Historically, the Gulf countries have relied on huge revenues derived from the sale of oil to finance their activities. This has allowed them to operate within a largely tax-free regime, whereby no VAT system existed.
In recent years however, the value of oil has reduced significantly, and subsequently revenues have reduced dramatically. This has now led to the proposed implementation of VAT throughout the region.
Which countries are involved?
All Gulf Co-operation Council (“GCC”) countries will implement a VAT system. These are United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain.
Whilst the draft framework has been approved by the GCC states, the country specific legislation is not anticipated to be released until Q3/4 of 2017.
Implementation is planned to begin in January 2018, although this may be staged by business type, turnover etc. and some states may be ahead of others in terms of implementation. At this time, it is thought that both Saudi Arabia, and United Arab Emirates will almost definitely be ready to launch VAT in January 2018.
How will VAT operate?
As the legislation is not yet available it is impossible to say conclusively, however based upon details of the framework, together with statements from authorities within the Gulf countries, it seems that the system will be broadly similar to the EU VAT system.
VAT will be applied upon each transaction within a chain, and businesses will be required to account for output tax whist also being able to recover input tax incurred. The aim is for the end customer to bear the VAT cost.
It is widely expected that the VAT rate will be 5% in each country, with no reduced rate as in the EU. However, a number of exemptions will be introduced, and these are thought to be applicable to healthcare, food, and financial products, amongst other items.
Once registered for VAT, businesses will need to submit periodic returns to the tax authorities. Early indications show that this may be through electronic submission.
Considerations for businesses
Any entities which are active within the Gulf market, and make supplies of goods or services will need to consider these changes carefully.
Businesses will need to consider what changes are required to their systems, pricing, and contracts for both sales made, and expenses incurred, and will need to ensure that processes are in place to ensure VAT compliance in each country going forward.