Saudi Arabia and UAE are in for a 2018 five per cent Value Added Tax (VAT) implementation. The UAE has already implemented an excise tax, which will apply to carbonated drinks at a rate of 50 per cent and to energy drinks and tobacco at 100 per cent.
The rest of the GCC is taking it a bit slower, not planning anything of the sort before 2019, despite the fact that the Unified Agreement VAT across the GCC region was published in the official gazette of KSA in May 2017.
“The UAE and Saudi Arabia will be the first countries to roll out VAT in the GCC from early 2018 while other Gulf countries have time till the end of next year to implement the new tax system,” Khalid Ali Al Bustani, Director General of Federal Tax Authority (FTA), told media at a press conference in Abu Dhabi last August.
The Unified Agreement provides the framework for the operation of VAT across the GCC. Each GCC member state will implement the framework through legislation and other instruments.
What are the key features of the framework treaty?
Key features of GCC VAT
Based on the agreement, PricewaterhouseCoopers (PwC) identified that VAT would apply to goods and services at five per cent, with VAT registration mandatory for businesses with an annual turnover of SAR 375,000 (approximately $100,000) and that businesses that generate 50 per cent of this threshold annually could voluntarily register.
It said that most VAT compliance requirements and procedures, such as tax periods or content of invoice, are left to the discretion of each member state. Taxable persons will be allowed to deduct input VAT that is incurred for making taxable supplies of goods and services. The resulting input tax credit at the end of each tax period may be allowed as a refund or carried forward.
Whether to exempt education, healthcare, oil and gas, and real estate is left to the discretion of each member state, but medical equipment and medicines will be subject to a zero rate as will the transport of goods and passengers (intra-GCC and international) and associated ancillary services.
Export of goods to outside the territory will be zero rated, but a reverse charge mechanism will apply to the acquisition of services from abroad, with VAT due on import of goods shall be paid at the first point of entry in the GCC Region.
Exempt or not?
In 2017, Deloitte published a report, in which it defined exemptions. It said that the distinction between zero-rating and exemption was an important one; in both cases VAT must not be accounted on the supply and that a supplier making exempt supplies was generally not allowed to recover input VAT in relation to such supplies. Recovery of input VAT incurred in relation to zero-rated supplies is generally allowable.
Must zero-rate: Medicine and medical equipment, cross-border good and passenger transportation services, goods exported outside GCC territory, certain cross-border supplies of services.
May zero-rate: Certain food items, supply of transportation for commercial purposes, oil, oil derivatives and gas sector.
Can zero rate or exempt: Education, healthcare, real estate, local transport sector.
Must exempt: Financial services (with some flexibility to tax), importation, if the goods are exempted or exempted from VAT in the respective member state.
Deloitte also set 5 common pre-implementation actions that businesses need to make before VAT is implemented:
1-Assess VAT readiness.
2-Develop roadmaps to 1 January 2018 or at the least the first quarter of 2018.
3-Map your transaction footprint.
4-Review and update contractual arrangements with vendors and customers.
5-Include appropriate clauses in contracts.
It said that the risks of getting it wrong were potentially enormous. There are reputational, legal and moral requirements to pay the right amount of tax at the right time.