The GCC governments agreed through 2015 and early 2016 to introduce VAT. During early 2016, consensus was reached on a level of 5% and a roll-out date of 2018, with the ‘go live’ date for each country to decide. The indicators from the regional governments are that UAE is setting its goal for 01/01/2018, while Saudi Arabia has merely stated Q1 2018 – although given fiscal pressures on the budget, an aspiration for 01/01/2018 is a reasonable assumption. Kuwait is aiming to be ready by the end of 2017 for an early 2018 date, and Qatar, Oman and Bahrain haven’t expanded on their dates other than the agreed mandate.
What Will Attract VAT?
With a 5% tax coming, the construction and development industry will see certain costs and thus inflationary pressures filter through the system. We expect most - if not all - products and services to attract VAT through the whole supply chain, as the only exclusions agreed by the GCC committees are basic commodities such as food, drink, medicines and school fees.
Additional Costs For Construction Supply Chain
The obvious cost is the tax itself. Given the length of build programmes, we started to feel the price pressures as early as late 2016, and these will continue to build through 2017, becoming fully priced into the market by the 2018 VAT commencement date.
With a 5% tax coming, the construction and development industry will see certain costs and thus inflationary pressures filter through the system.
At the time of writing (February 2017), Faithful+Gould is forecasting 3% inflation in UAE and c.0.5-1% in KSA, just as a result of the tax in 2017. However, there are significant additional costs associated with the roll-out. Both the public and private sectors have systems and processes aligned to the current low tax environment and both have a relatively short window in which to adapt – and a lot of organisations may still be unaware of the impact on their businesses and its operations.
The industry will have to amend invoicing and establish collection and accountancy mandates, and government entities will have to provide clear guidance on the collection periods and procedures they intend to use. Significant investment in human capital development will be needed to ensure compliance. More employees will be needed to administer this for organisations, again adding to costs across the industry.
What Does The Contract Say?
Finally, as the agreement to introduce VAT was only passed in early 2016, there will still be a considerable number of construction and consultancy contracts under execution in the GCC. These may or may not have any provision for recouping any direct or indirect costs levied under new taxation legislation. For contracts being delivered as we move closer to the date and which lack provision for recouping these costs, the prospect of absorbing the costs onto the project accounts could result in loss-making projects where profit was once forecast. For some organisations, this could be a deadly combination.
Significant investment in human capital development will be needed to ensure compliance.
Where contracts have sufficient provision to enable contractors to pass back the VAT to client businesses, we can expect a significant rise in claims and potential disputes as the industry grapples to monetarise the true values associated with the tax impact.
Working Towards a New Normal
There is general agreement that the region’s taxation regimes need amendment, as budget deficits amplify the call for more government revenue and diversified incomes sources. However, it won’t be all plain sailing as we seek to learn, train, educate, and adapt the construction industry to the new normal.