Insights from the GCIS Pulse 6 Report

Navigating VAT and Customs Implications Amidst the Middle East Shopping Evolution

Blog
November 22, 2023

The PwC Pulse 6 - Middle East findings of the Global Consumer Insights Survey 2023 have revealed a new generation of price-conscious shoppers who rely on research and technology to finalise their purchase decisions.

The shopping patterns in the Middle East are undergoing significant transformation. Recent findings from the Pulse 6 report indicate shifts from in-store visits to a mix of e-commerce and physical stores. With such changes come vital VAT and customs considerations.

Delving deeper, let’s evaluate the VAT and customs implications against these evolving trends:

Physical Stores vs Online Platforms
Self-Checkouts and Digital Payment Options
Direct Purchases from Brand websites
Subscriptions and E-commerce Growth
Preference for local produce
Returns
Hands-on immersive and advanced technologies

Physical Stores vs Online Platforms

The Pulse 6 global survey has revealed that half of those polled intend to boost their online spending and continue shopping in physical stores over the next six months. The VAT and Customs dynamics for both in-store and online shopping are thus crucial:

In-Store Shopping: The Pulse 6 report reaffirms that 49% of Middle East shoppers still prioritise physical stores. VAT for in-store purchases remains direct and in essence, uncomplicated. The amount is directly added to the cost at the point of sale. Businesses must ensure their billing systems are equipped to charge, collect, and remit this amount accurately to the tax authority. For example, a store failing to update its billing system after a VAT rate change could face significant fines.

Goods shipped to the stores from abroad may be subject to customs exemptions and reliefs that businesses need to be aware of to ensure they remain competitive, e.g. free trade agreements, tariff exemptions, low-value consignment relief, etc. The re-export of the stock may also avail a refund of the customs duty previously paid, for instance in end-of-season scenarios. On the other hand, it is important to remain compliant; we see customs valuation in the Middle East as an area of greater focus by customs authorities, with an increasing scrutiny on licence and royalty fees paid in connection with goods imported (e.g. brand royalties) and post entry transfer pricing-based adjustments.

Online Shopping: As 43% of consumers now opt for mobile phones and 31% for PCs for their shopping, VAT intricacies multiply, particularly for cross-border sales. Incorrectly identifying the place of supply can lead to a double taxation scenario or non-compliance, tarnishing a business's reputation and resulting in financial losses. Retailers must identify the place of supply to correctly charge VAT. Further, digital services may have different VAT rules in the buyer's country, which sellers should be aware of.

With the increasing consumer preference for e-commerce shopping, understanding the associated cross-border customs and international trade implications has become an area of focus for most market players, looking to maximise the customer experience by ensuring a seamless delivery at the most competitive cost. This requires a solid understanding of the cross border customs rules and simplifications and a strong governance around the customs function.
At the same time, the growing volume of e-commerce shipments has put a lot of pressure on customs authorities, who need to balance trade facilitation and adequate controls in a very competitive landscape. We see that more often than not, customs authorities in the Middle East would have implemented simplified customs procedures to clear e-commerce parcels and shipments; however, these measures are yet to achieve the full extent of facilitations that both e-commerce businesses and customers expect.

Self-Checkouts and Digital Payment Options

The Pulse 6 report highlights a noteworthy predilection for self-checkout systems. The growing preference for self-checkout systems (over 50%) in the Middle East, given their speed, convenience, and diverse payment options, also has VAT considerations:

Businesses must ensure these automated systems are correctly set up to charge VAT, especially when dealing with promotions, discounts, or bundled products. A failure in recognising a tax-exempt item or applying incorrect VAT rates, can disrupt the financial flow and lead to consumer dissatisfaction.

The array of digital payment options available should be equipped to handle, record, and report VAT accurately for financial transparency and compliance. Ensuring that digital payment methods can handle, document, and present VAT correctly is paramount.

Direct Purchases from Brand websites

68% of shoppers are turning directly to Brand websites. As the Pulse 6 report suggests, this trend, although beneficial for brands, requires a renewed focus on VAT:

Brands operating in multiple jurisdictions must accurately include VAT in their pricing strategies. An oversight can drastically affect profit margins and result in legal consequences, as seen in some cases where businesses inadvertently undercharged customers due to not factoring in VAT.

With the rise in e-commerce returns, policies for VAT refunds or adjustments need clarity.

More than half of our regional respondents have purchased food, beverages, clothes and accessories directly from the brand’s website, while more than 40% have purchased electronics, beauty and personal care products. Goods bought in a store do not have a price tag that shows the customs duties paid, as this is already embedded in the price. When buying from a website, the seller may or may not include customs duties and import taxes in the price. Consumers should familiarise themselves with the pricing model that the online seller has adopted (which can often be described in the website terms and conditions) to avoid unexpected import costs when shopping online.

Subscriptions and E-commerce Growth

Consumers in the region will continue to seek the convenience of buying online with the confidence of buying in-store. They want the best of both worlds - the immersive experience of physical shopping as well as the convenience of online and are increasingly using digital technologies to make an informed purchase.

The growth in e-commerce and a strong digital payments infrastructure in the region have seen a significant rise in the subscription model. The trend grew during the pandemic and regional subscriptions have been popular in UAE, Egypt, and Saudi Arabia, countries with strong e-commerce markets.

Our survey reveals that 32% of regional consumers (significantly higher than the 17% globally) subscribe to household grocery delivery services like fruit and vegetable boxes and meal kits. Cosmetics, wellbeing supplements, tea, coffee, cleaning supplies, grooming products, clothing services and online fitness apps are products and services that more than 20% of regional consumers currently buy using subscription services. Subscriptions often involve recurring payments, and businesses must ensure VAT is correctly and consistently charged throughout the subscription period.

Consumers in the Gulf also subscribe to an average of 2.9 video-on-demand streaming services, such as Netflix, Amazon Prime and YouTube Premium, second to the US where each person has an average of 4.7 subscriptions, according to the Arab News report. With this identified growth, some streaming services forget to update VAT charges, causing a significant shortfall over thousands of subscriptions. Hence, determining the place of supply for VAT purposes and considering the cross-border nature of many streaming services, is essential to avoid non-compliance.

Preference for local produce

More than 20% of regional consumers would be willing to pay 11 -20 % above the average price for a product produced locally. The rules governing the import and export of goods differ from country to country and are particularly inconsistent in the Middle East. For instance, the import of specific technology products, such as drones, is subject to strict regulations that sellers and buyers may not always be aware of (e.g. permits, licences, and/or government approvals).

Consumers must be well-informed on these restrictions to make informed decisions when purchasing these products; it might be easier to access certain goods locally from licensed importers than purchase online, exposed to the uncertainty of potential issues during the shipping and clearance of the goods on behalf of individual purchasers.

Returns

Product returns pose a major challenge for retailers in the region. As the region’s growing population shows a keen preference to shop online, we also find an increase in e-commerce returns. Returning items purchased from international online retailers can be complex. It's vital to review the store's return policy before buying. Major e-commerce chains have processes in place to arrange for international shipments of return of goods from and the financial settlement with customers. However, the cost of shipping may be borne by the customer and the related VAT treatment is often not completely compliant.

Our survey reveals that 20% of regional and 17% of global consumers believe that accurate and detailed product descriptions are critical to reducing the number of returns, followed by the ability to read previous customers' reviews (16% vs 14% globally) and accurate sizing information (15% vs 18% globally).

Highlighting their organisation’s top priorities in the next 12 months as it shifts to a zero trust mode, 54% of regional respondents said it would be secure cloud networking (as against 42% globally), while 46% said it would be identity and access management, almost the same as global respondents.

Hands-on immersive and advanced technologies

With an increased engagement in chatbots and virtual reality, the Pulse 6 report signals a future with predominantly virtual shopping. The survey also revealed that 67% of Middle Eastern consumers would like to be the first to buy cutting-edge technology as soon as it is available and to try out the latest technology before most people - a trend is significantly higher than 48% of the global respondents. Businesses exploring these territories must proactively discern potential VAT implications for virtual commodities or services. Considering virtual real estate sales without a clear understanding of VAT implications, businesses could either overcharge or undercharge their customers, leading to legal complications.

Conclusion

The Pulse 6 report outlines a blended shopping reality in the Middle East. Retailers, while capitalising on these shifts, must prioritise understanding and integrating VAT and customs nuances. Ensuring compliance is not just about abiding by the law, it's about safeguarding the business's reputation, maintaining consumer trust, and ensuring smooth financial operations.

A solid awareness of the existing rules and practices pertaining to policies for VAT refunds or VAT treatment and adjustments, customs duties, customs clearance and how to comply with import and export regulations is fundamental for both consumers and retailers. This will allow consumers to make informed purchasing decisions, while enabling retailers to provide transparent information to their customers about costs and requirements. The latter will not only build consumer trust, but will also enhance the overall consumer experience, set the stage for repeat purchase and generate positive word-of-mouth.