The slump in oil prices in the last few years has increased the pressure on the Gulf Cooperation Council (GCC) states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) to seek more sustainable government revenues through taxation. Corporate income tax is currently the only direct tax imposed within the GCC, and even then Bahrain and the UAE only impose the tax on narrow sectors of the economy. Customs duty, imposed uniformly across the GCC, is currently the main indirect tax assessed in these countries. Just over three years ago, the need to introduce VAT intensified due to the ever increasing challenges on the governments to meet their budget commitments.
Towards the end of 2016, the GCC states signed the “Unified Value Added Tax Agreement,” establishing the domestic legislation required for all countries to introduce a VAT by 1 January 2018 or one year thereafter. Although some GCC states have made various announcements/clarifications of what the rules will contain, none of the draft legislation has been published yet, making it quite difficult for the public to adequately prepare in advance for the implementation.
The standard VAT rate across the GCC will be 5%, with a zero rate applicable to certain supplies (e.g., education and healthcare). Exemptions will likely include staple food items, certain financial services, and local transportation. A business operating in a zero-rated sector will be able to recover the VAT charged by its supplies (the input VAT); however, if a business’ supplies are exempt, it will not be able to recover the input VAT charged by its suppliers.
It is likely that the reverse charge mechanism, similar to what is applicable in the EU, will apply to imported goods and services. However, VAT may need to be paid at the time of import if the goods are destined for other GCC countries. It is also likely that exports of goods and services will be zero rated.
At this stage, a number of key issues still need to be clarified, including:
- Whether supplies into and from free zone entities will be regarded as imports/exports subject to VAT, and whether free zone companies would be required to register for VAT.
- The precise scope of exempt financial services.
- How intra-GCC transactions will be accounted for, and whether there will be uniformity in the designation of products and services which are standard-rated, zero-rated, or exempt.
- How the rules will apply to cross-border online transactions, particularly B2C transactions, and whether foreign companies without a business license or registered offices in the GCC would be required to register for VAT. In this regard, the interaction between VAT compliance and direct taxes is uncertain (for example, whether companies that are registered for VAT are automatically liable for corporate income tax).
Even if the laws and regulations are released in the next few months, clarification of the issues outlined above still need to be published so that businesses can feel adequately prepared for implementation.
A closer look at VAT implementation in the UAE
The United Arab Emirates is set to be the first GCC state to implement a VAT, effective 1 January 2018. The government is expected to publish its domestic VAT law before the end of June 2017, and subsequently, issue executive regulations specifying the detailed implementation mechanism and rules.
Businesses with an annual turnover of at least US$100,000 will be required to register for VAT (a voluntary registration threshold will apply for businesses with a turnover between US$50,000-$100,000) at least three months before the launch of the VAT (online registration will be available).
Businesses will also be able to file their returns online. For most businesses, the default period for filing VAT returns will be three months, with the filing of returns and payments due within a month after the quarter. The penalties for avoidance are likely to be severe (as high as 500% of the VAT payable), in addition to the payment of the VAT. Where due, VAT refunds may be made in cash or carried forward to subsequent return periods.
Reggie Mezu is an Executive Director for The Cragus Group and an Advisor to the International Tax and Investment Center.