GCC countries signed VAT agreement

Saudi Arabia provided its approval to the Gulf Cooperation Council’s (GCC) unified agreement to implement VAT on 30 January 2017, and this was followed by an announcement by the Bahrain minister of finance who confirmed Bahrain signed the agreement on 1 February 2017.  Now all six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) have signed the agreement, paving the way for the introduction of VAT throughout the GCC in 2018.

The next steps are for local implementing laws to be agreed in each country.

Businesses having operations in the GCC countries will be impacted by the introduction of VAT, which will represent a fundamental change to business operations in a region with little history of taxation.

What is Value Added Tax?

Value Added Tax (or VAT) means a tax on supply of goods or services, or both. It’s an indirect tax, occasionally it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.

VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.

VAT in UAE

To fully comply with the UAE VAT law, businesses may need to make some changes to their core operations, financial management and book-keeping, technology, and perhaps even their human resources.

It is essential that businesses try to understand the implications of the new taxes and make every effort to align their business model to government reporting and compliance requirements.

Any company or businesses which provide taxable goods or services with annual revenue of more than Dh375,000 are required to register for it. Those with taxable supplies below Dh375,000 but over Dh187,500 will have the option to register for it.

The definition of business embraces most forms of activity and includes any activity conducted regularly or on an ongoing basis, e.g. industrial, commercial, professional, trade, etc.

For the purposes of understanding whether a registration obligation exists, a taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%. Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the UAE.

It is important to understand any potential obligations you or your business may have under the UAE VAT Law. The responsibility lies with the business to make sure that any required compliance obligations are fulfilled.

The FTA does have the power to conduct audits on taxable persons and subsequently impose penal measures on those that are not compliant with the law.

VAT Rates in UAE

In the UAE, VAT will be levied at a rate of 5% on most goods and services, although there will be some exceptions.

End-consumers generally bear the VAT cost in the form of a 5% increase of most goods and services they purchase in the UAE, while VAT registered businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

VAT at 0% in respect of the following categories:

• Exports of goods and services to outside the GCC States that implement VAT
• International transportation, and related supplies
• Supplies of certain sea, air and land means of transportation (such as aircrafts and ships)
• Certain investment grade precious metals (e.g. gold, silver, of 99% purity)
• Newly constructed residential properties, that are supplied for the first time within 3 years of their construction
• Supply of certain education services, and supply of relevant goods and services
• Supply of certain Healthcare services, and supply of relevant goods and services

 Categories of supplies exempted from VAT:

• The supply of some financial services
• Residential properties
• Bare land
• Local passenger transport

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the UAE government. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of any UAE government entity.