Highlights of GCC VAT Treaty
and Reasons for Implementing
VAT in GCC
By Syed Asif Zaman
On 17 May, 2017
5th Saudi- Pak Accounting Symposium
Riyadh, KSA
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ANALYSIS OF THE GCC VAT FRAMEWORK AGREEMENT
The Gulf region (including UAE & KSA), has long
been considered an attractive and low-tax
environment. However, to keep up with the changing
economic landscape and as part of wider development
reforms, the Gulf Cooperation Council (GCC) member
states signed a framework agreement to introduce
Value-Added Tax (VAT) on the supply of goods and
services at a standard rate of 5%, in 2018. The Unified
agreement for VAT was published by Kingdom of Saudi
Arabia on 21 April 2017.
Infrastructure development, access to highpotential growth markets in Africa and Asia, freetrade zones, competitive labor costs, few trade
barriers and economic and political stability are all
factors which add to the region’s appeal. In
addition, VAT will have a neutral impact on
registered businesses when managed effciently.
Implementing VAT will have implications for businesses
and new taxpayers, both in KSA and abroad, directly and
/or indirectly.
In this presentation I will try to examines the
GCC VAT Framework Agreement and reasons
for implementing VAT in GCC.
However, a broad-based VAT at low rate is
unlikely to deter investment in the surrounding
region, whose appeal stretches much further than
its low-tax status.
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BACKGROUND
The Unified Agreement for VAT of the GSCC, sets out the framework under
which VAT can be implemented in each of the GCC member states. The
framework includes agreement on certain matters and in addition, requires
member states to mandatory implement local legislation whilst allowing
discretion on how to handle other related issues.
Once the agreement is ratified, each member state must integrate the framework
into local law and implement VAT. Ministry of Finance in KSA & UAE has
announced plans to implement VAT by 1st January 2018, while some
member states have indicated an intention to implement VAT some where
between 2018 to 2019. The framework allows for a basic rate of VAT on
supplies of goods and services of 5%, as well as allowing such supplies to be
zero-rated or VAT exempt depending ultimately on the domestic legislation of
each country.
GCC countries
United Arab Emirates
Kingdom of Bahrain
Kingdom of Saudi Arabia
Sultanate of Oman
State of Qatar
State of Kuwait
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VAT Recent Developments
A common VAT framework
The GCC Member states have agreed on a common framework for the introduction of a VAT system in the GCC.
A of the A Treaty is formal announcement. Upon ratification of the GCC Treaty, each Member State is expected to
issue its own national VAT legislation based on the agreed common principles
VAT legislation
Each Member State will issue its own VAT legislation in accordance with the common principles outlined in the
GCC Treaty. It is expected that some countries will issue VAT legislation is expect to be announced shortly in
KSA & UAE.
VAT regulations
These regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the
VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT
legislation is issued.
Go live
The introduction of VAT across the GCC is expected to take effect from 1 January 2018 in KSA & UAE.
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Reasons for Introducing VAT
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The fiscal break-even price of oil is the price that balances an oil-exporting country’s budget.
Different institutions and assessors provide varying estimates of the BEP (break-even price), leading to confusion in the minds of
many who track the metric.
Below are the break-even oil-price-per-barrel estimates for GCC countries this year, as calculated respectively by the IMF
• Kuwait: $47.80 (IMF),
• Qatar: $55
• UAE: $60
• Saudi Arabia: $79.70
• Oman: $ 77.5
• Bahrain: $ 93.8
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The graph shows the deficit in GDP in 2016-17.
A GCC-wide VAT of 5% is already due to be
implemented in 2018 and IMF estimates suggest
this could raise as much as 1.5%–2% of GDP
across the region.
There is plenty of scope for other tax measures
to help close the fiscal. For instance, GCC
economies have long been able to spare
workers a personal income tax (typically the
major contributor to government revenues in
high-income economies).
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Another option is the broader application of corporation or
profits tax. The highly-regulated nature of several GCC
economies means that profits in some sectors are higher
than in comparable economies. A broader application of
this type of tax is therefore an obvious source of additional
government revenue. But applying it to more competitive
sectors could undermine companies’ ability to use retained
earnings for investment and, therefore, economic
diversification.
There are also logistical challenges posed by the
implementation of a VAT or profits tax – both would
require companies to invest substantially in accounting and
financial management systems to deal with potentially
complex taxes. This would be particularly burdensome for
small and medium-sized enterprises (SMEs) which will be
crucial to any successful diversification in the region.
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GCC VAT Treaty
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GCC VAT Mechanism
The question arises that whether the GCC VAT system is based on the EU model or the more modern
systems found in the newer VAT implementing countries (e.g. Singapore or New Zealand).
If we start by looking at comparators and the only comparator with a multi-country VAT system is the
EU. So, for that reason, it has similarities with the EU VAT system. Similarities to the EU are
principally around the intra-GCC movement of goods (and some services) between businesses (B2B)
as well as to private consumers (distance selling provisions apply so that someone supplying goods
over the VAT registration threshold to another country must register there).
If you are familiar with the EU system then the ability to not charge VAT on many B2B supplies
where your customer is VAT registered in another GCC country will be very familiar.
Apart from this similarity GCC VAT system ceases to resemble the EU system (except mechanically
in the way all VAT systems are similar) and begins to look more like more modern VAT systems. The
primarily manifests is the limited number of exemptions and zero-rates and the very low standard rate
– 5%.
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GCC VAT AGREEMENT STRUCTURE
The VAT framework comprises of 15 chapters and 78 articles
CHAPTERS
TITLES
Chapter one
Definitions and General Provisions
Chapter two
Supplies within scope of tax
Chapter three
Place of supply
Chapter four
Tax Due date
Chapter five
Tax Calculation
Chapter six
Exceptions
Chapter seven
Exceptions on Importations
Chapter eight
Persons who are obliged to pay tax
Chapter nine
Tax deduction
Chapter ten
Obligations
Chapter eleven
Special treatments of Tax refunds
Chapter twelve
Exchange of information between member state
Chapter thirteen
Transitional provisions
Chapter fourteen
Appeals
Chapter fifteen
Closing provisions
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Who will the Law Apply to?
VAT will ultimately impact every business that supplies goods or services
in the GCC countries. In particular, businesses that make taxable supplies
over the mandatory threshold, must register with the relevant tax authority.
There is scope for voluntary registrations and VAT registration
requirements will apply to non-resident entities. Additionally, there is
scope to register multiple entities as a single VAT group, subject to
conditions to be set out in the domestic legislation of each GCC country.
Policy choices available to the GCC Countries(1/2)
The following slides summarizes the policy areas which the GCC Countries have discretion to decide upon the
approach to be taken;
 VAT groups [Article 4,GCC VAT Agreement]
 Application of exemption, or zero rating or standard rating of certain supplies [Article 29 (1),GCC VAT
Agreement] relating to:




Health
Education
Real Estate
Local Transport
 Application of the standard rate or zero rate to:
 Oil & Gas [Article 29(2),GCC VAT Agreement]
 Food [Article 31,GCC VAT Agreement]
 Supply of a means of transport [Article 33,GCC VAT Agreement]
Policy choices available to the GCC Countries(2/2)
• Exceptions to payment of VAT (or allowing refund) in special cases[Article 30,GCC VAT Agreement] in relation to:
 Government bodies, Charities
 Some companies in relation to international event hosting agreements
 Citizens of a Member State constructing homes for private use
 Farmers and Fishermen
Example of Policy choices available to the GCC Member Countries
 Financial services-exempt or not [Article 36,GCC VAT Agreement]
 Input tax deduction-Conditions [Article 44,GCC VAT Agreement]
 Input tax apportionment methods [Article 46,GCC VAT Agreement]
 Tax period [Article 60,GCC VAT Agreement]
 Tax payment-date and method [Article 63,GCC VAT agreement]
 Repayment/refund of tax [Article 65,GCC VAT agreement]
 Tax refunds for international organization's and diplomatic bodies
-Conditions/limitations and the option to apply zero rating [Article 69,GCC VAT Agreement]
VAT liability
Planned Zero-rated supplies in the UAE (1/2)
• Zero – rated supplies are not subject to VAT – right to an input tax deduction on the corresponding expenses.
• Should be applied strictly as they are an exception to the normal rule that VAT should be charged.
• Examples of zero – rated supplies include:
International transport of
passengers and goods and
services related to such
transport
Certain supplies of
means of transport
and related goods
and services
New residential
buildings
VAT Liability
Planned zero – rated supplies in the UAE (2/2)
Examples of Zero – rated supplies include:
Newly Converted
residential
buildings
Charity related
buildings
Educational
services, in most
cases
Exported goods
and services
Investment
precious metals
Healthcare service,
in most cases
VAT Liability
Exempt Supplies in the UAE
 Exempt supplies are not subject to VAT-no right to an input tax deduction on the corresponding expenses.
 Exemptions should be applied strictly as they are an exception to the normal rule that VAT should be charged.
 Examples of exempt supplies include:
Some specific
financial services
Local passenger
transport
Bare land
Residential buildings
(other than zero- rated
supplies)
Important concepts
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SOME IMPORTANT CONCEPTS
Input tax [Article 1(22); GCC
VAT Agreement]:
Meaning of taxable supply [Article
1(28); GCC VAT Agreement]:
Tax payable by a taxable person on
supply of goods and services
received or on import of goods and
services for the purpose of
carrying out economic activities.
Supplies on which tax is charged
according to the VAT Agreement,
whether at standard rate of 5% or at
zero rate. A deduction of input tax
can be claimed against the VAT
payable on taxable supplies.
Tax Group [Article 4; GCC VAT Agreement]:
Member states may allow two or more persons
that are residents of same state to register for VAT
as a TAX Group; such group shall be treated as a
single taxable person for payment and compliance
of VAT.
Reverse charge mechanism
[Article 1(18); GCC VAT
Agreement]:
A mechanism under which the
recipient of goods or services is
required to pay VAT instead of
the supplier, when the supplier is
not a taxable person in the
member state where the supply
has been made.
Exempted Supplies [Article 1(27); GCC VAT
Agreement]:
Supplies on which no tax is payable and for which
deduction for input tax cannot be claimed.
Definition of ‘’Supply’’
The supply of goods or services......
It is important to establish whether a taxpayer is supplying goods or services since there are different rules applying to
each for the purposes of determining where and when the supply takes place.
Goods
Services
The passing of ownership of physical
property or the right to use that property as
an owner, to another person.
Anything which is not a supply of goods is
a supply of services.
VAT Groups-Registration
 Each Member State may treat the Tax Group as a single Taxable Person
 Two or more persons carrying on a business are able to apply for a single “Group” VAT registration where
 Each person has a place of establishment or affixed establishment in the GCC member country e.g. KSA
 The persons are “related parties” and
 Either one person controls the others, or two or more persons form a partnership and control the others
Two or more persons carrying on
a business(subject to grouping
conditions)
VAT group-for VAT purposes
the persons are now treated as
single taxable person
VAT Groups-Registration
 Effect: Entities within the VAT Group are treated as one entity for VAT purposes
 Results:
 supplies made between members of a VAT group are disregarded from VAT(i.e. no VAT is due on the
supplies)
 Supplies made by the VAT group to an entity outside the VAT group are subject to normal VAT rules
No VAT
implications
Company A
Company B
Sales + VAT
Company D
No VAT implications
Company C
Place of Supply
Place of supply rules will determine whether a supply is made in the KSA or outside
the KSA for VAT purposes:
• If the supply is treated as made outside the KSA: no VAT will be charged
• If the supply is treated as made in the KSA: VAT may be charged
Goods
•
Basic rule: the place of supply is the location of
goods when the supply takes place
• Special rules, for example:
 Cross-border supplies – that is supplies which
involve parties in different countries
 Water and energy
Services
• Basic rules: the place of supply is where the supplier
has the place of residence
• Special rules, for example:
 Cross-border supplies of services between businesses
 Electronically supplies services – where services are
used of enjoyed
Reverse Charge (Or self assessed VAT)
KSA
ServiceCo
Company X
Service flow
•
Reverse charge rules typically apply to services received from suppliers established outside the country
•
The recipient accounts for the VAT due on the supply on his VAT return (instead of the supplier)
•
The VAT accounted for by the recipient is deductible as input VAT on the same VAT return
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Place of Supply
Reverse charge mechanism - example
Legal Advice
KSA
SAR 10,000 + 5% VAT
The law firm
declares SAR 500 as
tax collected
UK
Legal Advice
KSA
SAR 10,000 + 5% VAT
The company
declares SAR 500 as
input tax paid to
the law firm which
is recoverable
The UK firm is
not registered
in the KSA and
files no return
International Border
KSA
The company declares
SAR 500 as input tax
and SAR 500 as output
tax. This is reverse
charging
Net result of Reverse Charging = puts local and international suppliers on
the same footing
Impact of VAT- Illustration
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Example 1 – Fully Taxable Business
• 70% of exports
sales subject to
0% VAT
• 30%
sales
subject to 5%
VAT
• Purchases and
imports subject to
5% VAT
• Entitlement to
claim input VAT
= 100% of input
VAT
Sales
1000
VAT Return
Taxable Supplies
Costs
VAT due on sales (30% of 100)
VAT due on reverse charge
(Services from Abroad 10)
Total due
5
20
25
15
500
Local
VAT deductible on purchases
200
purchases/imports
VAT deductible reverse charge
100
Salaries Services from
Total Deductable
30
Net amount Refundable
(10)
5
abroad
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VAT Records –Normal requirements
 VAT records must be kept for a period of 5 years.
 Records may be kept on paper or electronically.
 Records must be accurate, complete and readable.
Examples of records that need to be kept
1. Copies of all issued invoices
2. Originals of all received invoices
3. Debit or Credit notes
4. Import and Export records
5. Records of any goods given for free or allocated for private use
6. Records of all zero-rated or VAT exempt supplies and purchases
7. A VAT General Ledger Account
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VAT Return example
• Self-assessment
system
• Businesses submit a
regular VAT return
to the Tax
Authority
• Must report all VAT
on sales and
purchases made in
the period, including
intra-GCC
transactions
• Calculate the Net
VAT amount and
either pay or get a
refund for this
amount
VAT Return
For the period
31-Jan-18
VAT on Sales
1
x
VAT due on acquisitions from other Members States
2
x
TOTAL VAT Due (sum of Boxes 1 and 2)
3
x
LESS : VAT reclaimed on purchases and
other inputs (including acquisitions from the
GCC)
NET VAT to be paid to Tax Authority
4
x
5
x
Total value of sales and all other outputs excluding any VAT
6
X
Total value of purchases and all other inputs excluding any VAT
7
x
Total value of supplies of goods and related costs, excluding any VAT, to other
GCC Member States
8
x
Total value of acquisitions of goods and related costs, excluding any VAT, from
other GCC Member States
9
x
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Questions?
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Special thanks to my teacher Kahlid Petiwala
Presented by
Syed Asif Zaman
ACA, AAIA, FPFA, CISA, MBA, B.Sc
Managing Partner Ahmad Alagbari Chartered Accountants
President ICAP – UAE Chapter
Mobile : +971 55 4568555
Email : [email protected]
Web : www.aaa-cas.com
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