{"id":14242,"date":"2017-11-21T06:58:20","date_gmt":"2017-11-21T06:58:20","guid":{"rendered":"http:\/\/www.alj.com\/en\/?post_type=news&p=14242"},"modified":"2022-05-02T05:32:46","modified_gmt":"2022-05-02T05:32:46","slug":"vat-securing-financial-future-gcc","status":"publish","type":"news","link":"https:\/\/alj.com\/en\/news\/vat-securing-financial-future-gcc\/","title":{"rendered":"VAT: securing the financial future of the GCC"},"content":{"rendered":"

As 2018 fast approaches, businesses across the Gulf Cooperation Council (GCC) are preparing for one of the biggest taxation changes to ever be introduced in the region – the introduction of VAT.<\/p>\n

When the six member states of the GCC \u2013 Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates \u2013 signed a VAT Framework Agreement in early 2017, they confirmed a new phase in the region\u2019s economic development.<\/p>\n

VAT (Value-Added Tax) or its equivalent, Goods and Services Tax, or General Sales Tax (both often abbreviated to GST) is already common in most of the world\u2019s major economies.\u00a0 Of the United Nations\u2019 193 member states, 153 (79%) have implemented VAT to date.\u00a0<\/p>\n

Globally, VAT rates range from 5% in Canada through to 25% in Portugal.\u00a0 The GCC\u2019s rates will match Canada\u2019s, with a 5% rate being introduced on goods and services.\u00a0<\/p>\n

The decision by the GCC to introduce its own VAT regime is seen as a significant step towards modernization, providing additional government revenue that both protects against instability in oil prices, and brings the region into line with other major economic blocs, such as the European Union and North America.<\/p>\n

The UAE\u2019s Ministry of Finance states:\"\"<\/p>\n

\u201cVAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.\u201d[1]<\/strong><\/a><\/em><\/p>\n

What is Value-Added Tax?<\/strong><\/p>\n

VAT is an indirect or general consumption tax placed on the sale of almost all goods and services.\u00a0 It was first used in France and Germany in the mid-20th<\/sup> Century.\u00a0 Today, the OECD believes it accounts for 20% of global tax revenues[2]<\/a>.<\/p>\n

In the GCC, some products will have zero VAT, such as medicines and medical equipment. \u00a0Some services, too, such as the leasing of residential housing<\/a>, are exempt from VAT.\u00a0<\/p>\n

Businesses involved in any part of a supply chain must actively collect VAT.\u00a0 A VAT system works by applying a tax to each transaction.\u00a0 Businesses selling goods or services impose and collect VAT charges from their customers (known as \u2018output tax\u2019), while businesses buying goods or services pay VAT to their vendors or suppliers (known as \u2018input tax\u2019).\u00a0 Most businesses will both pay input tax and collect output tax.\u00a0 The details of these transactions make up a business\u2019s VAT returns, with the balance of the output tax minus the input tax being the overall figure owed to the tax authorities.<\/p>\n

Operational challenges<\/strong><\/p>\n

Although it is the final consumer who bears the ultimate cost of VAT, rather than the businesses in the supply chain, those businesses still act as collecting agents. \u00a0This is one of the major appeals of VAT, as it reduces the administrative burden on the state and \u201ccuts down on misreporting and tax evasion\u201d<\/em>[3]<\/a>.\u00a0<\/p>\n

However, the change will inevitably bring added uncertainty and operational challenges to businesses in the region. \u00a0Ratings agency Fitch warned that the introduction of VAT in GCC countries \u201cwill create risks for companies and put pressure on performance and cash flows<\/em>\u201d[4]<\/a>.<\/p>\n

In particular, it highlighted the costs associated with new training and procedures, reconfiguring IT systems, and the compliance costs of collecting and remitting the tax.<\/p>\n

In addition, it noted that companies that supply goods and services between GCC members, or that operate within or between free zones, could face additional complexities, as agreements between individual GCC members could vary.<\/p>\n

Implications for the business community<\/strong><\/p>\n

\"\"Saudi Arabian businesses are set to be the earliest in the GCC to face these challenges. The country is set to implement VAT from January 1, 2018, following approval of the implementation regulations in September by the Board of Directors of the General Authority for Zakat and Tax (GAZT), chaired by HE the Minister of Finance, Mohammed Al-Jadaan.\u00a0<\/p>\n

All Saudi businesses with annual revenues exceeding SAR 375,000 must register for VAT.\u00a0 Businesses with annual revenues between SAR 187,500 and SAR 375,000 have the option to register, if they wish.\u00a0 The deadline to register via the dedicated GAZT VAT website is December 20, 2017.\u00a0 Any companies that have not registered by then face a fine of SAR 10,000.\u00a0<\/p>\n

The 250 largest businesses in the country, already registered with GAZT for tax, are being registered automatically for VAT. \u00a0Small businesses with turnover below SAR 1 million have an additional year to register, i.e., until January 1, 2019, to enable them to ensure they are VAT-ready.<\/p>\n

The Governor of GAZT, His Excellency Suhail Abanmi, commented: “Businesses of all sizes have much to do to prepare for the introduction of VAT and GAZT is ready to support them through the process. Ensuring businesses understand the implications of VAT – and the steps needed to prepare – is a priority for GAZT.\u201d[5]<\/strong><\/a><\/em><\/p>\n

Financial penalties will be imposed on companies who are not VAT compliant.\u00a0 In serious cases, such as tax evasion, businesses face fines of up to SAR 1 million, two years imprisonment and other criminal penalties \u2013 in addition to a 200 per cent penalty.<\/p>\n

The threat of negative publicity, and the potential impact that could have on a business\u2019s investors and customers, is also expected to be a significant factor contributing to a widespread eagerness to ensure the transition to a VAT regime is as smooth as possible.<\/p>\n

VAT-registered businesses will need to document in detail every transaction in which they are involved.\u00a0 They must also take steps to ensure they complete VAT returns as required, and that their cash flow is managed appropriately in order to make quarterly VAT payments.\u00a0<\/p>\n

A report by specialist VAT consultants, The VAT Consultancy<\/em>, counsels that:<\/p>\n

\u201cThere is a systems challenge for corporates in terms of how they capture the correct information for reporting and invoicing.\u00a0 Certain GCC member countries rely on cheques and post-dated cheques as the main instruments for carrying out large corporate transactions in certain industries.\u00a0 Businesses will, therefore, need to fully understand the tax point rules and how to correctly book these transactions to ensure correct VAT reporting<\/em>.[6]<\/sup><\/a>\u201d<\/p>\n

VAT in Saudi Arabia<\/strong><\/p>\n

From January 1, 2018, all imports and supplies of goods and services in Saudi Arabia will be subject to VAT at the standard rate of 5%, although certain goods and services will be subject to zero rate or exempt.<\/p>\n

Among the main exemptions[7]<\/a> are:<\/p>\n