Insight
VAT in the Gulf - What you need to know
August 2017
A Gulf Cooperation Council (GCC) agreement has confirmed the introduction of VAT in 2018 in all GCC Member States - Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman. What does this mean for businesses in the region?
The VAT Framework Agreement
The agreement broadly reflects OECD and EU VAT principles in terms of place of supply rules, reverse charging and treatment of input/output VAT. To a large extent, there will be universal GCC-wide regulation, but Member States will have considerable scope in terms of compliance regulation, zero-rating and exemptions.
The following principles are universal across all GCC jurisdictions:
- A standard rate of 5% will apply to all goods and services that are not zero-rated or exempt;
- VAT registration is mandatory for any business with turnover above SAR/AED 375,000 (approximately USD 100,000). Businesses turning over 50% of this may register voluntarily;
- Imports are subject to VAT at 5%, except where specifically exempt or zero-rated;
- Services delivered to 'taxable persons' from outside the GCC are subject to tax under the reverse charge mechanism.
The following are mandatorily zero-rated throughout the GCC:
- Exports to countries outside the GCC, as well as temporary imports
- Intra-GCC and international transport and transportation services
- Financial services
- Gold, silver and platinum
- Medical equipment and medicines.
In other areas, the application of exemptions or zero-rating is to be determined by individual Member States. The Framework Agreement also allows Member States considerable scope in terms of practical implementation and businesses' compliance obligations.
What happens next?
While simultaneous implementation had been mooted, the levels of preparedness in individual Member States make this unlikely. The UAE is expected to introduce its VAT regime from 1 January 2018. A draft VAT law has been approved in Qatar. Saudi Arabia is expected to implement its VAT regulation in Q1 2018, and Bahrain by mid-2018. There are, as yet, no public announcements from Oman and Kuwait.
What does this mean for businesses - and what should you be doing now?
Once specific tax collection and enforcement agencies are in place, the first steps for every business will be to:
- register for a Tax Identification Number (TIN)
- familiarise themselves with local VAT legislation and filing obligations
- make sure they know who to contact at their local tax authority.
In the meantime, businesses should develop a full understanding of the nature and operation of VAT, its likely impacts throughout the business, and the changes necessary to contracts, invoicing, IT, systems and staffing.
Whereas profits taxes are typically applied only at a company's year-end, VAT returns (and settlements) are normally required monthly or quarterly. Apart from the additional reporting and compliance burden, effective VAT management introduces other considerations: poor control over input and output VAT can have serious implications for cash flow, contracts and invoices need to reflect all VAT costs for clients, and IT and systems need to be fully adapted to accommodate these requirements.
Developing a viable VAT implementation strategy
Businesses should evaluate their existing systems and assess how far these can be adapted to meet the requirements of the new VAT regime.
- Review existing systems and processes: Remember, you will need to record (and reclaim) all VAT paid on goods and services you purchase; you will need to show all VAT due on goods and services you supply.
- Undertake an analysis of your full supply chain: It is important to identify any areas that might result in irrecoverable VAT.
- Pricing policy: Consider how you are going to adjust your pricing strategy to reflect what your clients and other end-users may perceive as a 5% price rise.
- Cash flow: You will need to make sure you have scope to meet VAT liabilities.
- Review contracts, invoicing and documentation: Make sure that all documents make reference to VAT charges. Make sure your accounting functions are adapted to record where VAT has been paid, and where it is charged.
- Personnel and training: Do you need to recruit an experienced professional with specialist VAT skills, or is it viable to re-train existing staff?
Smaller enterprises may not have the financial or personnel resources to undertake the level of preparation required. If that's the case for your business:
- At the very least, revise your accounts payable function to show VAT paid, and to reflect where VAT is and isn't due.
- If nothing else, make sure you can at least introduce manual accounting processes for VAT management, in the short term.
We can help
Russell Bedford member firms in Kuwait, Qatar, Saudi Arabia and the UAE can advise on the most immediate impacts of the new VAT regime, including contract reviews, invoicing and systems analysis, corporate restructuring, tax planning, and recruitment and staffing.