This is the third in a series of VAT articles by Keypoint. This week’s article has been developed by Chris Park, a New Zealand-qualified lawyer who has worked on VAT/GST in New Zealand, as well as implementations in Malaysia, Saudi Arabia and the United Arab Emirates
Conceptually, VAT is easy for retailers – account for VAT on sales, then recover VAT on your expenses.
For 99 per cent of transactions that’s absolutely the case.
However, based on experience working with retailers in New Zealand, Australia and Malaysia, as well as the GCC, VAT raises complexities and practical challenges that are unique to the retail sector.
Typically, these are only identified on a “deep-dive” into the retailer’s practices and supply chain.
Challenges for retailers
A common ‘hidden challenge’ arises where third parties are involved in the sales process.
Ensuring the appropriate party reports concession or consignment sales, and that invoicing corresponds with who actually makes the sale, can be challenging.
Proactive communication with third parties is key to ensuring consistency.
Another challenge faced by retailers is with technical complexities – voucher arrangements, rebates, points systems and loyalty schemes all raise technical VAT issues.
Further up the supply chain, volume discount arrangements, cash rebates and similar incentive schemes with distributors raise similar challenges.
VAT systems tend to be silent on these kinds of arrangements.
Each one needs to be considered in light of the VAT rules and fundamental VAT principles.
In the absence of arrangement-specific guidance and precedents, VAT treatments will need to be ‘mapped out’ by looking at the transaction flow on a case-by-case basis.
Opportunities and strategies
On a brighter note, VAT also offers opportunities for retailers.
For example, how will the introduction of VAT affect demand in the lead up to implementation and after implementation – and how can this be best used? Look to the UAE and Saudi Arabia to learn from their experience.
For example, if retailers sell high-value non-perishable items (such as cars and electronics), they must ensure they have sufficient stock leading up to implementation.
There are also pricing strategies.
The GCC VAT treaty requires retailers to display VAT-inclusive prices, but it doesn’t dictate those prices.
During implementation in Malaysia, retailers used GST (Malaysia’s VAT equivalent) as an opportunity to generate goodwill (and increase market share) by promising not to increase their prices on implementation day.
Is this a strategy that could work?
Would another strategy suit better?
VAT tends to have a positive impact on cash flow for retailers – as retailers tend to get paid up-front, but the VAT on sales doesn’t have to be remitted until VAT returns are submitted.
However, retailers may face pressure from distributors to shorten credit terms as they are likely to be in a cash flow negative position.
Park concludes: “Bahrain will be my fourth VAT/GST implementation.
“If there is one thing I’ve learnt, it is that the more time you have, the smoother your implementation will be.
“Learning from competitors – both here and elsewhere - and working with experienced VAT consultants – preferably a firm that has relevant sector experience – will smooth the learning curve.
“Retailers should be prepared to listen – expect the unexpected from any ‘deep-dive’ by your VAT consultant!”