United Arab Emirates: GCC Releases VAT Framework

Last Updated: 21 July 2017
Article by Ashok Hariharan, Clare McColl and Rob Dalla Costa

The text of the GCC unified agreement for value added tax (VAT) has been published (in Arabic) by the Kingdom of Saudi Arabia.

Which countries make up the GCC?

  • The United Arab Emirates
  • The Kingdom of Bahrain
  • The Kingdom of Saudi Arabia
  • The Sultanate of Oman
  • The State of Qatar
  • The State of Kuwait

What is VAT?

VAT is a tax on the consumption of goods and services. It is charged and collected by a taxable person and remitted to the tax authority. A taxable person is a person, persons or entity that carries out an economic activity that requires them to be registered for VAT.

Why is the unified agreement important?

The unified agreement sets out the framework under which VAT can be implemented in each of the GCC member states. The framework includes agreement on certain matters but allows member states discretion on how to treat others.

Once the agreement is ratified, each member state can interpret the framework into its own local law and implement VAT. Some member states, notably the United Arab Emirates and the Kingdom of Saudi Arabia, have indicated an intention to implement VAT with effect from 1 January 2018. The framework allows for a basic rate of VAT of five percent as well as allowing for certain supplies of goods and services to be zero-rated or VAT exempt.

Who will the law apply to?

VAT will ultimately impact every business that supplies goods or services in the GCC. Businesses that make taxable supplies over the mandatory threshold must register with the relevant tax authority for the member state. There is scope for voluntary registrations. VAT registration requirements will also apply to non-resident entities. Additionally, there is scope to register multiple entities as a single VAT group, subject to conditions set out in the local laws.

What does the VAT framework cover?

The VAT framework comprises 15 chapters and 78 articles.

These include:

  • Definitions and general principles, including scope
  • Supplies within scope, including supplies of goods and services and deemed supplies
  • Place of supply of goods and services, including special cases
  • Importation
  • Due dates and calculation of taxable values
  • Provision for exempt and zero-rate supplies
  • Liability to pay VAT
  • Input tax credits and VAT refunds
  • VAT registration obligations
  • Tax invoices and the record retention requirements
  • VAT return completions and filing requirements
  • Settlements or refunds
  • Intra-GCC arrangements

What is the place of supply?

The place of supply determines where a supply takes place and therefore which member state's local VAT law is relevant.

The place of supply of goods is typically where they are placed at the disposal of the customer. The place of supply of goods provided with transport is the place where the transport starts. However, there are special rules that affect the place of supply for certain intra-GCC supplies of goods where the supply is to a VAT-registered entity in another member state.

The place of supply of services is the place where the supplier is resident. However, the place of supply of services provided to a taxable customer shifts to where the customer is resident.

There are special provisions for the place of supply of oil, gas, water and electricity, hiring means of transport, transport services for goods and passengers, services to real estate properties, the supply of telecommunication and electronically-provided services and supplies by restaurants, leisure and cultural facilities and sporting events.

What are taxable supplies?

Taxable supplies include all goods and services subject to either the basic VAT rate of five percent or the zero rate, including:

  • All goods and services (sales, transfers of ownership, disposals, leases, rentals and construction) used in business
  • Transfers of goods and services from and to other GCC countries
  • Transfers of goods and services from and to the rest of the world
  • Deemed supplies
  • The importation of goods and most services

What could be VAT zero-rated?

Zero-rated supplies include:

  • Medicines and medical supplies (a common list will be proposed by the committee of Health Ministers and endorsed by the Financial and Economic Cooperation Committee)
  • Certain foodstuffs (a common list will be ratified across the GCC by the Financial and Economic Cooperation Committee)
  • The oil sector and the oil and gas derivatives sector (at the discretion of each member state)
  • International and intra-GCC transport
  • Means of transport (at the discretion of each member state)
  • Supply outside the GCC (for example, exports)
  • Supply of precious metals for investment (gold, silver and platinum)

Additionally, each member state can zero rate or VAT-exempt:

  1. The educational sector
  2. The medical sector
  3. The real estate sector
  4. The local transport sector

What could be VAT-exempt?

Financial services performed by authorized banks and financial institutions will be VAT-exempt. Banks and financial institutions will have the right to a refund of input tax, based on refund rates determined at the discretion of each state. Each member state has the discretion to apply other tax treatments to the financial services sector.

The international practise in many VAT jurisdictions is to treat the education and medical sectors, the leasing of residential property and local transport as VAT exempt. However, this has been left to the discretion of each member state.

What are the consequences of making something VAT-exempt or zero-rated?

A VAT rate of zero is still a rate of tax and a taxable supply. A supplier of zero-rated goods or services is entitled to a credit for the VAT incurred on his or her costs. In sharp contrast, VAT exempt is not a rate of tax and not a taxable supply. As a consequence, suppliers of VAT-exempt supplies cannot claim credits on the VAT incurred on their costs. This will result in higher costs for VAT-exempt suppliers.

Will there be special treatment of VAT for specific categories or persons?

The framework agreement allows discretion for member states to provide special VAT treatments to certain categories of person, applying exemptions or refunds on tax incurred supplying:

  • Government organizations
  • Charitable organizations and public utility establishments
  • Companies hosting international events (exempted by agreements)
  • Citizens of a member state building their homes for personal use
  • Farmers and ¬fishermen not registered for VAT

What are imports and exports?

Imports are goods entering a GCC member state from outside the GCC. VAT is typically due on the importation of goods, however, there are special rules regarding, for example, the valuation of imported goods and goods under suspension.

Exports are goods leaving from the GCC. Exports are typically zero-rated but subject to certain conditions.

When is VAT charged? What is the time of supply?

Generally, the time of supply for VAT purposes is the earlier of the date of:

  • The supply of goods or services
  • The issue of a tax invoice
  • Receipt of a partial or full consideration

Who can deduct VAT?

A taxable person can deduct VAT incurred in carrying out taxable supplies from the VAT due on those taxable supplies. Evidence of VAT paid, typically a tax invoice, is essential. Each member state will adopt its own conditions for VAT deduction. For example, the UAE has suggested that VAT recovery for certain entertainment expenses maybe denied.

What happens next?

The framework provides sufficient information to begin planning for VAT, with introduction in some member states just months away. Local laws are likely to follow in the few months. Businesses should be planning and preparing now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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