On October 18 2020, the VAT law was published in the Official Gazette of Oman under Royal Decree No. 121/2020 (Royal Decree). As per the Royal Decree, the VAT regime will come into force on April 16 2021. Although the VAT law has been published, the Executive Regulations have not, which is causing worry among businesses as it is impacting preparation and implementation.
Considering that the effective date of the VAT law is fast approaching, businesses should start gearing up to implement the VAT requirements at full pace. Based on the experience of VAT implementation in other member countries of the Gulf Cooperation Council (GCC), there are five key elements that businesses should be ready with before the effective date:
Conducting a VAT impact assessment;
Ensuring the IT infrastructure supports VAT implementation;
Establishing long-term good governance of master data;
Reviewing contracts with vendors and customers to ensure they are VAT compliant; and
Training other business departments on VAT and ensuring they are aware of its business impact.
Each one of these elements is discussed in more detail below, offering tax departments a brief checklist ahead of the April 16 effective date of VAT in Oman.
VAT impact assessments
The VAT impact assessment is the most crucial step in the entire VAT implementation process.
At a strategic level, businesses need to assess the changes required to be made in pricing and the cash flow management. This would depend upon competitor analysis, the post-COVID economic recovery, and the company’s financial health and liquidity. Companies should also continuously monitor consumer sentiments to price changes after the VAT go-live date.
At a transactional level, each transaction, whether it is the sales of goods or services, imports, exports, inter-company transactions, purchase of goods or services, general expenses, etc., will need to be mapped to assess the VAT impact. An effective way to cover all transactions would be by analysing the general ledger (GL) accounts. This will help tax departments understand the avenues of income and expenses of the business, which will then allow the VAT treatment for these income and expenses to be determined.
Oman’s VAT law is largely in line with the common GCC framework, which should help businesses to prepare their VAT impact assessments in advance of the April effective date. Having said this, businesses should be vigilant to re-visit their tax positions once the final Executive Regulation is released because there may be a difference in the VAT treatment on certain transactions. It addition, companies would be wise to analyse their VAT positions in other GCC countries and seek professional advice on ambiguous transactions to avoid any legal penalties in the future.
Preparing the IT infrastructure
Information technology plays the most challenging, time consuming and complex role in the VAT implementation journey.
The key changes required in an ERP system for VAT implementation include the development of tax codes, customised tax reports, GL account mapping, and the generation of tax invoices/credit notes. System reports with tax identifiers will be required during VAT return fillings and the VAT audit to gather and maintain accurate and complete data. Hence, these customised system reports should be developed in advance to avoid any VAT return filling and audit hassles.
Businesses also need to assess their ERP systems to ensure that the infrastructure has the capability to handle the changes required. Any required changes to the configuration would have to be taken care of in advance of April 16.
In addition, if a business is ready with its IT infrastructure, there should not be much trouble in tweaking the IT system or making changes, where required, once the final Executive Regulations are released.
Master data management
While master data management should be part of the IT infrastructure, its importance in the VAT implementation process means it should be given additional consideration.
Incomplete and inaccurate data master could result in errors in the tax determination and result in non-compliance. Hence, not only it is important to ensure that the master data is up-to-date and changes required in the master data have been carried out but also that the master data governance is in place. This will help maintain the quality of the data even after the VAT regime is implemented.
Advance emails/letters will be required to be sent to the vendors and customers to update the tax identification number and other elements in the master data, such as location, ship from and ship to details, where these details do not exist in the master data. Collaborating with different functions in the company, e.g. finance, supply chain, procurement, IT, could ease the process of getting the required information at a much faster pace, which will then help in streamlining the master data.
Reviewing contracts
Company contracts with vendors and customers will need to be amended to include a standard VAT clause, i.e. VAT would be charged in addition to the consideration as per the VAT law.
Businesses also need to assess the requirement to include other clauses in the contracts, such as the tax invoice clause, penalty clause, etc. based on the commercial aspects of the business and to ensure alignment with the vendors and the customers.
To avoid a last-minute rush, tax departments should carry out this exercise as early as possible before the VAT law enters into effect.
Training and awareness among business departments
Everyone in a company has a role to play in the journey towards VAT implementation, as each and every function in the business, be it finance, human resources, IT, procurement, sales, or marketing, will be impacted by VAT in some way.
Hence, the tax department is responsible for creating a basic awareness of VAT among the different functions and deciding the responsibilities of each function. It is important to make everyone in the organisation understand the following:
What is VAT and when is it applicable?
What are the VAT rates applicable for different transactions carried out by the business?
What is a compliant tax invoice/credit note?
Which expenditures are eligible and non-eligible for input tax recovery?
The timeline by which input tax should be recovered;
Consequences of not raising the tax invoice and reporting income in time; and
Consequences of other non-compliances, etc.
As the saying goes: “He who is well prepared has won half the battle”. The above five considerations should help businesses in preparing and managing VAT implementation in a better way, ensuring VAT compliance and business continuity.