All six Gulf Cooperation Council states—Saudi Arabia, United Arab
Emirates, Kuwait, Bahrain, Oman and Qatar—will introduce value-added tax during
2018, initially at a rate of 5 percent. Expected consequences for corporate
travel programs include higher hotel and other costs but also faster adoption
of automated expense reporting systems. Meanwhile, per-diem allowances are
extremely common in the region, so businesses will have to tackle the cultural
challenges of switching to a more transparent expense process or preserve the
status quo, which would likely leave them unable to recover trip-related VAT.
Along with the U.S., the Gulf is one of the few places that haven't imposed
VAT or a similar consumption tax, thanks to oil wealth that enables light taxation.
But GCC nations, concerned about the future of their economies once their
natural resources run dry, are creating a new source of revenue through VAT. "It
has purposefully been set up at a low rate to get the infrastructure embedded
without raising alarm bells," said Chris Pouney, director of travel
management consultancy Severnside Consulting.
Each GCC state said it will introduce VAT during 2018, but none has
given an exact date. Businesses with revenue exceeding US$100,000 will have to
register for VAT purposes, though many of the finer details have yet to be
revealed. EY said the "lack of official guidance from government
ministries" is making the tax challenging to implement in time. Broadly
speaking, however, the GCC will introduce a VAT regime similar to that in the
EU, said Richard Barrett, head of consulting for outsourced indirect tax
management business VATGlobal, a subsidiary of VAT IT.
Crucially, following the EU model will include the right for
businesses to "reclaim VAT on business-related expenses," said Concur
EMEA managing director Chris Baker. In return, however, businesses will have to
jump through the necessary hoops to validate their VAT recovery claims, such as
ensuring that travelers' business addresses, not their home addresses, appear
on supplier VAT invoices.
As for most VATs worldwide, transport is likely to be zero-rated while
hotel and conference expenses will almost certainly be liable to the full rate.
"It is unclear if suppliers will charge VAT on top of existing prices or
swallow the tax to keep prices level," said Barrett. If the former, warned
Pouney, meetings organizers "may look elsewhere for their conferences."
Attractive rates coupled with good air links have until now made Dubai, Abu
Dhabi and Qatar favorites for multinational and overseas meetings.
Watchers also await clarification on the deadline each GCC state
will impose for reclaiming VAT. Recent indications suggest they'll be more
consistent than some had feared. Anywhere in the world, however, reclaiming VAT
is a fiddly undertaking that is really only viable if the amounts claimed can
be identified and presented digitally. That is why, said Pouney, "CFOs in the
Gulf are starting to think this might be the time to move towards technology.
The likes of Chrome River and Concur should be rubbing their hands over this."
Pouney guesses right. "VAT reclaim has always been part of the
case for automated expense management," said Baker. "Finance
departments will need line item expenses along with VAT-compliant receipts so
they can get their money back. All of a sudden, one of the strongest business
cases to introduce Concur is coming to the Middle East." Concur is anticipating
an increase in demand by beefing up its presence in the region, including
relocating two of its most senior executives from London to Dubai.
But while VAT may catalyze the region to automate, it also could be
a culture shock. Expenses, indeed many areas of administration, remain heavily
paper-based in the Gulf. Concur is hoping that, unlike Europe and North
America, the Gulf will skip a transition phase of passive spreadsheets and move
directly to fully digital expense management.
More of a problem is likely to be employee resistance to an
elimination of per diems. VAT cannot usually be recovered on per diems because
it cannot be established transparently that the money given by the employer is
used exclusively for business payments. "Most employees book travel and
hotels directly and pay directly and regard the per-diem allowance as
supplementary income," said Baker.
Pouney believes the prospect of weaning Gulf employees off per diems
will prove too daunting for many. "Per diems are the bane of travel
managers' lives in the Middle East," he said. "Companies might start
steering their people away from them, but we are not seeing that yet. Instead,
we are seeing a perception that they need to raise per diems. Does the
inability to recover 5 percent of spend warrant getting rid of per diems? The
majority will be willing to take the hit rather than incur the wrath of their
employees."
Baker, not surprisingly, disagreed. "Prices will rise 5 percent,
so companies are going to have a cost anyway. And although the rate is 5 percent
now, it could go up. It is better to automate now so you are ready when it goes
to 15 to 20 percent." Baker recommended gradual change, requiring
employees to submit invoices as they collect them and later introducing other
policy rules like meal-spend caps. Barrett believes employers may need to
compensate travelers directly for loss of their per diems, perhaps through a
salary bonus. In some cases, the right to per-diem allowances could be written
into employee contracts.
Barrett urged travel managers to collaborate with their finance
departments to prepare for VAT, which could hit budgets. "Even though the
VAT will be recoverable, there will be a cash-flow issue," he said. "You
are looking at three months until you get your money back."
Barrett added that travel managers also should review
their TMC contracts to see if they include service fees that may attract VAT,
although TMC fees are less common in the Middle East than in Western countries.
Booking meetings through intermediaries will need consideration, too. In
Europe, the complex Tour Operators Margin Scheme makes VAT treatment of
meetings bookings notoriously easy to get wrong. Barrett said there is no
indication the GCC will introduce a mechanism similar to TOMS.