VAT health check – will your processes and systems hold strong?
Now that companies in the UAE and KSA have experienced the first phase of VAT implementation, several process and technology challenges have come to light.
Many businesses hastily adapted existing workflows and systems for VAT, but a lack of initial tax expertise means these are not fully fit for purpose – and could even put companies at risk of compliance failures. Inappropriate data integration and management practices are key problem areas.
In this video, Thomson Reuters MENA and Innovate Tax explore why it’s important to address these gaps sooner rather than later – no matter whether you’re in the UAE, KSA or elsewhere in the GCC region.
Pierre Arman, Market Development Lead for Tax & Accounting, Thomson Reuters MENA
Andrew Bohnet, Managing Director, Innovate Tax
Pierre Arman - Hi, I'm Pierre, the Market lead for Thomson Reuters Tax and Accounting in the MENA region, and I'm very pleased today to be joined by,
Andrew Bohnet - My name is Andrew Bohnet, and I'm the Managing Director of Innovate Tax and we're actually a specialist Oracle tax integrator. I'm also the chair of the Oracle Tax management specialist group and I'm also an Oracle ace on the subject matter of e-business tax.
PA - So a lot of Oracle experience,
AB - But it tends to come across in other applications as well.
PA - I'm sure it does. So, Andrew, first of all, thank you very much for being with us today. I think the first question is around this - we've seen VAT being introduced, both of us in this region, in the UAE and in Saudi, on the 1st of January 2018. Both of us have live clients, they're happy with what they have, but we are also starting to see feedback from other clients who have not gone through the, I guess proper technology rules and starting to see issues. What are some of these issues that you have seen in there?
AB – So, I think yeah, the clients that we've generally implemented, they've got our solutions, they've used our experience and we've made sure that they've got a compliant product. Where we're seeing the issues is actually around the two main areas: one is around the change of process that companies have, how they deal with pre-payments, for example, advanced payments on account receipts, you know retention, where you already have an existing process in place, but it wasn't designed for VAT, and, so they, without the right experience or without the right understanding of how tax works, some of those processes are potentially non-compliant in the way they are doing them now particularly around those pre-payments. And then, the other area is around how some of the integration partners, who may not necessarily have the right experience around VAT, have implemented or you know things around interfaces or reporting or even the number of rules and rates that we have. One of our clients we were speaking to, or potential clients are speaking to, they have been implemented with three tax codes. And I know that in the UAE we have almost 200 within our setups.
PA - So sorry before you go into that, so why is it important that someone has more than three tax codes?
AB - I think if you look at how most people, it will start and look at designing a tax solution, they start from the calculate tax point first and then work their way up to the reporting at the end. The true way to get a properly compliant solution is you start at the compliance and say what do we need, and then you work your way backwards and so the reason why you need more tax codes is to give the right information to: either those people entering the transactions or the people doing a reconciliation to make sure that the right tax has been calculated. Because, if you don't have that that level of detail then you're going to potentially miss some critical areas and you miss that level of control. Now, obviously when you have a lot of tax codes, you then want to minimize the user interaction and minimize their responsibilities and that's obviously where tax automation becomes very important. I think one of our biggest concerns though is the way data is being interfaced from third-party applications. We saw in one particular case, in actual fact we've seen it in several cases, where data is being consolidated and interfaced in, captured in maybe on a journal line, and they're capturing the tax code but not the tax amount against the line and then when they're actually doing the reporting, they're recalculating the tax based on the code and the amount when the actual tax amount could be a completely different value. And that, it's clearly non-compliant and that will really lead to potential future issues for them.
PA - And you know, and I think we've seen something very similar with our clients, which is, you know the amount of data and the quality of data and the level of detail that is in there, is shockingly bad.
AB - Yes.
PA - And you have so many companies who are struggling when it comes to the reporting side of things, where they just don't have enough details. So, they're trying to work out basically what number goes into which box and they just don't know, and they have to do all that manual work around to try to get there, and they will get there at some point and they will file a VAT return, but, how confident are they that these figures are accurate is where, again like you, we are concerned about.
AB - Yeah, I think it's the saying of you know, garbage in, garbage out.
PA - Absolutely.
AB - And that there's a common saying and there's a reason for that. And I think if you look at the way the data is coming in as well the focus has obviously been about that tax return, but if we look at the future with regards to intra-GCC, the reporting, the capturing of the tax, most companies have no foundation to be able to improve their solution without a complete redesign and also the issue around, I wouldn’t say the issue, but the requirement to report your data like the FAF report, which I think you know you'll be able to give us some information as to how that is actually changing globally not just with the UAE but the trend globally.
PA - Yes, you know the FAF file I think is a very interesting one right because it reminds us a lot of SAF-T, obviously back in Europe, the Standard Audit File for Tax. And what is also very interesting is if you look at a country like Poland they've just removed the VAT return.
AB - Yea they have just announced, haven’t they?
PA - Because they have SAF-T or the equivalent of SAF-T that they have there. So, at some point, not tomorrow, at some point in this region, a similar trend, will arrive right and we already seen this globally where if you look at the amount of data that tax authorities are asking taxpayers is going increasingly towards the high. It's more data, more often, to a point where probably at some point it will be completely real-time.
AB - Yeah. And I think if you look at it now, you have an audit, they'll go through an archive for certain records, and check with the SAF-T type reporting, every transaction for every customer for every period will be audited.
PA - They have got everything.
AB - Yeah and that, that's so potent they're actually going to be producing the VAT returns for you so there's nowhere to hide, right?
PA - So exactly, and so, and then again begs the question: so, you've implemented VAT right now let's say in the UAE or in Saudi, how can you be future proof for this type of requirement that are going to come ahead? And here, there is two parts of that question: the first one is exactly as you were saying the other countries in the region are going to open up to VAT.
AB - Yeah.
PA - So how ready are you for that and how much work is involved for you to be able to jump and basically configure a new country? Or do you have to redo and then in time commission once again? And or more importantly, then when these kind of requests come in where tax authority wants more data, are you ready from a system point of view?
AB - Exactly. And I think you know a lot of companies will either have implemented something they may be happy with it, they may start seeing the cracks appearing, there may be a little bit concerned about the data in those reports. What do you think companies can do now? So those companies in the UAE and the Kingdom of Saudi Arabia who already have a solution, they may not be happy with it what can they do to potentially say, actually, I want to review this, maybe, some sort of health check or something like this? And those companies, countries rather that are in the other GCC countries that are looking to implement VAT?
PA - So I think that you've got two different cases right. So, if you're already in the UAE and in Saudi, you have done something.
AB - Yeah
PA - Good or bad, you’d have done something.
AB - You’d have hope they have.
PA - So now it's all a matter of, first of all, trying to assess what you have done. Like you do a media review, a health check on what you have done, and look at your process and your workflow internally.
AB - That's important, you have to look at the process, not just the system.
PA - Exactly right, because systems, as we both know, is only part of the solution.
AB - I always say, any system will fail without the right process in place.
PA - Absolutely, because again, it's only garbage in, garbage out, right. So, it's really about trying to work out what you have done, to look at your process, your workflow and then do a solution review or a technology review. Well, how have you set up your IT systems, where are the gaps, where are you spending most of your time today. Then, what is the risk, if you keep on doing like that, what is the risk and then based on that, what are your options. And these could be we just need more people, most likely, it is you probably need to change what you have done. It might not be a complete revamp, then there might be thing that you can do to improve drastically your process today, but you need to do that exercise to know what these options are. That's the first thing. The second one would be, yes, you had to spend money last year to implement VAT, if you are having a risk or if you're not confident, you're going to have to spend money again and that conversation need to be raised at the board level, and both IT and Tax have to be involved or Finance. And I'm sure you've seen that as well, where you have IT and Finance do not speak to each other, and they have different KPIs, different requirements, and sometimes even think, are they actually part of the same company?
AB - Yeah.
PA - And finally, if you are in one of the other country that is going to implement VAT, then here it's about going back to the beginning: do a VAT impact assessment. You don't need to wait for the law to do that.
AB - Absolutely. We have a solution as you do, ready right now.
PA - Exactly.
AB - I think on that point what I say to companies is it doesn't matter what the tax rate is, it doesn't matter whether it's exempt or zero-rated, what matters is that you can calculate tax rate, that you can drive something that has been exempt or zero-rated and the interfaces are going to work. So, start now with that.
PA - Exactly. That's exactly the point, right. And I think there is also a big part of a lesson learned that needs to happen here right which is, you've seen how UAE and Saudi, you know, they were a bit rushed toward the end of last year, and that is because a lot of them have waited until the final law was out actually do something about it, right? Do not do that mistake. Start now, do that exercise now, because then when the law is out, it's just a tweaking exercise and not a whole clean sheet type of things from the ground up.
AB - Because the other problem as well people don't realize is that whilst you may have internal resources that have to get organized, those external expertise that you potentially need to give you a sanity check or make sure you are on the right track, they're going to be in short supply as well.
PA - Absolutely.
AB - Because other companies should be using them.
PA - Well, Andrew,
AB - Thank you very much.
PA - Thank you very much. thank you for audience and we hope to see you soon.
AB - Great, thank you.