BLOGS

July 01, 2019

When it comes to taxes, better be safe than sorry!

Costs of non-compliance can be much higher than costs of compliance.

Tax compliance costs money. Even the so-called neutral taxes such as Value Added Tax (VAT) cost businesses money through investments required in systems and people, non-recoverable taxes, penalties incurred for non-compliance and costs of cash flow timing differences.

GCC has had a reputation for being a low tax/tax-free environment, a reputation which is slowly changing as the GCC countries introduce newer and newer taxes. All six countries have had some form of corporate income tax for a while now, albeit some of them only targeted at specific sectors such as oil. In the recent period, we are observing an increase in tax incidence in the region with the introduction of excise tax and VAT and actual/expected changes in income tax.

With the increasing tax incidence, a perceived increase in focus on compliance by the regional tax authorities and implications from the Base Erosion and Profit Shifting (BEPS) project which is taking the tax world by storm, it is only normal for businesses in the region to worry about whether and how they need to change in order to meet the requirements of what appears to be the emergence of a new tax order.

Though Nishe is quite a young firm, we have had plenty of experience in direct and indirect tax issues in multiple jurisdictions in the GCC. And based on our experience, one thing is very clear to us — when it comes to taxes, it is better to be safe than sorry.

Let me elaborate on that.

It’s a well-established fact that taxes create deadweight losses on the economy, no matter how well-conceived. However, we are talking about businesses here, not economy. For businesses, in relation to taxes, when things go well, well, they go as well as deadweights can. But the moment the tax authorities perceive an issue or a potential issue, the time and money that management will have to spend on resolving those issues can be staggering. This includes the opportunity cost of the obscene amount of time that may have to be spent by management for responding to the issues, costs of any consultants hired to support, costs of any penalties charged by the tax authority, costs and income losses arising from reputational risks and even costs of court action if it comes to that.

So, what is a better approach? In our experience, it is way better to take proper care when information is provided to the tax authorities, be it filing of returns or otherwise. In other words, comply. And comply truly well. This may mean incurring more time and cost upfront than what many companies are willing to invest. But in the longer run, this can prove to be much cheaper than any alternative strategy which, at its worst, roughly translates for many organisations as: “we will handle it if and when it comes.”

So, like I said, better be safe than sorry.

And by the way, we have published “At a Glance – Doing Business in GCC”, a downloadable one-page summary of all aspects of doing business in GCC, with a focus on taxation, which is available here. Hope you will find this document useful. We would love to hear from you. Please send in your suggestions and comments to info@nishe.me.

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