and further customization difficult.
The preference for many organizations was to customize their existing enterprise resource planning (ERP) systems and to make isolated changes to their finance modules without embedding any tax technology.
This has resulted in further costs for some organizations such as, challenges in producing the correct required data when requested by tax authorities, or incomplete or incorrect VAT returns which has lead to large fines. In addition, some organizations were unable to claim back deductible input tax as they did not have the correct data (especially applicable in the real estate and financial services sectors). For example, organizations operating in the KSA experienced a couple of unique scenarios including:
- Transition rules: Existing systems have been unable to handle transitional rules during introduction and the rate change.
- Amnesty: The KSA ran an amnesty which organizations could avail if they were able to explain the mistake, when it was made, how it was made and how it was fixed. This requires data which most organizations did not have meaning; most were unable to benefit from the amnesty.
Focusing on the four pillars
To mitigate the above issues, organizations that are looking to digitize their tax function should focus on four main pillars which are:
- Determination
- Ongoing data quality
- Reporting
- Controversy
