VAT or value-added tax is basically a consumption tax or indirect tax placed on a product at each supply chain, from the point of production to the point of sale. VAT is equivalent to the amount that the users pay on the cost of the product after deducting the cost of materials used in the product that has already been taxed.
VAT is not just about the taxation and accounting rather it impacts every part of your business with respect to the capital cost, cash flow, pricing of products and services, tax accounting, financial reporting, compliance processes, procurement and all other related technology that are needed in this ecosystem. In case you are already using the Oracle ERP system, there will be absolute significant configuration required in your existing oracle ERP system to meet all the changes mentioned above.
VAT is considered as one of the traditional sources of revenue for governments around the world. And now, it’s the time when companies in Oman will have to collect VAT.
What is Oracle VAT ERP?
Oracle ERP (Enterprise Resource Planning) systems are making significant efforts to ensure that ERP implementations comply with the regulations prevailing in the markets like the Oracle VAT in Oman. More or less, every economy is becoming global and IT-reliant. Different approaches used in ERP system implementation are being instigated to cope with the growingly complicated situations typically induced by the contemporary supply chains.
In case you and your company is already familiar with Oracle ERP solution, there are two parts in it .i.e,
-Tax automation, and
-Reporting & provisioning
Tax automation comprises accurately recording and determining of tax on every transaction. Oracle ERP highlights an automated tax solution that makes you and your company possible to support global configuration and tax rules. For instance, it automatically applies relevant taxes to the transaction data and helps access a wide range of reports like a generic, standard feature, country-specific, etc.
When it comes to reporting and provisioning, it is not readily available with most of the competing ERP solutions. It requires reporting to government authorities and provisioning an estimated future amount that you will need to pay in VAT.
Before you choose either one of it, i.e. the tax-automation or reporting and provisioning route, you must consider the following points:
First, If you require just the tax automation, you can continue using your existing Oracle ERP systems as before. Still, you will need to implement tax modules which basically fall under Oracle financial suite.
Second, suppose you choose reporting and provisioning. In that case, you will need to create tax reporting on Oracle e-business suite and deploy a cloud-based solution that will enable you to carry out tax-reporting and provisioning processes.
On the other hand, if you are new to oracle and are looking to deploy a new ERP system, you can directly employ Oracle’s VAT-compliant ERP cloud solution. The oracle’s rapid implementation strategy will save your valuable time and ensure that you can easily comply with the new VAT legislation in a few weeks without waiting for months or years.
Working Mechanism of Oracle VAT compliant ERP
VAT (Value-added tax is considered an example of indirect tax that pops up complex situations and should be handled by ERP systems either through manual interventions or automatically. Customs also come under indirect tax and are often supported by Oracle ERP systems. This includes warehouse management systems (WMS), customs management systems (CMS), few other tailor-made customs applications which communicate properly through sophisticated interfaces. It is quite evident that ERP systems play an important role in providing support to business processes into which the overall tax processes are incorporated.
The complexity of business operations and different ERP software packages paves the way for repeated customization needs for ERP systems. In future and current implementation practice in GCC like Oman VAT is believed to be addressed partly by the vendors and somewhat during the implementation process itself. When you study a large ERP environment, you will find that automated VAT handling within ERP systems is not always implemented in the right way. The reason behind can be the lack of attention to VAT issues or the degree of exposure to risks in the operations. One of the most important VAT risk exposure criteria is distributive trade activities.
Within a VAT regulation, the actual goods flow becomes the determining factor of the required VAT treatment for the supply of goods. At the same time, the VAT determination for service deliveries differs to a great extent from the VAT rules for the supply of goods. In case you want to automate the VAT derivation for services, additional VAT derivation functionality within the ERP system is required. Products usually have different VAT ratings in each GCC member state. The correct product rating depends on the accuracy and maintenance of master data. When the master data maintenance is not centralized, risks may arise owing to sales of the same product in different countries in different categories.
In contrast to income tax, VAT is a reporting tax which means tax authorities always check afterwards on the correct VAT reporting. Companies which are not VAT compliant may risk penalties and reimbursement of VAT of up to past five years with interest.
How will VAT implementation impact existing operations of GCC Companies?
The most anticipated introduction of VAT (Value Added Tax) in Oman in 2019 under the GCC VAT agreement framework has laid out an array of issues for businesses to look out and ensure adequate business continuity.
Impact of VAT implementation
The primary issue of each and every business facing the introduction of a new tax regime is to ensure business continuity. This would need a comprehensive assessment of the impact of the relevant tax on inward and outward transactions. Businesses may struggle to understand the taxation of day-day transactions in case there is no adequate preparation for the new VAT regime. This may also result in a detrimental effect on customer and supplier relationships.
To properly understand the VAT regulation requirement in Oman, businesses can look into the GCC VAT agreement framework and the VAT laws of UAE and Saudi Arabia. To get all your answers, you must look for the following questions:
- Is your company’s purchases taxable, zero-rated or exempted?
- What kind of conditions your company needs to comply with to become eligible for exemptions?
- Which type of taxes are recoverable and which are not?
- Which type of treatment is given to exports, imports and intra-GCC supplies?
Analysing the questions mentioned above may help companies prepare for the introduction of VAT and help them retain their competitive edge. It is advisable to keep your customers and vendors informed before the implementation of any tax change. If possible, companies should review the contracts and assess the potential of renegotiation to safeguard business interests and ensure business continuity.
Business Restructuring Requirements for Oracle VAT ERP implementation in Oman
A new tax regime generally prompt businesses to better understand their operations and contractual relationships, allowing for the development of solutions and outcomes like:
- Either to maintain inventory or undertake registration in another GCC country or
- How to go about transactions with overseas groups of companies in the nature of imports, exports and intercompany recharges.
For a smooth transformation to Oracle VAT compliant ERP, such analysis is crucial. It may also help identify other tax inefficiencies like corporate tax and customs that often intersect with VAT.
Changes required in business processes and practices:
The introduction or implementation of a basic VAT rate may seem simple, but a lack of experience in dealing with consumption and transaction taxes can create a lot of fuss for a company’s tax department as well as for other functions, for instance, human resource department, legal department, sales and supply chain.
Businesses would require multiple changes as they move from a “no sales tax regime” to a VAT regime under Oracle VAT compliant ERP. Few points that must be considered are:
- Segregating taxable, zero-rated and exempt supplies and changing the invoice documentation in order to comply with all these requirements.
- Bringing about change in accounting and recording systems to generate reports that provide relevant information necessary for the completion of tax filings.
- Properly aligning IT systems to process VAT-related information across various business functions.
- Developing a step by step action plan for implementation.
- Testing user acceptance systems to ascertain whether the changes are appropriately implemented.
- Training staff about Oracle VAT compliance software’s functionality to understand the impact of VAT and any subsequent related changes to business processes.
Challenges in implementation of VAT in Oman
On the basis of VAT implementation in other GCC countries, there have been certain challenges during the implementation process. These can be listed into the following: lack of seriousness, starting the process of implementation and transition late, not able to appoint an implementation expert, focusing on tax positions that are being discussed at industry forums rather than concentrating on the law concerning a specific business scenario, etc. Businesses at Oman must consider the experience/learnings from the previous GCC VAT implementation to avoid any penal consequences.
The following are few sector-based challenges that might erupt during the implementation process in Oman keeping the zero-rating and exemptions specified in the Oman VAT Law:
Certain food items belong to zero-rated as per the VAT Law and are issued in due course. Most businesses are not able to map the product with the list when the composition of the product, purpose, etc is taken into consideration. This incorrect classification often leads to wrong zero-rating positions.
Medicines and medical equipment are often considered as zero-rated. Nevertheless, the zero-rating is expected to apply only in those cases where registered authorities approve the medicines. The approval may either be generic or it may apply for a certain period or a certain class of medicines. Therefore, most VAT services in Oman could be challenging as it involves verification of every sale/purchase to find whether the medicine is approved to apply zero-rating or not.
In Oman, banks and large financial institutions have to classify their products into margin or fee-based income. Margin is classified as exempt from the VAT while fee-based income is subject to VAT. Most financial services sectors would have a substantial portion of income which can fall under the exempt category; therefore, input tax apportionment would be a key challenge.
When it comes to international transportation, movement from Oman to outside and vice-versa is categorized as zero-rated. In contrast, the local passenger transport is exempt and local transport of goods is subject to VAT at 5%. The transportation journey generally involves freight forwarder, shipping line, feeder operator, agent, etc. It is crucial to ascertain the VAT impact on different charges for providing services. Further clarification is expected from the Executive Regulations at Oman, which is again a challenge.
In Oman, providing services to a customer that is based outside Oman falls under the category of a zero-rated subject to certain conditions. The condition includes that any other person should not receive the benefit of services in Oman, which is quite subjective and largely depend on the arrangement with the customer and the nature of charge/services. The impending challenge is to identify such arrangements and evaluate VAT treatment.
Looking at other GCC countries, it is expected the Oman Tax Authority will follow sector-specific guidance only. An early start to such implementation may give businesses ample time to file representation with the Tax Authorities.
How upgrading to Oracle ERP for VAT would help?
Oracle’s solutions and coding experts have helped millions of companies worldwide to comply with local VAT requirements. Oracle’s few of the new approaches include connecting VAT cloud services to on-premises enterprise resource planning (ERP) for example, Oracle E-Business Suite. Businesses may simply take the opportunity to completely digitize and modernize their services by deploying enterprise resource planning in the cloud using the software as Saas.
Whatever the case may be, there are plenty of benefits of placing tax functionality in the cloud. For instance, you will always have access to the latest version of the software instead of using the on-premises systems, which basically requires lengthy upgrades.
Oracle ensures that its cloud applications are up to date on a regular basis to ensure that you always have the latest solution to comply with the new VAT rates or any tax regulations. With VAT deadline implementation in Oman cornering, the cloud can complete either of these approaches in a much shorter time than traditional premises.
The key benefits of upgrading to Oracle VAT solutions are:
- Define and upload tax-efficiently through straightforward workbooks
- Spreadsheet templates for all prebuilt validations and instructions
- Instant tax implementations that can be completed in minutes
- Seamless integration of new configuration in the spreadsheet templates
- Updated legal entities are automatically subscribed to the tax regimes
Implementation of VAT in Oman
Oman is quite fortunate as it will be able to benefit from the experience of Gulf countries like the UAE and Saudi Arabia who have already introduced VAT. Being a part of the GCC, Oman can examine the challenges faced by them. At the same time, businesses can begin the registration of VAT in Oman. Various aspects like treatment of intra-GCC supplies, free trade zones and exemptions are still not appropriately determined, the tax authorities in these countries continue to provide clarifications to ensure the tax is implemented appropriately.
Based on a Royal Decree(No 121/2020) approved by Sultan Haitham Bin Tariq Al Said, it is evident that Oman plans to implement a 5% VAT from 1st April 2021. The mandatory VAT registration threshold being OMR 35,000 for businesses in Oman. Nevertheless, there is a possibility for voluntary registration above OMR 19,250. Further, non-resident businesses will also be required to register for VAT if they provide taxable supplies.
Certain supplies that are exempted include: basic foodstuffs, rent, public education, healthcare, public transport, sale of greenfield land sites, sale of real estate, import of medical equipment, certain transport equipment, certain precious metals, and crude oil imports.
Due to the worsening of COVID-19 situation, it appeared like the Gulf state of Oman would delay the introduction of the consumption tax. According to the IMF (International Monetary Fund), owing to the government deficit of 16.9% of the GDP( gross domestic product), Oman has cut public spending to restrict financial leakage occurred due to cheap oil prices and coronavirus impact.
Oman will become the fourth of the six Arab Gulf countries to introduce VAT as a part of the 2016 VAT union agreement. All six states had agreed to implement a 5% regime. Until now only, Saudi Arabia, UAE and Bahrain were able to do so. Like the other oil-rich Gulf countries, Oman has suffered a drop in oil prices and is looking for a way to stabilise its revenues through the introduction of consumption tax or VAT.
The success of an organization’s GCC VAT implementation will entirely depend on its ability to prepare in advance and pre-deploy automated processes across the organization.
Is Your Company VAT Compliant?
WRITTEN BY: Raoof Ahmed
Oracle Solution Architect at bTranz Technological Solutions Pvt Ltd
With over 10 years of expertise in Oracle Applications R12 and Fusion. He has comprehensive knowledge on Implementation, Upgrade and Development projects spread across Oracle Applications.
If you would like to connect with Raoof: [email protected]