VAT is a tax on consumption. It affects all of us when buying goods and services. Whether we're buying groceries or browsing the internet for impulse buys. The standard VAT rate is governed by each country locally and could be as low as 5% (e.g. UAE or Oman) or as high as 27% (e.g. Hungary) or even 50% (e.g. Bhutan). For the countries who have introduced a VAT system, VAT is commonly contributing the most (compared with other taxes) to the government revenues.
The tax authorities in the GCC region are becoming more active with auditing taxpayers. Following the introduction of VAT we did not hear a lot about VAT cases for some time. Recently, high-profile dispute cases have been reported in the media. These cases commonly revolve around a disagreement between the taxpayers and taxable persons regarding the determination of VAT. Substantial amounts of money are at stake for companies. Even the biggest multinational would presumably feel the economic impact of unfavorable outcomes for their business.
Arguably, the VAT scope is wide and covers almost all type of transactions (goods and services). Consequently, the amounts at stake can become substantial. In the VAT system, the taxable persons charge and collect VAT on behalf of the governments/tax authorities. This is in principle not a problem if the businesses are genuine, are complying with the rules and are remitting the net payable VAT amounts to the tax authorities. But what happens if criminals find ways to collect VAT and ‘’disappear’’ without transferring the collected amounts to the tax authorities? This is referred to as tax evasion and results in a VAT gap for the countries concerned.
What is a VAT gap?
‘’The VAT Gap is the overall difference between the expected VAT revenue and the amount actually collected. The VAT Gap is defined as the difference between the amount of VAT amount actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations.’’
Did you know the VAT gap in the European Union in 2018 was estimated to total USD 168 billion (USD 168,000,000,000)? That is more than, for example, three times the gross domestic product of the Sultanate of Oman.
European countries are dealing with VAT fraud for decades. Many strategies have been tried and tested. One of the success stories is from Poland. During the author's time as an outsourced in-house tax advisor for a big multinational , he had the chance to experience and prepare for some of these Polish initiatives. In the report (see the link below) you can read how Poland successfully reduced its VAT Gap. One of their solutions has been the so called ‘’Split Payment Mechanism’’ or the SAF-T reporting.
What is the Split Payment Mechanism?
‘’When buying a product, a buyer only transfers the net amount to the seller’s account. The amount equal to VAT goes directly to the taxable person’s VAT subaccount, which the entrepreneur uses to pay amount of VAT due to its suppliers and settles accounts with the tax office’’. By applying this mechanism, the Polish Ministry of Finance expects that the new measure could save the budget approximately USD 20 billion in 10 years’ time.
What is SAF-T reporting (Standard Audit File for Tax)? Another Polish solution which has been implemented by other countries is the SAF-T filing. The VAT return layout is similar in a lot of countries and does not provide much information about the transactions by the company. By implementing SAF-T reporting obligations countries intend to change this. SAF-T stands for ‘’Standard Audit File for Tax’’ and is an additional reporting obligation for VAT registers in the specific file format (a .jpk file).
Every tax period, taxable persons are required to send structured data on economic transactions to the Polish tax authorities in electronic form. The (additional) data provided enables the tax authority to perform data analysis and detect irregularities sooner.
When reading the GCC VAT Agreement, one cannot help but notice similarities with the EU VAT Directive. Similarly, on a local GCC country level, the guidance issued by various tax authorities sometimes bears a striking resemblance to case law from the European Court of Justice. Therefore, it cannot be denied that the legislators and the tax authorities of the Member States have been significantly influenced by the EU VAT system.
Since the GCC VAT Agreement and local legislation is influenced by the EU VAT Directive and therefore the expectation exists that issues and fraud cases similar to the ones in the European Union will be seen here, the right thing to do for legislators and tax authorities in the region is to learn from the mistakes and apply the solutions that are (being) used in Europe and not re-invent the wheel again.
The Split Payment Mechanism and the SAF-T reporting obligations are only two examples from Poland. The Polish tax authorities are continuously working together with taxpayers and technology companies and constantly looking for skilled programmers to create and implement new ways of automatically collecting and analyzing data for the purpose of preventing VAT frauds and making sure companies are compliant with the VAT rules.
 https://ec.europa.eu/taxation_customs/vat-gap_en  https://ec.europa.eu/taxation_customs/vat-gap_en  Reducing the VAT Gap: lessons from Poland. Link: https://pie.net.pl/wp-content/uploads/2019/02/Raport-LUKA-VAT-EN.pdf  Fundamentals of GCC VAT Law, Preface.
The views expressed in this article are solely those of the author in their private capacity and do not in any way represent the views of his respective employer.
About the Author:
Halil Erdem is a tax lawyer with PwC and the head of PwC's Tax Academy in the Middle East, operating from Dubai. Halil advised companies on cross-border and domestic VAT matters with respect to Dutch, EU and GCC VAT. Halil has been instrumental in various VAT audits across multiple EU and Middle Eastern jurisdictions. In addition, Halil has been extensively involved in the GCC VAT implementation and served as an in-house adviser for both EU and GCC multinationals.
Halil is professionally qualified as a tax advisor in the Netherlands. Halil obtained a bachelor’s degree in Dutch Law and an LLM in international and European tax law from the University of Amsterdam, the Netherlands. Halil has developed and overseen numerous VAT training programs across the GCC. His key strength is the simplification of complex tax technical topics and making complicated legislation understandable.