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BUSINESS 8 Friday, February 17, 2017 Bashar Al Natoor By Invitation T he plan to introduce value-added tax in Gulf Cooperation Council member states could create operational risks for companies and put pressure on EBITDA and cash flows in some industries as markets adjust, Fitch Ratings says. Collecting and remitting VAT to the government will have notable set-up and compliance costs. Businesses with VAT- exempt goods and highly competitive sectors could find themselves, rather than customers, taking on this additional cost. VAT implementation could be as soon as early 2018 according to media reports, which would create a very tight timetable in a region with little history of taxation of any sort. This will introduce greater uncertainty and operational challenges for GCC corporates than for companies in other regions with established tax cultures that have introduced VAT or reformed their tax systems. However we expect GCC governments to recognise these challenges and show a degree of flexibility during the initial implementation. Companies will have to replace or update IT systems, implement new procedures and train staff before VAT is introduced. This will be particularly burdensome as it will add to costs when low oil prices and lacklustre economic growth are weighing on corporate performance, particularly for SMEs. Companies involved in supplying goods and services between GCC members, or those operating within or between free zones, are likely to face additional complexities, as agreements between individual GCC members could vary. In theory, VAT is ultimately paid by the end consumer, so if a company does not fall into that category the planned 5% rate should not have a direct impact on financial performance. Some goods or services may be assigned a zero rate, meaning the business will charge VAT at 0% on sales and will be able to reclaim VAT on purchases. But if the goods or services a company sells are VAT exempt then they will not be able to reclaim VAT on purchases and will have to bear this cost themselves. So it will be important to know the VAT treatment for sectors like healthcare, and education, which could face profit margin erosion if they are VAT exempt and are unable to increase prices to compensate. Even with no VAT exemption, highly competitive sectors or those with thin margins could face a cash flow burden from having to meet the cost of paying VAT on purchases before it can be reclaimed. Fierce competition in some sectors may also put pressure on companies to cut pre-tax prices and absorb some of the cost themselves. This is most likely in sectors like telecommunications, consultancy and contracting and will vary by country. The need to renegotiate previously agreed contracts and conditions with customers would pose additional challenges in some industries. The introduction of VAT, alongside other government initiatives to cut spending, could also reduce disposable incomes, weakening demand in more discretionary corporate sectors. We believe the lack of any significant historical taxation means it will take time for companies to fully pass on costs, but that they will be able to do so eventually. The main long- term risk from the introduction of VAT is therefore the potential for errors in collecting and accounting for the tax that could leave companies liable for the cost themselves. This impact will not be clear until each member state establishes its own national legislation to enact the agreement, which could make the timetable even tighter. The author is Global Head of Islamic Finance, Fitch Ratings GCC Corporates Face Multiple VAT Challenges (The views and opinions expressed in this article are those of the author and do not necessarily reflect the policy or position of this newspaper.) © GRAPHIC NEWS Sources: International Institute for Strategic Studies, IHS Jane's Missiles Chinese military technology is reaching “near-parity” with the West and western dominance in advanced military systems can no longer be taken for granted, reports the International Institute for Strategic Studies PL-10 missile: 5th-generation short-range infrared homing air-to-air missile for China’s new Chengdu J-20 stealth fighter J-20 Type-052D guided-missile destroyer: At least 13 ships in service or under construction Top defence budgets (2016, US$ billions) 33.8 52.5 56.9 58.9 145.0 UK Saudi Arabia Russia China 604.5 United States 38.3 47.2 47.3 51.1 South Korea Germany France Japan India NATO members Comparable to U.S. Arleigh Burke-class destroyer Following high-speed launch, PL-10 can accelerate to Mach 4 (4,939km/h) in 2.5 seconds. Missile capable of intercepting Lockheed Martin F-22 Raptor flying at Mach 2.25 (2,778km/h) © GRAPHIC NEWS 200m 650ft Pictures: Associated Press, Getty Images Sources: The Burial of Nefertiti? by Nicholas Reeves, Factum Arte, Theban Mapping Project, A rigorous investigation of Tutankhamun’s tomb using next-generation radar technology will attempt to determine once and for all whether the boy king’s burial site contains hidden chambers, a contentious topic for archaeologists in recent years 2015: British archaeologist Nicholas Reeves claims Tutankhamun’s tomb contains two hidden doorways that could lead to secret chamber, possibly lost burial site of Queen Nefertiti Scans by Japanese radar specialist Hirokatsu Watanabe suggest tomb contains two open spaces 2016: Further scans by National Geographic Society fail to confirm initial findings 2017: Team from Polytechnic University of Turin, led by Franco Porcelli, will use new radar technology capable of peering up to 10 metres into solid rock to detect existing underground structures River Nile Mediterranean Sea Cairo EGYPT V A L L E Y O F T H E K I N G S Some believe “Younger Lady”, mother of Tutankhamun whose mummy was discovered in tomb of Amenhotep II in 1898, could be Nefertiti Reeves believes remains of Tutankhamun, who died 3,300 years ago aged 19, may have been rushed into outer chamber of what was originally Nefertiti’s tomb Reeves’s theory based on close examination of high-resolution laser scans used to create facsimile of tomb for multiple tourist visits Fissures revealed may indicate presence of two sealed doors in west (1) and north (2) walls Confirmation of Nefertiti’s final resting place would be most remarkable Egyptian archaeological find in almost a century Discovered in 1922 by Howard Carter Corridor Entrance Antechamber Annex Treasure Chamber Tutankhamun’s sarcophagus Nefertiti: Queen of Egypt and wife of Pharaoh Akhenaten in 14th century BC 16 feet 5 metres Possible resting place of Nefertiti Proposed storeroom Moscow R ussia said yesterday it will fully comply with an oil output cut agreement with other oil producing countries by the end of April. Under the deal with OPEC and non-OPEC countries signed last year Russia pledged to reduce its crude output by 300,000 barrels per day as part of a concerted effort to combat a global oil glut. “We can get to 300,000 barrels per day at great speed by the end of April,” Energy Minister Alexander Novak told the Interfax news agency. “This will allow us in May to produce exactly 300,000 less per day than in October.” In December, the Organisation of the Petroleum Exporting Countries agreed with 11 non-members, including Russia, to cut output in the first half of this year to push prices higher. Russia, which has suffered badly from oil price declines, was pumping oil at a record- breaking level of over 11 million barrels per day at the end of last year. Novak said Russian production was currently down by more than 100,000 barrels per day and should be 150,000 barrels per day lower in March. Technical issues affecting Russia’s production were stopping the country from going to the agreed level immediately, Novak said. The OPEC oil cartel, meanwhile, has implemented 92 per cent of its agreed output cuts, Kuwait’s oil minister said on Monday. Non-OPEC producers had delivered on more than half of their pledged production reductions, said the minister, Essam al-Marzouk, who chairs a committee tasked with monitoring the agreement. Novak said Thursday an oil price recovery since the agreement could boost Russian oil producers’ earnings by 700 billion rubles ($12.2bn, 11.5bn euros) this year and add 1.5 trillion rubles to the state’s budget. Brent crude oil stood at $55.76 per barrel on Thursday, up 1 cent on the day, while WTI was up 7 cents at $53.17. Oil prices are now up to 20 percent higher than they were three months ago. (AFP) Russia to meet oil cut deal by April Russian Energy Minister Alexander Novak
