Out-Law Guide | 02 Apr 2020 | 2:10 pm | 5 min. read
Gulf Cooperation Council (GCC) states have introduced a number of tax reliefs to help businesses in the region manage the impact of the coronavirus outbreak on their finances and people.
Many businesses have already felt the impact of this crisis, operating with significantly reduced revenues and having made some difficult decisions in terms of staff dismissals and some location closures.
There are, and will continue to be, many difficult decisions for businesses to make in order to be able to manage the financial and commercial challenges they are facing. Some strategic and prompt tax planning and impact mitigation by tax managers and finance directors will also be a smart investment of time for a business in operational 'survival mode'.
It goes without saying that every business operating across the GCC should investigate the tax reliefs implemented within the countries relevant to their business, and should ensure to take the necessary steps if any are required in order to avail of these promptly. The situation should be monitored so that businesses can take advantage of any further reliefs that may be implemented in the coming weeks.
Many businesses across the GCC region have allowed VAT refunds to build up on their account with the tax authorities, on the basis that they could deduct these from future VAT liabilities and possibly to avoid the burden of potentially triggering a tax audit from the tax authorities.
The tax authorities across the region have continued to promote the claiming of tax refunds. For example, the KSA tax authority has advertised on its website that all VAT refunds should be paid within a 30 business day window. In addition, most government bodies across the region will be under more strict instructions to release payments to businesses as promptly as possible in order to relieve financial pressures caused by the pandemic.
Although businesses should be prepared in the event of queries or an official audit being triggered, now may be as good a time as any to submit VAT refund requests to the relevant tax authorities in order to improve cash flow into the business.
VAT Bad Debt Relief is available where a business registered for VAT purposes in the GCC has charged VAT to a customer, reported such VAT on its periodic VAT returns and settled any outstanding liabilities, but remains unpaid in part or in full by the customer.
This relief allows the supplier to claim the amount of VAT associated with unpaid amounts from customers as a credit in the current period, in order to reduce its VAT liability for that period. If the customer subsequently pays, the supplier would again adjust its VAT liability to the authorities in its periodic VAT return in the period that the payment is received.
This relief is likely to become more relevant to businesses during the pandemic, as payments from customers may be delayed more than usual and the delays may continue into the coming weeks and months. If applicable, and claimed, Bad Debt Relief would free up cash flow within the business by reducing any VAT due in the current period.
Of course, in the event of non-payment to vendors, similar bad debt relief may be triggered requiring the business to adjust VAT previously deducted on purchases, increasing the current period VAT liability.
These positive and negative adjustments should be planned and managed in an effective way by the business for optimal cash flow.
This may also become relevant in the KSA after its three month period of the VAT return and liability deferment initiative.
No doubt a number of challenges and disputes are being faced across the region in respect of long-term and high value contracts. These challenges may bring with them reductions to originally agreed pricing, suspension of payment due dates, claims for penalties for breach of contract where one party can no longer deliver, and other changes that may impact the overall VAT liability and timing of liabilities for these contracts.
Issues which may arise include:
The impact of any government contribution to private sector salaries should also be considered from a social security perspective and any ambiguity on treatment clarified. This will ensure that costs are mitigated for both employer and employee as much as possible, as well as mitigating any risk of penalties for non-compliance.
Corporate groups across the GCC region may wish to reconsider their corporate structure in response to economic constraints caused by Covid-19. This exercise could include scaling back on certain divisions, merging businesses within fewer legal entities or even liquidating certain entities.
It will be important to consider the tax impacts of any mergers or liquidations as part of this process, together with the correct timing for these actions in order to optimise the tax position or mitigate costs. See our Out-Law Guide: VAT and corporate structuring in GCC countries
Some initial considerations might include:
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