VALUE ADDED TAX (VAT) IN THE GCC
In the backdrop of lower oil prices and slower than expected economic growth coupled with the geo-political situation, the countries comprising the Gulf Cooperation Council (GCC) are gearing to bolster government revenues from non-oil/gas based sources. Measures so far taken by the various GCC countries include raising corporate income tax rates, limiting corporate income tax exemptions, widening scope of withholding taxes, cutting down subsidies etc. One important decision taken by the GCC Supreme Council is the adoption of the “Unified VAT Agreement for the Cooperation Council for the Arab States of Gulf” (the “Framework”), which provides for uniform imposition of VAT at a standard rate of 5% by all GCC countries. Timely implementation of VAT across the GCC countries is expected to give a significant boost to government revenues and help them trim their widening budget deficits.
So far, Saudi Arabia and UAE have notified their VAT law which will be in force with effect from 1 January 2018. Oman is also working on developing the Oman VAT law and the requisite infrastructure, recruitment and training of staff for VAT. Following is a brief summary based on the Framework.
VAT is levied on the sales value of goods and services supplied by businesses, and is collected from the customers (Output VAT). Correspondingly, businesses will pay VAT on the goods and services they buy from their vendors (Input VAT).
The Net VAT (Output VAT less Input VAT) represents the VAT on the value addition undertaken by the business along with the profit element, and is to be paid/claimed by the company to/from the designated tax authority. The three categories of VAT rates are given below:
|Standard rate||VAT at 5% of sales/revenue for supplies/services. In this case, the input VAT paid by the business is deductible from the output VAT (subject to certain conditions), and so generally the VAT would not be a cost/expense for the business.|
|Zero rate||0% VAT on sales/revenues for supplies/ services. In this case, the input VAT paid by the business is deductible from the output VAT and VAT refund can be claimed (subject to certain conditions), by the business from the designated tax authority, and so generally, the input VAT would not be a cost/expense for the business.|
|Exempt||Supplies/services on which VAT is not charged, and for which related input VAT is not deductible. Consequently, such input VAT would be a cost/expense for the business.|
VAT rates, as may be applicable to the various business activities and services, are given below based on the Framework:
|Standard rate (@5%)|
|Supplies of products and services (other than zero rated and exempt category) e.g.
|Gold, silver and platinum jewellery|
|Sale of capital assets|
|Sale or lease of commercial properties|
|General insurance services|
|Fee-based financial services|
|Zero rate (@0%)|
|Exports & re-exports of products/services outside GCC (* see note below)|
|Oil and gas sector & petrol derivatives|
|Food products (notified)|
|Medicines, medical equipment and notified healthcare services|
|Intra-GCC and international transport of goods and passengers|
|Supply of transport means & its repair, maintenance etc.|
|Pure gold (24k), silver & platinum held for investment purpose|
|Supplies to/within free zones|
|Sale and lease of new residential properties (i.e. within three years of construction)|
|Notified educational services|
|Financial services by banks and financial institutions|
|Local passenger transport|
|Sale of bare land|
|Sale and lease of old residential properties (i.e. after three years of construction)|
|Life insurance services|
|Margin-based financial services|
* In case of exports and re-export of products/services within GCC, a supplier will not charge VAT in its sale invoice. However, the importer will have to pay applicable VAT directly to the local government under reverse charge mechanism.
VAT is to be computed on the sales value (viz., the fair market value) of goods and services supplied (customs value in case of imports) including all expenses such as freight, and taxes, other than VAT, such as custom duty and excise duty. The supply value shall be reduced by discounts/ deductions granted to customers, reduction in supply value, total/partial cancellation or rejection of supply, and bad debts.
Point of Taxation
Generally, the point of taxation (when VAT will be levied) is the earlier of the following events (except in special circumstances): a) Date of payment b) Date at which goods are made available or services are rendered/completed c) Date of issue of VAT invoice
An importer has to pay VAT directly to the Government at the time of import of goods and services from outside the GCC territory or from other GCC member states although the supplier has not charged VAT. VAT paid under reverse charge will be eligible for input VAT credit as per applicable rules.
The threshold annual turnover for mandatory VAT registration has been fixed at USD 100,000 equivalent, whereas for voluntary registration, the threshold annual turnover has been set at USD 50,000 equivalent. Businesses whose annual turnover is less than USD 50,000 equivalent cannot register for VAT.
Records and documentation
Amongst others, the following are the important records to be maintained by companies for VAT compliance:
1.Copies of all sales invoices issued;
2.Originals of all received suppliers’ invoices. In absence of original invoice, input tax credit will not be allowed;
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.Records of goods and services purchased and for which the input tax was not deducted;
8.Records of adjustments or corrections made to accounts or tax invoices;
9.VAT general ledger accounts;
Returns Due dates for filing of VAT returns, time limits for modifying VAT returns, procedures to file VAT returns, time limits for VAT payment and assessments, etc., will be notified by respective GCC member states in due course. The UAE has notified that VAT returns may have to be filed quarterly using e-services, within 28 days from the end of the designated quarter.
Amongst others, following are the important areas where companies should carefully focus for smooth and effective VAT implementation:
- Reviewing long-term contracts and striking consensus with suppliers and customers to incorporate impact of VAT on transactions;
- Analysing the impact on cash flows as VAT is payable on accrual basis (i.e., on supply of goods/services) whereas collection of VAT from customer will be deferred up to the end of the credit period;
- Reviewing costing methods and pricing structures;
- Ensuring proper VAT classification of various products and services;
- Collecting the Tax Identification Number (TIN) of suppliers as well as customers in advance as it is crucial for claiming input tax credit and preparation of VAT invoices;
- Ensuring that all suppliers’ invoices for goods/services are in the name of the business and not of a related party, to avoid disallowance of input tax credit;
- Ensuring suitable changes to Information Technology systems so that it can generate various VAT-compliant documents and records, and the VAT return;
- Imparting proper staff training and awareness;
- Integrating VAT compliance with management reporting and exception reports;
- Appointing a VAT leader responsible to guide, co-ordinate and ensure effective VAT implementation and compliance.
Whilst implementation of VAT would, to some extent, increase prices and inflation, looking from a broader macro perspective, it will help the GCC countries to strengthen their economies by significantly increasing their revenues and also assist in diversifying revenues away from oil/gas. As the VAT implementation is very near to reality and the VAT laws have been notified by couple of GCC countries, it is essential that companies undertake an “Impact Assessment” to identify the impact and implications of VAT on their business, conduct “Staff Training Sessions”, and ensure timely “Implementation Efforts” to ensure compliance with various reporting and regulatory requirements.