Asset Management and the new VAT in the Gulf region

The beginning of 2018 brings a new Value Added Tax legislation in the Persian Gulf region, and one of the many industries affected will be asset management and financial services. The transition from zero-tax to 5% VAT environment will cause a shift in the industry. What will distinguish the winners from the losers is how flexible their asset management software is at reacting to VAT. Otherwise entering a tax to each transaction manually is an expensive and tedious transition strategy.

The United Arab Emirates, along with the other five Persian Gulf states, are facing a major tax reform from the introduction of VAT and excise taxes in the region. This new tax is being created to support and diversify government income, due to the current environment of low oil prices, as well as ensuring increased efficiency within their economies. Despite administrative or technical obstacles, a VAT of 5% (known as goods and services tax, GST in some countries) will be effective from January 1, 2018 onwards. Businesses have been able to register for the VAT since October 1, 2017.

Even though a marginal increase of a tax rate may be normal to European countries, it marks the beginning of the end for zero-tax Emirates life style. The other GCC members adopting the VAT are Saudi Arabia, Kuwait, Qatar, Oman and Bahrain. The target of the tax is non-essential consumer items, referring to anything other than necessary food and commodities, also financial products and services are subject to the tax. Therefore, VAT is also a concern of investors and financial service companies.

For financial service providers, it is essential to be able to track and include VAT in their actions – when providing financial advice, portfolio management, securities brokerage, and other services. For their daily operations companies should embed a software that supports tracking VAT for transactions or fees, defining portfolio taxation based on the valuation method, and separating VAT automatically for accounting entries. This is not only a concern for the biggest organisations, for example, the VAT also affects a Family Office’s ownership of non-listed equities.

Eventually, the transition from a zero-taxed economy into a 5% flat rate VAT environment will be a process. Therefore, it takes time for the exact details and best practices to take their shape, and these cannot be perfectly declared before experiencing the VAT in a real environment. At the current state of affair, what is important for companies is the ability to comply and adjust when needed. Meaning that companies should not resort to a software that is too strict to handle adjustments and changes, but instead choose a solution that flexibly adapts to changes. Whether the change requirements originate from your business or external sources, software flexibility is key. The new tax approach in the Gulf region might be a sign of a bigger shift, and as the market transforms also must business models evolve, reconsider, and innovate.

FA Platform adapts flexibly to the changing businesses and environments of investment management and financial services, rather than the other way around. From the taxation point of view, the platform allows its users to easily generate different tax types (such as VAT, CGT, withholding tax, etc.) and set default tax rates for different countries, customers, portfolios, transaction types, security types, corporate actions, and fees.