Gulf States gear up for VAT in 2018

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Gulf States gear up for VAT in 2018

The introduction of Value-Added Tax (VAT), touted as one of the biggest taxation reforms in the region, constitutes an important means to help Gulf Cooperation Council (GCC) Governments achieve their social and economic policy goals, and in turn reduce reliance on hydrocarbon revenues.

The GCC Member States (the United Arab Emirates, Saudi-Arabia, Qatar, Bahrain, Kuwait and Oman) have developed a broad framework (the GCC VAT Framework Agreement) - modelled upon the EU VAT Directive 2006/112/EC - for the introduction of VAT. Each GCC Member State has signed this GCC VAT Framework Agreement and is taking the internal procedures necessary for enacting a national law that enters the provisions of this Agreement into force. On 29 May 2017, Saudi-Arabia has released its draft domestic legislation which will be open for public consultation and feedback until 29 June 2017.

The information set out below is based on our understanding of the GCC VAT Framework Agreement and is for informational purposes only.

This should not be relied upon without seeking further advice.

Categories of VAT

For levying tax under the VAT regime, products and services are divided into three categories:

 Standard rated – The 5% standard rate shall be imposed on taxable supplies and imports unless there is a provision of exemption or imposing a zero (0%) rate.

Generally, the taxable person shall have the right to recover the input VAT imposed on the goods and services supplied to him/her.

 Zero-rated - Zero-rated supplies will be taxable but at a rate of 0%. A person making zero-rated supplies shall have the right to recover the input VAT incurred in respect of those supplies, unless restricted by a specific provision.

 Exempt - Certain supplies will be exempt from VAT. A person making exempt

1A mechanism by which the person subject to VAT becomes liable to pay the VAT due on behalf of the supplier.

supplies will not be allowed to recover the input VAT imposed on the goods and services in relation to the exempt supplies.

VAT Treatment of certain sectors based on the domestic law

Each Member State has the right to subject the following sectors to a zero rate or exemption:

► Education sector

► Health sector

► Real estate sector

► Local transport sector

All food products are subject to VAT. However, each Member State may impose a zero rate on the imported goods mentioned in a standard list of products to be approved by the Ministerial Committee.

Likewise, the oil and gas sector including oil and petrol derivatives may be subject to VAT at a standard rate or zero rate, at the discretion of each Member State and in accordance with the modalities and conditions set out by each State.

The Member States have the right to exempt financial services from VAT. The term financial services is not defined in the GCC VAT Framework Agreement but the exemption will generally relate to dealings in money, securities, foreign exchange and the operation and management of loan accounts, deposits, trade-credit facilities and related intermediary services. The exemption is not expected to extend to fee based services transacted by a financial institution. However, each Member State may choose to apply a different VAT treatment to financial services.

Import of goods

The VAT due on imported goods will become payable at the first point of entry in the GCC Customs Union.

Based on the conditions and the disciplines it establishes, each Member State may allow the person subject to import VAT to adjourn the payment of the VAT due on the imported goods for the purpose of an economic activity and declare it in the following VAT return (so-called reverse charge mechanism¹ i.e. import VAT will not have to be physically paid at the point of entry).

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Intra-GCC treatment of supply of goods

Specific place of supply rules apply for intra-GCC supplies of goods transported from one Member State to another to avoid double or no taxation.

 Intra-GCC Supply to a VAT registered person (B2B) – In case the goods are transported from one Member State to another to a VAT registered person, the place of supply is the Member State to which the goods are transported.

The person receiving the goods becomes liable to pay the VAT due on the goods via the reverse charge mechanism.

 Intra-GCC Supply to a non-registered person (B2C) – The place of an intra-GCC supply of goods without installation or assembling by a supplier who is registered for VAT purposes in a Member State in favour of a person who is not registered in another Member State is the Member State in which the transport has started.

However, it is provided that the gross value of that supplier’s transactions during a period of 12 months shall not exceed an amount of SR 375,000 (approx. 100,000 USD) or its equivalent of the GCC States’

currencies. If the gross value of the supplier’s transactions exceeds that amount, the place of supply becomes the Member State to which the goods are transported and the supplier has to register for VAT in that Member State.

Place of supply of services

The place of supply of services supplied by a taxable person is the supplier’s place of residence.

As an exception, the place of supply of services supplied to another taxable person is the recipient’s place of residence. A reverse charge mechanism will apply to the acquisition of services from abroad. The recipient subject to VAT in the destination State will be the person liable for the VAT due.

In special cases (e.g. transportation hiring services, supply of real estate related services, supply of wire/wireless services and electronically supplied services, supply of passenger transport services), the above general place of supply of services principles will not be applicable and specific place of supply rules will apply.

Deduction of input VAT

A taxable person has the right to deduct from the payable VAT the value of the deductible VAT which he or she has paid in that country on conducting supplies subject to VAT (5% or 0%).

To exercise its right of VAT deduction, the taxable person must have a valid VAT invoice and, in case of imports, the customs documents that prove he or she is the importer of record.

Input VAT which has been paid may not be deducted in case such inputs were not for the purpose of conducting an economic activity or were for the purpose of conducting supplies subject to a VAT exemption.

In case the input VAT relates to both taxable supplies and non-taxable or exempt supplies, the input VAT may not be deducted except within the revenue proportion of the taxable supplies.

Input tax credit at the end of each tax period may be allowed as a refund or carried forward, depending on each Member State’s modalities.

Intra-GCC treatment of supply of goods

Specific place of supply rules apply for intra-GCC supplies of goods transported from one Member State to another to avoid double or no taxation.

 Intra-GCC Supply to a VAT registered person (B2B) – In case the goods are transported from one Member State to another to a VAT registered person, the place of supply is the Member State to which the goods are transported.

The person receiving the goods becomes liable to pay the VAT due on the goods via the reverse charge mechanism.

 Intra-GCC Supply to a non-registered person (B2C) – The place of an intra-GCC supply of goods without installation or assembling by a supplier who is registered for VAT purposes in a Member State in favour of a person who is not registered in another Member State is the Member State in which the transport has started.

However, it is provided that the gross value of that supplier’s transactions during a period of 12 months shall not exceed an amount of SR 375,000 (approx. 100,000 USD) or its equivalent of the GCC States’

currencies. If the gross value of the supplier’s transactions exceeds that amount, the place of supply becomes the Member State to which the goods are transported and the supplier has to register for VAT in that Member State.

Place of supply of services

The place of supply of services supplied by a taxable person is the supplier’s place of residence.

As an exception, the place of supply of services supplied to another taxable person is the recipient’s place of residence. A reverse charge mechanism will apply to the acquisition of services from abroad. The recipient subject to VAT in the destination State will be the person liable for the VAT due.

In special cases (e.g. transportation hiring services, supply of real estate related services, supply of wire/wireless services and electronically supplied services, supply of passenger transport services), the above general place of supply of services principles will not be applicable and specific place of supply rules will apply.

Deduction of input VAT

A taxable person has the right to deduct from the payable VAT the value of the deductible VAT which he or she has paid in that country on conducting supplies subject to VAT (5% or 0%).

To exercise its right of VAT deduction, the taxable person must have a valid VAT invoice and, in case of imports, the customs documents that prove he or she is the importer of record.

Input VAT which has been paid may not be deducted in case such inputs were not for the purpose of conducting an economic activity or were for the purpose of conducting supplies subject to a VAT exemption.

In case the input VAT relates to both taxable supplies and non-taxable or exempt supplies, the input VAT may not be deducted except within the revenue proportion of the taxable supplies.

Input tax credit at the end of each tax period may be allowed as a refund or carried forward, depending on each Member State’s modalities.

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VAT registrations

VAT registration is compulsory for a person independently engaged in an economic activity and making taxable supplies with an annual turnover of SR 375,000 (approx. 100,000 USD) or its equivalent from any other GCC Member State’s currency. A person may apply to register for VAT voluntarily if the value of its taxable supplies is not less than 50% of the compulsory threshold. While calculating the registration thresholds, exempt supplies and supplies outside the scope of VAT are not considered. Persons not registered for VAT cannot charge VAT on their sales and cannot claim any VAT incurred on their inputs.

Registered persons will be expected to submit VAT returns on a periodic basis, and will be required to keep records allowing the government to identify details of business activities and to review transactions.

VAT litigation

The GCC VAT Framework Agreement contains provisions for dispute resolution. Taxable persons in each Member State will have the right to challenge decisions of the national tax authority in specialized local courts.

However, there is no dispute resolution mechanism (e.g. GCC courts) to handle intra-GCC disputes. Although GCC Member States have signed the GCC VAT Framework Agreement which is expected to ensure uniformity in approach to VAT implementation, there may be differences when interpreting regulations.

VAT treatment of GCC free zones

The treatment of GCC free zones is not addressed in the GCC VAT Framework Agreement and is left at the discretion of each Member State. The question arises whether free zones will be subject to the same VAT treatment throughout the different GCC Member States.

VAT Go-Live date

Both the GCC governments of the UAE and Saudi- Arabia have already ratified the GCC VAT Framework Agreement and are determined to implement VAT with effect from 1 January 2018 and have commenced active engagement with business groups on the need to be VAT ready in 2018.

Considering this VAT go-live date, there is a relatively short time frame to consider the implications of the introduction of VAT and to make the necessary changes. It is imperative for businesses operating in the GCC region to take immediate steps to become VAT compliant.

Jeremy Choner Tel: +971508308476

Email: Jeremy.Choner@ae.ey.com

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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