Building a value-added tax (VAT) framework that can be supported by your company's resources
VAT knowledge in the Middle East region is at a premium on all sides, which means companies will need to look to their trusted partners to help them build a VAT framework that underpins their specific, operational technology needs while making allowances for the limited availability of client VAT resources. Automating as many of the VAT functions as possible by using easy-to-connect, third-party VAT software will go a long way to removing the VAT compliance burden faced by all major businesses across the region.
Deciding where and how to use technology to automate your VAT calculation and return preparation processes is primarily based on two factors: a) whether your current IT systems have the functionality available to build the VAT logic in the first place, and b) how much VAT knowledge currently resides in the business. Unlike the US and Europe, where branded Enterprise Resource Planning (ERP) systems such as SAP, Oracle, Microsoft® and NetSuite make up over 80% of business IT systems, the majority of IT business systems in the Middle East are either developed in-house or on older, legacy IT systems with limited capability to set up the VAT logic required to calculate the correct VAT treatment on every invoice. This poses a unique IT challenge in the region.
The ideal scenario
The ideal VAT readiness scenario for a business is to have both IT systems with the capability to have the required VAT logic setup in them and plenty of VAT-knowledgeable in-house resources. This means that an in-house tax function can be set up using those VAT-knowledgeable in-house resources, and the required VAT logic can be built within the IT systems. In terms of third-party VAT software, this scenario provides an opportunity to implement VAT returns automation software to streamline the compliance reporting and returns submission process.
The large-enterprise scenario
A more realistic VAT readiness scenario for larger enterprises, not enjoyed by the majority of businesses, is where the IT business systems have the required VAT capability available, but there are very few or no VAT-knowledgeable in-house resources. Larger businesses have the luxury of being able to build an in-house tax function, taking both investment and time. With guidance from a trusted tax and accounting advisor, a transition road map would be executed, beginning with outsourcing key VAT determination processes, controls and compliance-reporting operations to the company’s tax advisor, underpinned by VAT logic that the advisor would work with the company’s IT department to build into the IT systems. Over time the business would bring some or all of these VAT compliance processes and controls in-house, in parallel with the business developing an in-house tax function. Implementing third-party VAT compliance-reporting software automates and streamlines the VAT returns preparation and submission process, managed by the company’s tax advisor and subsequently handed over to the in-house tax function when it is ready to on-board those processes and controls.
The mid-market scenario
A more common VAT readiness scenario in the region is one in which the IT business systems contain little or no VAT capabilities to have the required VAT logic built. The business has VAT-knowledgeable in-house resources and can afford to build an in-house tax function over time. In this case, with guidance from a trusted tax and accounting advisor, a transition road map would be executed, beginning with outsourcing those key VAT determination processes, controls and compliance-reporting operations to the company’s tax advisor that could not be immediately managed in-house by the tax function. This would be underpinned by a “plug and go” VAT engine and VAT-reporting automation software, implemented by the tax and accounting advisor, systems integration or technology partner, alongside the company’s VAT-knowledgeable team.
Possibly the most common VAT readiness scenario in the region for medium-to-large organizations is one where the IT business systems have little or no VAT capability, the business has few or no VAT-knowledgeable in-house resources, and they cannot afford to build an in-house tax function over time. In this scenario the key VAT determination processes, controls and compliance-reporting operations can be outsourced to the company’s tax and accounting advisor; and a “plug and go” VAT engine and VAT-reporting automation software can be implemented for the business by the advisor, systems integration or technology partner. This scenario is addressed by taking away the VAT readiness burden from the business by outsourcing the challenge to a trusted partner or partners, underpinned by a tax technology automation software platform.
Assessing your VAT readiness
The quadrant diagram below illustrates the four VAT readiness scenarios:
- High level of capability within the IT systems to build VAT logic and a high level of VAT knowledge in the business
- High level of capability within the IT systems to build VAT logic and a low level of VAT knowledge in the business
- Low level of capability within the IT systems to build VAT logic and a high level of VAT knowledge in the business
- Low level of capability within the IT systems to build VAT logic and a low level of VAT knowledge in the business
Where implementing third-party VAT engines and VAT reporting software makes sense
Making sense of external help
Selecting the right VAT advisory, implementation consulting and outsourcing partners is dependent on the company’s budget, IT systems capability and VAT knowledge profile.
The table below summarizes some of the key VAT readiness tasks by VAT policy, VAT operations, IT systems and VAT process optimization.
VAT vendors compared by VAT readiness tasks
Once we look beyond the Big 4 accounting firms who have everything from VAT advisory/consulting to IT systems integration/VAT implementation experience, the top 10 and boutique tax and accounting firms can provide VAT advisory, VAT consulting and VAT outsourcing services, but typically not IT services. Conversely, the same applies to systems integrators and ERP vendors who can provide IT systems implementation services but are not VAT professionals.
This gap in the vendor side of the new Middle East VAT ecosystem is currently being filled by the more forward-thinking of the top 10 tax and accounting firms and systems integrators, e.g., tax and accounting firm BDO and systems integrator Wipro, both of which are heavily investing in the Gulf Cooperation Council (GCC) region.
From the client perspective of the VAT ecosystem in the region, there is an opportunity to match their IT systems VAT capability, internal VAT knowledge and budget with the right VAT advisor and IT systems integration to form the right vendor combination.
To underpin whichever combination of tax and accounting and systems integration partner makes sense for your business with the ONESOURCE® VAT software platform, Thomson Reuters Middle East and North Africa (MENA) has built a partner program that brings these tax and accounting and systems integration specialists together.
To this end, we work with you to introduce ONESOURCE VAT-approved trusted advisors and systems integrators.
Choosing the right VAT partner
Internal option: If you have sufficient, knowledgeable internal resources, time and budget; establish an internal tax function and VAT compliance processes; and implement a combination of VAT-sensitized ERP and tax technology software solutions.
External option: If you do not have sufficient, knowledgeable resources, time and budget; use your trusted VAT advisor and associated VAT technology services provider to take the VAT determination and reporting obligations off your hands.
Co-source option: If sufficient resources, time and budget are only available in some areas of your business, adopt a mix of both internal and external tax technology delivery options.