Getting Ready for VAT in the GCC
By Simran Juneja, Consultant, Indirect Tax
The Gulf Cooperation Council (GCC), which comprises Saudi Arabia, the United Arab Emirates (UAE), Qatar, Bahrain, Oman and Kuwait, will be implementing a value added tax (VAT) in 2018. Businesses operating in the Gulf region need to be aware of how this tax will affect their operations.
GCC countries have long depended almost exclusively on oil revenue for government financing. But oil has dropped from over $100 a barrel in mid-2014 to under $50 currently. Existing non-oil revenues are totally inadequate to finance increasing public spending. Implementing a VAT is a good way for these nations to meet anticipated needs.
How VAT Works
VAT is a flat consumption-based tax that makes enforcing compliance straightforward. Over 120 countries worldwide use some version of VAT and it makes up 20 percent of worldwide tax revenues.
VAT is collected at every stage along the supply chain. This is certainly more complex than a simple sales tax, but it has significant advantages. One of them is that, since each buyer along the supply chain has to pay tax to the seller, and, in turn, adds tax to the invoice they send to the next buyer down the chain, there is always a counterparty that has a stake in getting reimbursed for the tax they have paid, and thus that documentation is correct. This significantly eases enforcement.
The standard VAT in the GCC will initially be 5 percent. Some categories, such as basic food and medicine, as well as exports outside the GCC, will be taxed at zero percent. In other sectors, such as education, healthcare, real estate and local transportation, details of VAT implementation may vary from one state to another.
Schedules and Deadlines
In 2016 the GCC agreed to introduce VAT on January 1, 2018. While there has been no announcement to the contrary, most observers believe that only Saudi Arabia and the UAE are likely to meet that deadline.
The UAE will start registering business for VAT in mid-September, but Saudi Arabia has not yet issued a deadline for businesses to register.
The GCC agreement provides members with a one-year grace period. Kuwait’s parliament approved draft VAT legislation on August 7; Oman has not announced a firm VAT date; and Bahrain has said it would introduce VAT in mid-2018. Despite finally approving draft legislation, it is unlikely that Kuwait will be able to meet the January 1, 2018 rollout date.
Saudi Arabia, the UAE and Bahrain, along with Egypt, imposed sanctions on Qatar in June 2017. The effects on Qatar’s VAT rollout are unknown, though they are likely to include delay.
Differences in the timing of VAT implementation in various countries in the GCC may provide the opportunity for tax arbitrage, particularly if implementation in some countries is delayed past January 1, 2019.
The Need for Business Planning
Any business operating in Saudi Arabia or the UAE needs to be preparing to be compliant when the regulations go into effect in 2018. This will include ensuring that you have the proper financial records in place, and knowing which category of VAT applies to your organization. You should also understand what the effects will be on your end prices, profit margins and cash flow. You should also review your existing contracts to determine who will absorb VAT costs, and negotiate any necessary modifications.
IT departments should assess system capabilities to identify possible issues with ERP and other IT systems — any error that requires manual correction will impose substantial additional costs, as well as possible fines. In addition, be ready to customize for each country. While the broad VAT framework applies across the GCC, every country will use local laws to implement the terms.
Businesses that already operate under a VAT regime elsewhere in the world most likely already have experienced such transitions and will have an advantage.
The delays in passing legislation will make an organized, deliberate VAT implementation process difficult in most GCC countries. Both the revenue authority and the private sector have to go through many steps before VAT operates smoothly. And detailed and clear communications are essential for any organization that hopes to comply with the new laws.
A survey by recruiting firm Hays in the first half of 2017 found that over half of UAE-based businesses did not yet have a VAT implementation strategy in place, and 60 percent of them had no budget assigned for the necessary changes. And this is in one of the only two countries that are anticipated to make the January 1, 2018 deadline for implementing VAT.
Despite possible delays in deadlines, businesses should move ahead as quickly as possible with their own planning in order to be compliant as soon as VAT is introduced. There is no advantage to be gained by delay.