More VAT pain to come for KSA and UAE companies as they fail to properly understand VAT automation

@Christopher Thomas was representing Innovate Tax at the MEOUG this week where, along with myself, spoke to many clients who have implemented VAT, many who have done it with an in-house team.

Unfortunately, whilst they appear to be able to produce VAT returns and may have escaped a fine so far, the majority we spoke with simply have not set up their solutions correctly where the focus was on calculating either 5% or 0% without much thought about the reporting requirements or the content they were ultimately reporting, i.e. you can paint over the cracks but they will eventually come back.

It is clear that there is still a huge gap when it comes to the understanding of VAT and how to translate that into a fully automated VAT solution and in a country where many of the IT teams of different companies all seem to be connected in someway, it really is a case of the blind leading the blind. My findings were further confirmed after speaking with several people from Big4 or from tax advisory firms where they had seen far more shocking approaches to tax automation.

At the moment, there are many companies being fined (I heard [but not confirmed] that over 3000 of 10,000 KSA returns were fined) but these must only be for blatant mistakes because those that have filed and think they have got away with it are highly likely to run into problems when a deep dive audit takes place and the accounting practices that are used to record the VAT are uncovered. Some of the mistakes we are seeing are;

• Applying VAT on 'Proforma invoices' for customers because the customer asked for VAT even though a program is NOT a tax invoice
• Applying VAT on prepayment invoices to suppliers when no VAT invoice has been received
• Using just a handful of tax codes - if you have less than 10 for the KSA or UAE then you are not going to be able to report correctly. Around 25 for KSA and 200 for UAE are what you should be aiming for
• Putting in adjustment credit notes with VAT against suppliers without an official tax credit note from suppliers - it appears that many think they can adjust VAT as they see fit to make their accounting easier!
• Creating tax invoices that are sent to clients then deleting them rather than creating a credit note - your invoice is now a legal document, you cannot just delete them once issued!
• lack of understanding of the the requirement to record VAT by Emirate, "its ok, our head office is in Abu Dhabi so thats what we record all our VAT under" - even though they have branches across the country where they are clearly selling from
• Using reverse charge for purchase of goods from overseas
• Not using reverse charge for purchase of services from overseas
• No consideration for intra GCC reporting that will eventually be coming in
• reporting by GL date and not the VAT (or transaction) date

These are just a handful of the points we were picking up but every time we heard these, there was complete ignorance to how they may impact their VAT compliance.

Oman, Bahrain, Qatar and Kuwait please be warned, you may think you will be saving money by using a cheap integration partner or doing your VAT set up in house but you will get what you pay for and it will cost you in the long run. Get the right advice from those that know what they are doing and start fully compliant and stay fully compliant.