Many aspects of our daily life, including tax-matters, are being disrupted by technology today. The world of tax technology is growing substantially, and whilst the breadth and rate of expansion is exciting, the influence of technology on tax-matters is still somewhat unpredictable. Digitalization and recent technological developments have provided taxpayers and tax authorities with new challenges and an opportunity to rethink the different ways in which day-to-day operations (such as compliance and administrative matters) are managed.
With only two more Gulf Cooperation Council (GCC) countries left to implement VAT – Kuwait and Qatar, (as per the GCC VAT Framework Agreement 2016), we have seen numerous updates to the tax market landscape in the region, including the current implementation of e-invoicing in Saudi Arabia. With this in mind it is worth considering whether early adoption of tax technology in the GCC countries (before the tax system matures) would be as smooth in comparison to a more mature jurisdiction.
In my professional opinion, adopting and implementing tax technology before the tax system matures in the GCC countries can be smooth as compared to mature jurisdictions as newer jurisdictions will benefit and learn from the experiences and lessons that have already been set down by established regimes.
Adopting and implementing tax technology
Based on what we’re witnessing within the marketplace, there are four key focus points we need to be aware of:
1 No disruption to the traditional tax-function
In mature jurisdictions, the introduction of VAT took many years as taxpayers were more set in the way things were done. As a result, the introduction of new tax-technologies to mature jurisdictions faced certain challenges in terms of employees’ resistance to change towards modern advancements within the workplace.
The challenges for mature jurisdictions mainly came from a technology-resistant mindset along the lines of - ‘The company has always done things in a certain way, why would there be a need to change it?’ and the ever so famous ‘If it is not broken, do not fix it’ attitude.
Will the GCC countries face the same issue in terms of the resistance mindset?
It has been around four years since VAT was introduced to the GCC region, with four out of the six countries having adopting VAT. Saudi Arabia and the United Arab Emirates implemented VAT on 1 January 2018. With Bahrain and Oman following through with a staggered implementation plan that commenced on the 1 January 2019 and 16 April 2021 respectively.
The introduction of VAT is still considered fairly new and at a developmental stage in comparison to countries within a mature jurisdiction (e.g. within EU VAT system).
In this regard, it may be easier to implement and adopt tax technology before the GCC VAT-system matures, as:
a. Taxpayers in the GCC countries are still in the process of adapting to the introduction of VAT as the tax function evolves.
b. Given the recent introduction, there cannot be disruption against traditional tax-function norms.
GCC countries are therefore more likely to avoid the challenge of disruption and backlash against the traditional tax-function norm, and this may be an opportunity to start afresh and encourage both taxpayers and tax authorities to embrace technology at an early stage.
2 Close proximity in the timelines of the introduction of VAT in the GCC countries and the Fourth Industrial Revolution
Klaus Schwab came up with the Fourth Industrial Revolution (4IR or Industry 4.0) concept in his “2017 Fourth Industrial Revolution” book[i]. Schwab argues that 4IR started in the 21st century and it is different in scale, scope, and complexity from any that have come before. It is characterized by a range of new technologies that are fusing the physical, digital, and biological worlds.
4IR focuses on the use of modern smart technologies, large-scale machine-to-machine communication (M2M) and the internet of things (IoT) to increase automation.
Given that VAT has been implemented in the GCC countries during the same era where technology is viewed as valuable and seen as an integral part of the business function, it makes it easier for taxpayers and tax authorities to take advantage of their unique late-adopter opportunity.
Further, the idea of adopting tax-technology and taking advantage of the use of such technologies may be more convincing to both the tax authorities and taxpayers in the GCC countries as opposed to if VAT has been introduced during a period of uncertainty. The wider acceptance of advance technology being an integral part of the business function makes it easier to adapt to such changes.
3 Tax authorities keeping up with the trends in technology
Given the advantage of the late-adopter opportunity of VAT implementation in the GCC countries, the tax authorities have started in an era where technology is already an established part of the daily business activity, for example, VAT return filing process has been electronic in these countries right from Day 1, and there was no actual shift from a traditional filing process.
Further, the development of technology will continue to have a positive impact for tax authorities in terms of overcoming challenges and adopting tools to transform the day-to-day practice and delivery of service.
An example in the region is where Zakat, Tax and Customs Authority (ZATCA) in Saudi Arabia has recently introduced E-Invoicing ‘FATOORAH’.
E-invoicing is a procedure that aims to convert the process of issuing of paper-based invoices and notes into an electronic process that allows the exchange and processing of invoices, credit notes & debit notes in a structured electronic format between buyer and seller, through an integrated electronic solution.
ZATCA has also launched a center for monitoring and inspection, incorporating the best technology to promote tax compliance. This is in line with its long-term digital transformation strategy.
Now looking at it from a taxpayer’s perspective, if the tax authorities in the GCC countries are moving towards functional digital transformation, then as a consequence, taxpayers will need to be more diligent and meticulous with their tax administration, filing, and other related tax-matters.
There will be growing pressures from tax authorities on taxpayers in terms of enhancing their digital tax reporting requirements and tax audits, which will eventually force taxpayers to invest in tax technology to futureproof their businesses and revenue against the evolving tax regulation and increasing oversight.
Taxpayers in the GCC countries should ask themselves, “In the long-term, are traditional systems versatile enough to stay ahead of the worldwide trend toward digital tax reporting and tackling the resourcing challenge?”
4 Post-pandemic mindset – ‘Shift Happens’
The spread of the Covid-19 pandemic forced many businesses to shift their mindset about adopting technology in their day-to-day activities and forced businesses to rapidly accelerate their digital strategy to be able to keep up with the new-norm to sustain their business operations.
Businesses in general are now starting to consider the shape, design and workflow of the post-pandemic workplace and there are new opportunities arising for both the tax-administration function and employees due to an increased reliance on technology in a digitally transforming landscape. There is also a likelihood that this new reality will trigger many taxpayers to consider investing in tax technologies to make the process of tax-administration easier and cut long-term costs in the future.
[i] Schwab, K., 2017. The Fourth Industrial Revolution. 1st ed. UK: Penguin.
Ask yourselves this
- Whilst there may be a semblance of resistance to change as well as other reasons that we may as ‘taxpayers’ use to delay ourselves from investing in tax technologies before the tax system matures, taxpayers and tax authorities in the GCC countries should welcome the opportunity to turn taxation into a sustainable, reliable source of revenue with less administrative burden on taxpayers.
- Are we resisting change or just pushing the impending transformation to the back burner? As resistance to change may cost us the advantage of being early adopters of tax-technology.
- By learning from the experiences of mature tax jurisdictions, are we in a position to leverage the opportunity in-hand to leapfrog over traditional issues by adapting the new and innovative trends in tax administration?
- Given the post-pandemic marketplace and workplace, do we truly have the human-capital and resources to be able to sustain a laborious manual process when it comes to tax compliance and administration?
- While many business leaders in the GCC region were rapidly accelerating their digital strategies to be able to cope with the rapidly evolving marketplace, did ‘tax administration’ feature within their digital strategy as a priority? Considering that a failure in appropriate tax administration could lead to financial risk, compliance risk, and even reputational risk.
Please note that this article is written from an ‘indirect-tax’ perspective in the GCC countries and reflects only a small sample of opportunities and challenges when considering the far-reaching capabilities the latest tax technologies could deliver on.
This article is my own professional opinion and does not represent the official position or views of KPMG.
Hawra Arab is an Associate with KPMG in Bahrain, and is a learning-professional and an emerging leader in the field of Tax and Corporate Services. A Master’s graduate from the University of Glasgow, Ms.Arab has a keen interest in tech-based disruptions in the growing field of Tax Advisory services.