Value Added Tax in the GCC Insights by industry | … Added Tax in the GCC Insights by industry | Volume 2 Ninety years in the Middle East Changes and challenges of building the needed

Value Added Tax in the GCCInsights by industry | Volume 2

Ninety years in the Middle East

Changes and challenges of building the neededIndirect Tax department –a European benchmark toguide GCC businesses

Ch. 4 – Structure of a VAT function

Deloitte | Value Added Tax in the GCC | Structure of a VAT function

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As a transactional tax, VAT will havesignificant impact across a business’sentire operations – including the VATfunction itself. Businesses in the GCC must ensure relevant employees have theappropriate VAT skills and knowledge fortheir roles, and this process may identify a need for a specialist in-house VATresource. This will influence taxrecruitment in a region where there hastraditionally been little or no need to havetax specialists as dedicated resources in-house. Businesses in the GCC arealready planning dedicated resources tooversee VAT advisory and complianceactivities. This requires consideration ofthe appropriate size and make-up of a VAT function.

In order to determine the size of the teamthat businesses in the Gulf might need,the European market provides a usefulbenchmark. The Deloitte Tax practice inthe Middle East has collaborated with GuyBarrand at the specialist global indirect taxrecruiters Beament Leslie Thomas, (BLT)(www.blt.co.uk), to provide thosebenchmarks by looking at the data andtrends from the United Kingdom (UK). TheUK is now into its fifth decade ofadministering a VAT system, and istherefore a great example of a mature VATsystem.

Using the UK and European marketpractice as an example, we will outline thedifferent elements of a VAT function andwhat a VAT function typically looks like –focusing on in-house teams and touchingon alternative models such as co-sourcingand outsourcing.

Accessing the VAT populationBased on the research conducted by BLT,there are currently approximately 1,800VAT specialists employed outside of thegovernment in the UK. Of thesespecialists, 44% are employed by

companies/organizations as internal VATexperts, with the remaining 56% asprofessional advisers. Further, separatebenchmarking looking at the broader taxadvisory market suggests that it iscommon for businesses to have adedicated tax team in-house. Therefore,businesses in the GCC may wish toconsider establishing dedicated resourcesto oversee VAT advisory and complianceactivities with the introduction of the newVAT scheme, and continuing on anongoing basis.

The number of in-house VAT specialiststypically varies in size depending on theindustry and size of the business. In a

recent survey we found that the size of thetax function varied by industry, butfollowed the general trend of increasingwith company turnover. We expect thesame to apply in the Gulf region.

There is a trend toward greater focus onindirect tax expertise in the market: ourresearch indicated that the total volume ofVAT specialists has increased, matchingthe developing complexity of indirect taxover the years. Similarly, the proportion ofthe VAT population working in-house hasalso dramatically increased since the mid1990s.

Business and professional services

Technology, Media and Telecoms

Consumer business

Financial services

Life sciences

Energy and resources

Public sector

Manufacturing

Construction

Other

Tax Functions FTEs (Globally)

0 5 10 15 20

Average Tax Full Time Employees (FTEs) by industry

Dedicated indirect tax staff

1 Between 2 and 5 5+ No answer

51%

33%

10%6%

Businesses in the GCCare already planningdedicated resources tooversee VAT advisory andcompliance activities. Thisrequires consideration ofthe appropriate size andmake-up of a VATfunction.


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The bulk of the VAT specialists workingoutside of the professional services firmsin Europe operate in advisory or strategiccapacities. In the very largest (and/or mostcomplex) global businesses based in theUK, the increasingly regulatedenvironment of the last decade has led togreater scrutiny on how best to managethe VAT compliance burden. In fact, mostrespondents in the Deloitte indirect taxsurvey named compliance as the numberone priority of their indirect dedicatedresource.

According to BLT, this increased scrutinyon the compliance burden has resulted inglobal VAT compliance activities migratingaway from the traditional provenance oflocalized accounting departments, and theestablishment of internal teams with thesole purpose of effectively managing theglobal VAT compliance burden. A relatedtrend is greater awareness of how the useof cutting-edge technology can assist inthe compliance process. Indeed, in recentyears we have observed a noticeableincrease in requests for specialist indirecttax technology expertise.

The approach to VAT compliance haschanged significantly with time – andbusinesses in the GCC are in a good placeto follow these global developments andto implement ‘best in class’ compliancefrom the outset. This may includecentralized and specialized delivery, aneffective internal framework andmanagement oversight, and maximizingefficiencies through automation andtechnology.

Average tax FTEs by turnover

5

0

Group turnover (Euros)

Tax

func

tion

FTEs

(Glo

bally

)

10

15

20

25

30

35

40

Less than 99.9 million 350-479.9 million 1-2.49 billion 5-9.9 billion

10 billion or more2.5-4.9 billion750-999.9 million100-349.9 million

Number one priority for indirect tax function

ComplianceReducing tax paid

Dealing with Her Majesty’s Revenue and Customs (tax authority)

Improving SystemsCash flow management

Dealing with VAT in other countries

63%11%

7%

5%

4%

10%


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Common operating modelsWe have observed that tax operatingmodels of large organizations areincreasingly focused on indirect tax risksand obligations. Many businesses havemoved further to introduce specific VAT orindirect tax operating models, definingand controlling how VAT is managed within the business.

Unsurprisingly, most VAT operatingmodels are compliance-centric.Compliance work in a business is usuallyperformed:• By an in-house dedicated VAT team; • As a co-sourced solution between an in-house team and an external provider; or

• Externally in full – where it is completely outsourced to a third party provider.

We expect that businesses operating inthe GCC jurisdictions will follow this trendand prioritize compliance above strategicVAT management in the short term. Wherethere are no other senior tax staff, such asa head of tax, for example, we wouldexpect the senior VAT manager to takemore of a strategic role.

In-house VAT functionsAs mentioned in the “Preparing forChange” article in Volume 1 of thewhitepaper, a VAT transformation projectneeds to be approached in a structuredway, taking into account the need to keepthe wider business appraised of thedevelopments and changes relevant tothem, and for the business to engage inthe process. This requires comprehensiveplanning, design, implementation and postimplementation monitoring of the VATprocess within the relevant business. In considering the introduction of an in-house VAT function, considerable thoughtshould be given to issues such as: • Resourcing constraints within the organization;

• Availability of specialist knowledge and technical expertise;• Complexity of the business; • Process design and integration into the core business activities;• Governance and risk management procedures to be implemented and monitored;• Potential technology support required; • Data gathering, validation and processingrequirements;• Compliance monitoring.

Typically, most in-house VAT functionshave a specialist dedicated resource with afocus on compliance as well as supportingthe wider business with technical advice.Leading class functions will be fullyintegrated into the wider business areassuch as procurement, finance and IT toensure both proactive and reactiveapproaches to transactions.

The diagram below illustrates acomprehensive leading class approach toindirect tax function in a business and thetypes of activities that we would expectthe function to perform globally and in the GCC.

Level 1Strategic direction

Level 2Key indirect tax andreporting activities

Level 3Supporting

infrastructure

Division 1 Group tax Finance

Roles and responsibilities

Governance

Strategy

Indirect tax processes

Influence and lobbying

Indirect taxreporting

Organization People Data Systems Risk

Customs duties,excise duties

Audits and enquiries

Planning VAT/GST, etc.

SSC Business

Division 2

Division 3


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Level 1 – Strategic Direction – seniormembers of the tax and finance teams,including head of VAT/ head of tax or,where applicable, senior finance memberswill own the strategic direction of thefunction. This will include ownership overthe governance activities and roles andresponsibilities.

Level 2 – Key Indirect Tax and ReportingActivities – the majority of the tax team orfinance team members will undertake thecore activities listed. A shared servicecenter (SSC) is a common vehicle to assistin compliance activities.

Level 3 – Supporting Infrastructure -underpinning the operation of an in-houseVAT function are the people, technology,processes and risk managementframeworks developed to support theactivities above. Each of these in turn willbe impacted by the introduction of VATand potentially will require improvementsto provide the appropriate support. As noted, this is a comprehensiveapproach to in-house VAT. In most caseswe expect some of this activity to be co-sourced or outsourced to third partyproviders who are able to provide therequisite specialist knowledge and supportsuch as VAT advisory or planning.

We expect that the strategy and othergovernance activities will be developed inmost cases where a tax strategy haspreviously not been required. The UKrecently required large businesses topublish their tax strategy statements onthe internet for the purposes ofpromoting greater transparency in taxreporting. While we do not expect the GCCto progress to such a requirement as animmediate priority, a tax strategy is likelyto be a new addition for most boards toconsider as part of their governanceactivities.

Typical roles we would expect to see in-house include:• Head of indirect tax / VAT director –primarily responsible for managing andproviding support to the business’s keystakeholders, setting strategic directionand managing the relationship with taxauthorities. • VAT manager – managing day-to-day VATrisk, overseeing the operational day-to-day activities including the complianceprocess, implementing the VAT strategy,and supporting and training the business • VAT analyst or accountant – preparingand calculating the compliance, workingalongside finance / the shared servicecenter, and understanding the end-to-end system flow

Shared service centers are increasinglybecoming the preferred option for tax andfinancial reporting within indirect tax, asevidenced by recent responses frombusinesses below.

Do elements of your tax or financial reporting function sit within shared services

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

No - it is mainly run in-country

Indirecttax

Directtax

Statutoryfinancialreporting

It is mainly outsourced

No - but planning to move to shared services in future

Yes - it sits mainly within shared services

A tax strategy is likely tobe a new addition formost boards to consideras part of theirgovernance activities


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Co-sourcingCo-sourcing tends to suit most businessesthat are able to have some tax resourcein-house but lack the specialists skillsrequired for some activities (for example,compliance in other jurisdictions,planning, technology support). Co-sourcing usually means the business willoutsource some activities to a third partyprovider for completion. This typicallymeans that the business still maintains thefinal review and sign-off activities withoutinvesting time and resources to moreconsuming activities such as datagathering and processing.

The compliance process can besummarized in most jurisdictions toinclude the activities below. Varying levelsof judgement and skill are required ineach stage of the process, and this willdetermine how the steps are split amongthe resources within the organization andwith external providers. Whilst the rightsolution will depend on each business’sindividual needs, we expect co-sourcing tobe a popular approach for largebusinesses managing VAT complianceacross the Gulf region.

OutsourcingOutsourcing is common for manybusinesses: larger organizations choose tooutsource compliance and advisorymatters to utilize specialist knowledge andexpertise in a cost-effective way. Smallerorganizations often choose outsourcingbecause there is no business need forhaving a full-time tax role. We do notexpect a large number of businesses inthe GCC to fully outsource all VATobligations from the introduction date.However, we expect that some – especiallythose global businesses with an effectiveoutsourced compliance model – couldlook to implement a full outsourcing in theGCC in the medium term, once VAT is implemented.

Companies with the best indirect taxcompliance usually have a designatedowner of the indirect compliance process– their role is to have ultimateresponsibility for the end-to-endcompliance process, to regularly reviewand update the process and, mostimportantly, ensure that all the variousteams in their organization (AP, AR, localfinance, group tax) know their roles in the

ProcessPlanning

Datacollection

Datavalidation

Dataprocessing

Returnpreparation

Review& sign off

Submit& archive

Stakeholderreporting

Outsourcing is commonfor many businesses:larger organizationschoose to outsourcecompliance and advisorymatters to utilizespecialist knowledge andexpertise in a cost-effective way. Smallerorganizations oftenchoose outsourcingbecause there is nobusiness need for havinga full-time tax role.


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process and carry these out effectively (bethis an in-house model, a co-sourcingmodel or a fully outsourced model).

Dealing with global indirect taxIndirect taxes in their different forms havebeen around for decades in manyjurisdictions around the world, and thistrend is continuing with more countriesintroducing new VAT systems. More oftenthan not, multinational businesses chooseto have decentralized compliance ofindirect tax due to the availability of localexpertise and nexus to the transactionalactivity. It is not uncommon, however, tosee centralized management of indirecttaxes in some organizations. This may becommon where the business has few,simple indirect tax filing obligations orwhere local expertise is not available.Some businesses will prefer acombination of the two in a co-ordinatedapproach.

Common challenges of less matureVAT functionsThe potential impact of implementationand operation of a VAT system is expectedto be significant for all large businessesoperating in the region. As the tax isindirectly levied on a transactional basis,the effects of VAT – and the ongoingobligations for effective compliance – will touch on a very broad section of a

business’s activities and support functions.It is important to keep stakeholders andmanagement across the business in mindwhen completing the rollout.

In established VAT markets Deloitte hasperformed varying reviews of tax functionsand identified a number of similar trendsand common issues among the lessmature VAT functions.

Common issues for developing VATfunctions can include: • Unclear roles and responsibilities;• Inadequate resources and limited accessto training;• Little understanding of the data used inthe process;• A number of manual processes includingcalculation and reporting of returns;• Inadequate technology support;• No controls in relation to VAT on salesand purchases;

• No system controls relating to VATliability determination;• Little input into the business process;• No formal risk identification procedure in place;• Missing filing deadlines with no overallplan on how to manage filings.

Whilst the implementation of a brand newregime in the GCC region will bring unique

challenges in its own right, with theappropriate support and expertise it ispossible to plan a smooth transition andminimize the day-to-day running oforganizations.

Preparing for successVAT implementation is likely to be asignificant challenge for most businessesin the GCC, and a sensible first step is toquantify the impacts and communicatethese across the business. Deloitte hasworked to perform many impactassessments in this area, and to thenrecommend processes and frameworkswhich support compliance requirementsand business objectives.

We are working within the Gulf region tosupport businesses to respond to theimpacts and challenges of VAT, and toprepare for the upcoming changes in the most effective way. Our full VATimplementation process addresses manyof the considerations discussed in thisarticle – and includes VAT functionoperating model design, solutionimplementation, compliance readinessand more.

The foundations of a VAT function -whether designed on an in-house, co-sourcing or outsourcing basis - will providethe basis of a successful transition to theVAT system. We would encourageorganizations to start planning theirapproach and desired outcomes early toensure the necessary projects can bedeployed in time to meet compliancedeadlines. We expect the process for fullimplementation will typically span at leasttwo to three years to be fully effective -and businesses that fail to prepare inadequate time will inevitably be underpressure to comply during the transitionperiod.

Method 1Decentralized

Global operating models - the 3 methods

Delivered andmanaged locally

Delivered locally,managed centrally

Delivered andmanaged centrally

Method 2Co-ordinated

Method 3Centralized

Local delivery Central delivery


This publication has been written in general terms and therefore cannot be relied on to coverspecific situations; application of the principles set out will depend upon the particularcircumstances involved and we recommend that you obtain professional advice before actingor refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.)would be pleased to advise readers on how to apply the principles set out in this publication totheir specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for anyloss occasioned to any person acting or refraining from action as a result of any material in thispublication.

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Value Added Tax in the GCC Insights by industry | … Added Tax in the GCC Insights by industry | Volume 2 Ninety years in the Middle East Changes and challenges of building the needed