Latest Developments and Impact on the Financial Sector VAT in the GCC Latest Developments and Impact on the Financial Sector

VAT Recent Developments A Common VAT framework The GCC Member states are in the process of agreeing a common framework for the introduction of a VAT system in the GCC. A formal announcement of the Treaty is expected shortly afterwards. Upon ratification of the GCC Treaty, each Member State is expected to issue its own national VAT legislation based on the agreed common principles. VAT legislation Each Member State will issue its own VAT legislation in accordance with the common principles outlined in the GCC Treaty.It is expected that some countries will issue VAT legislation shortly after announcement of the treaty by the GCC. VAT Regulations These regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT legislation is issued. Go live The introduction of VAT across the GCC is expected to take effect from 1 January 2018. PwC VAT in the GCC

Our understanding of the GCC VAT system Standard rate 5% VAT at Import Minimum annual turnover VAT on goods & services Possible VAT exemptions Exports subject to 0% Deduction of input VAT Periodical filing and reporting Expected transition period between 12 to 18 months Envisaged system is a standard fully-fledged VAT system applying on most supplies of goods and services with possible exemptions/exceptions PwC VAT in the GCC

VAT/GST Design Benchmark The design of the VAT/GST system has a direct impact on cost of compliance and cost of collection High Multiple VAT rates Multiple exemptions Complex and inefficient obligations Lack of facilitating instruments Burdensome fines Low Single VAT rate Few exemptions Simple and clear regulation E-filing Proportional penalties New Zealand EU Brazil Norway Chile Mexico Australia Singapore High Low PwC VAT in the GCC

Impact of VAT on Organization Purchases Suppliers Government Administration People Systems Assets Organization Payments Cost + VAT VAT Filing Filing Payments Refunds Net VAT Customers Sales Payments Sales + VAT PwC VAT in the GCC

Financial Services General treatment is that most Financial Services are exempt from VAT (no VAT charged – no VAT deductible on costs associated with supplies) Typical supplies include: - granting and negotiation of credit - transactions concerning payments, transfers, deposits, currency, bank notes, etc. - transactions in shares and other securities - insurance transactions Some services are subject to VAT (VAT is charged – VAT deductible on costs associated with supplies) Typical supplies include investment advice, safekeeping and debt collection services PwC VAT in the GCC

Financial Services Challenges Identification of correct VAT treatment of supplies i.e. taxable vs exempt Identification of VAT incurred on costs particularly reverse charge services received Budgets, responsibilities Capital Goods adjustments? IT customization to capture / calculate the recoverable amount of VAT : How does your systems landscape look like? Commercial impact of non-recoverability - lower margin or higher selling price: Allocation of VAT costs PwC VAT in the GCC

What does VAT mean for businesses Business impacts Potential effects on margins and pricing Cash tax impact from VAT leakage Cash flow: funding of timing differences between paying and collecting/receiving VAT VAT issues when undertaking deals Technology and Systems Systems changes for VAT compliance and reporting (e.g. financial and point of sale systems) VAT coding of accounts payable and receivable IT architecture impacts Process and compliance automation Electronic documentation Data and analytics to enhance compliance Controls/Monitoring Legal What VAT means for you Controls/Monitoring Reflecting the VAT law Identify correct VAT treatment of every business transaction Industry sector specific issues Inter-company transactions Intra GCC transactions Apply any exemptions/Zero rate Sales and Marketing VAT treatment of sales and exports Effect on demand Pricing strategy and payment terms Customer management Impact on current contracts and commercial arrangements Compliance – throughout the value chain Map business flows including procurement, production, logistics, sales and marketing activities Establish VAT management framework covering governance, controls, roles and responsibilities Tax knowledge and training Tax registrations and filing requirements Process and procedure guides Procurement VAT treatment of purchases and imports Procurement strategy Vendor management Contracts and arrangements PwC VAT in the GCC

A phased approach will facilitate smart choices in effort and sequencing VAT technical Project management Business processes Technology People & organization Impact assessment Design Implement Operate Pre announcement Business impact modelling. Undertake a gap analysis to assess the systems, people and process changes required to be VAT compliant. Build awareness. Assess high level business impacts. Review contracts that need a VAT action. Shape project. Design VAT approach for: Tax technical considerations Governance Financial, sales and supply chain systems Filing and reporting. Implement system design requirements. Transitional measures. Training and communications . Simulate and test before go- live date. Ensure VAT compliance and efficiency. Monitor new developments. Ongoing staff training. Mobilisation VAT readiness assessment VAT Blueprint Re-configured systems, processes and people Ongoing compliance and continuous improvement. Outcome: PwC VAT in the GCC

Latest Developments and Impact on the Financial Sector VAT in the GCC Latest Developments and Impact on the Financial Sector