The Middle East is often perceived to be a low tax, or even a ‘no tax’ area, however, a recent survey of the regions’ tax and finance leaders show that managing tax in the region can be complex and challenging.
Launched today, PwC Middle East’s latest tax survey Managing Tax, discusses tax and business challenges that companies in the region face, the way their tax functions are organised, and the impact of international and domestic tax reforms.
“Tax regimes in the region can be complex and challenging to manage and their implementation can give rise to uncertainty and confusion, which in turn creates risk. As a result companies need to manage their tax affairs with the same care and attention to detail that applies everywhere else in the world.” says Dean Kern, PwC Middle East Tax and Legal services Leader.
A key theme that emerged from the survey is the lack of clarity in the application of tax law and to some extent what laws are in place. Only 3% of the participants felt there was a high degree of certainty in the application of tax laws across the region.
Dean Kern added, “There’s a considerable scope for the region’s authorities to reform, modernise and streamline the tax regimes, which could make their markets more attractive to foreign investors. Tax administrations are also facing the challenge of being asked ‘to do more with less’, and so it would make sense to consider co-operative compliance and other models which would help provide greater certainty for all stakeholders.”
Furthermore, as the age of technology and digital is playing a vital role in our lives, the survey respondents think that processes and systems will be one of the biggest challenges in tax reforms that authorities are planning, ranging from managing the additional workload, to collecting and analysing the data, to internal reporting and external compliance. This will certainly be high on the agenda for the survey respondents as 34% have no automated processes at all, and another 60% have only partial systematisation.
There was also a view from participants that greater use of technology by administrations would improve efficiency and certainty.
Commenting on this Jeanine Daou, Partner and Middle East Leader for Indirect Taxes and Fiscal Policy said, “The introduction of VAT, in particular, would put even greater demands on these tax departments, given the huge number of transactions that would be covered, and the volume of data that would be generated; it will be almost impossible to manage this without effective systems. It’s instructive in this context to look at what happened in Malaysia, when the government introduced a goods and services tax in 2015. Many companies under-estimated the time and resources required to implement the new regime properly, and how much it would cost. Using digital technology can save both time and money, and improve accuracy and efficiency.”
Another key challenge addressed in the survey is that 27% of our survey respondents have no dedicated resource at all, and another 43% have only one or two people. Without knowing the seniority of these people, it’s hard to say if companies in the region have the skills and resources they need to manage an increasingly complex area. There is also the wider question of the ‘right’ size for a tax function, which can only be determined on a case-by-case basis. The size of the company is certainly a relevant factor, but not necessarily the most important one.
Companies in the region also need to bear in mind that the skills required by tax functions are changing, and now include leadership, business acumen, and data analysis skills. With so many processes becoming automated, businesses need technological as well as technical skills in their tax functions.
Dean Kern, PwC Middle East Tax and Legal services also added, “Taking advantage of digital technology should be a much higher priority than it currently is: dedicated software can analyse the data, calculate the liabilities, and prepare the filings. The latter, however, will require the tax authorities in the region to modernise their own processes, if it is to be fully effective, and as our 2016 Paying Taxes survey highlighted, there has been very little progress in this area. We can envisage that in the future though, Tax Administrations in the region will begin to make use of data and analytics, ‘real time auditing’ and other emerging tools and methodologies. ”