Value Added Tax (“VAT”) is a tax payable on consumption and is implemented across the Member States of the Gulf Cooperation Council (“GCC”).
In an attempt to achieve economic integration in the region, the Unified GCC VAT Framework Agreement (the "Agreement") was published by the Kingdom of Saudi Arabia in April 2017.
The Agreement provides a broad framework of how VAT is to be applied by the GCC members on supplies of taxable goods and services, however most of the detail is to be found in the individual VAT laws and regulations of each of the GCC Member States.
In this article, we will deal with some of the provisions of this agreement, and the reality of its application in the countries of the Cooperation Council for the Arab Gulf States.
Member States of the GCC
The members are the United Arab Emirates, the Kingdom of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar, and the State of Kuwait.
Implementation of the Agreement
In accordance with Article 78 of the Agreement, it shall be approved by the Supreme Council, ratified by the member states in accordance with their constitutional procedures, and shall be enforceable according to the following:
- The agreement shall come into force upon delivery of each member state’s second ratification document to the GCC General Secretariat.
- Each member state must take the required internal measures to issue local legislation to affect the provisions of the Agreement, including the implementation of the necessary policies and procedures.
- Each member state shall remain outside the scope of the Agreement until the date on which the aforementioned local legislation law comes into force.
Key Aspects of the Agreement
The following are the most important features of the Agreement:
- VAT will apply to taxable goods and services at a standard rate of 5%;
- VAT registration UAE will be compulsory for those businesses with an annual turnover exceeding AED 375,000;
- Businesses with an annual turnover of between AED 187,500 and AED 375,000 will have the option to register for VAT voluntarily;
- Taxpayers will be permitted to deduct input tax incurred whilst making taxable supplies;
- Medical equipment and supplies shall be zero VAT rated.
- Although food products shall be subject to the standard VAT rate of %5, each individual GCC members state will have the option to apply a zero VAT rate to food specified on the unified food list, for example bread, milk etc.
- The individual member states shall have the discretion to decide on the VAT treatment of certain sectors, including education, real estate, local transport and healthcare, i.e., whether such sectors will be subject to standard VAT, zero VAT, or exempt.
- Financial Services is exempted from VAT in terms of the Agreement; however, the individual states will have the discretion to elect a different VAT treatment for financial services.
- The individual members states shall have the discretion to decide whether the oil, gas and oil derivatives sector will be subject to the standard or zero VAT rate.
- Intra-GCC and international travel shall be zero VAT rated.
- Export of goods outside the GCC territory shall be zero VAT rated.
- VAT levied on imported goods shall be paid at the first point of entry into the GCC.
- Taxable supplies from a Taxable Person in one GCC member state to a Taxable Person in another member state will be subject to the reverse charge mechanism, i.e., the Taxable Person in the destination state shall be liable for payment of the VAT due.
- Two or more legal entities resident in a member state may apply for the formation of a VAT group.
- Each individual state will have the discretion to prescribe the VAT treatment for its Free Zones.
VAT Exemptions
In addition to the aforesaid, pursuant to Article 30 of the Agreement, the member states have the discretion to exempt certain taxpayers from paying tax on goods and services received in the state by applying either zero-rating or exemption. These categories include:
- Governmental entities or institutions (as determined by the member state).
- Charitable Organisations or Public Benefit Entities (as classified by the member state).
- Companies that have been exempted under agreements or companies hosting international events.
- The citizens of the member state when constructing homes for their own, private residential use.
- Farmers and fishermen who are not VAT registered.
Co-Operation between Member States
The Agreement further provides that member states shall take the necessary measures required to facilitate administrative cooperation between them, primarily in respect of the following:
- Sharing information needed to determine the correctness of the tax, as requested by each member state;
- Agreeing to conduct audits concurrently and in partnership with any member state based on the approval of the concerned state;
- Assisting with the collection of tax.
Applying VAT in the UAE
The United Arab Emirates utilises the funds found in government budgets to establish, develop and improve infrastructure, facilities, road networks, health services, and other public services that are used to the benefit of and in the best interest of its citizens and residents.
However, the standard VAT rate of 5% was introduced in the UAE on 1 January 2018 which in turn provided an additional revenue stream for the state, thus ensuring the continued provision of high-quality public services in the future.
The Federal Tax Authority is the authority responsible for the regulation and implementation of VAT in the UAE.
VAT in Bahrain
The Kingdom of Bahrain adopts flexible policies in its commercial markets and was the third country, after the UAE and the Kingdom of Saudi Arabia, to implement a VAT regime in early 2019 by its signature of the Agreement.
VAT in Bahrain is governed by Decree 48 of 2018 Regarding VAT. The Arabic version of the VAT Law was published in October 2018 after both the Shura Council and Parliament voted for the VAT Law to be implemented in 1 January 2019 as mentioned above.
The National Bureau for Revenue is the regulatory authority in Bahrain responsible for the collection of taxes, the performance of audits, the hearing of complaints and the general management and implementation of tax compliance in Bahrain.
VAT in the Sultanate of Oman
The Sultanate of Oman implemented a standard VAT Rate of 5% by royal decree. This standard VAT rate is imposed on most goods and services with certain exceptions provided for sectors such as health and medical care, the education sector, and financial services, food and supplies for its disabled citizens.
VAT in Saudi Arabia
The Kingdom of Saudi Arabia (“KSA”) was among the first countries to adopt the Agreement in 2016, and from the outset committed to applying VAT at a standard rate of 5 %. However, recently in accordance with the royal decree amending Article (2) of the Tax Law, the VAT rate increased to 15% on all taxable goods and services.
The Tax Authority in the KSA is the General Authority of Zakat and Tax (GAZT) and is the entity responsible for the regulation and implementation of VAT in the kingdom.
