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 high-
potential growth markets in Africa and Asia, free-
trade zones, competitive labor costs, few trade
barriers and economic and political stability are all
factors which add to the regions appeal. In
addition, VAT will have a neutral impact on
registered businesses when managed effciently.

Implementing VAT will have implications for businesses In this presentation I will try to examines the
and new taxpayers, both in KSA and abroad, directly and GCC VAT Framework Agreement and reasons
/or indirectly. 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 GCC countries
between 2018 to 2019. The framework allows for a basic rate of VAT on United Arab Emirates
supplies of goods and services of 5%, as well as allowing such supplies to be Kingdom of Bahrain
zero-rated or VAT exempt depending ultimately on the domestic legislation of Kingdom of Saudi Arabia
each country.
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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Ahmad Alagbari Chartered Accountants 6
The fiscal break-even price of oil is the price that balances an oil-exporting countrys 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 Certain supplies of

passengers and goods and means of transport New residential
services related to such and related goods buildings
transport and services
VAT Liability
Planned zero rated supplies in the UAE (2/2)
Examples of Zero rated supplies include:

Newly Converted Educational

Charity related
residential services, in most
buildings
buildings cases

Exported goods Investment Healthcare service,

and services precious metals 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 Local passenger Residential buildings

financial services transport (other than zero- rated
supplies)

Bare land
Important concepts

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 SOME IMPORTANT CONCEPTS

Input tax [Article 1(22); GCC Meaning of taxable supply [Article Reverse charge mechanism
VAT Agreement]: 1(28); GCC VAT Agreement]: [Article 1(18); GCC VAT
Agreement]:
Tax payable by a taxable person on Supplies on which tax is charged
supply of goods and services according to the VAT Agreement, A mechanism under which the
received or on import of goods and whether at standard rate of 5% or at recipient of goods or services is
services for the purpose of zero rate. A deduction of input tax required to pay VAT instead of
carrying out economic activities. can be claimed against the VAT the supplier, when the supplier is
payable on taxable supplies. not a taxable person in the
member state where the supply
has been made.
Tax Group [Article 4; GCC VAT Agreement]:
Exempted Supplies [Article 1(27); GCC VAT
Member states may allow two or more persons Agreement]:
that are residents of same state to register for VAT
as a TAX Group; such group shall be treated as a Supplies on which no tax is payable and for which
single taxable person for payment and compliance deduction for input tax cannot be claimed.
of VAT.
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 Anything which is not a supply of goods is

property or the right to use that property as a supply of services.
an owner, to another person.
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 VAT group-for VAT purposes

a business(subject to grouping the persons are now treated as
conditions) 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 Services
Basic rule: the place of supply is the location of Basic rules: the place of supply is where the supplier
goods when the supply takes place has the place of residence

Special rules, for example: Special rules, for example:

Cross-border supplies that is supplies which Cross-border supplies of services between businesses
involve parties in different countries Electronically supplies services where services are
Water and energy 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 UK Legal Advice KSA
KSA
SAR 10,000 + 5% VAT SAR 10,000 + 5% VAT

International Border
The company
The law firm declares SAR 500 as The UK firm is The company declares
declares SAR 500 as input tax paid to not registered SAR 500 as input tax
tax collected the law firm which in the KSA and and SAR 500 as output
is recoverable files no return 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 VAT Return

sales subject to 1000 Taxable Supplies VAT due on sales (30% of 100) 15
0% VAT VAT due on reverse charge
(Services from Abroad 10) 5
30% sales
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subject to 5% Costs Total due
VAT 500 Local VAT deductible on purchases 25
Purchases and 200 purchases/imports VAT deductible reverse charge 5
imports subject to 100 Salaries Services from Total Deductable 30
5% VAT
abroad
Entitlement to
Net amount Refundable (10)
claim input VAT
= 100% of input
VAT

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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 VAT Return
Businesses submit a For the period 31-Jan-18

regular VAT return VAT on Sales 1 x

to the Tax VAT due on acquisitions from other Members States 2 x

Authority
TOTAL VAT Due (sum of Boxes 1 and 2) 3 x
Must report all VAT
on sales and LESS : VAT reclaimed on purchases and
other inputs (including acquisitions from the
4 x

purchases made in GCC)

the period, including NET VAT to be paid to Tax Authority 5 x

intra-GCC Total value of sales and all other outputs excluding any VAT 6 X
transactions 7 x
Total value of purchases and all other inputs excluding any VAT
Calculate the Net
VAT amount and Total value of supplies of goods and related costs, excluding any VAT, to other
GCC Member States
8 x

either pay or get a

Total value of acquisitions of goods and related costs, excluding any VAT, from 9 x
refund for this other GCC Member States
amount
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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 : saz@aaa-cas.com
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Web : www.aaa-cas.com