The sharp decline in global oil prices has significantly impacted the revenue of energy-exporting countries in the Middle East and created a budget deficit. In a move to diversify its revenue source and boost the economy, the GCC (Gulf Cooperation Council) has decided to introduce a VAT (Value Added Tax) system in the 6 gulf countries: Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and UAE
On 1st January 2018, Saudi Arabia (also known as KSA) and the UAE became the first two countries of the GCC to end the proud regime of tax-free living and levy a 5% VAT on most goods and services.
VAT concept and general principles
Value Added Tax (VAT) is an indirect tax, which is determined by the value of the item at the various stages of its production, distribution and sale. The 5% VAT in the GCC is being applied on most goods and services, except a few that are exempted from the VAT.
Like most VAT systems the VAT is charged at the time of the purchase of goods or services rendered and as in most countries, if you are a VAT registered buyer then you can deduct the amount of VAT paid when declaring your local tax filings.
The VAT is charged on the sales/export of goods and services.
The list of supplies on which VAT is not charged by the authorities.
The list of supplies where the VAT rate is zero and hence no VAT is charged.
Standard Rate Supply
It refers to a taxable supply whereby VAT is charged at the country’s standard rate, in the case of the KSA and the UAE the standard rate is 5%. All goods and services that are not exempted or zero-rated fall under this category.
Reverse Charge Mechanism (RCM)
The buyer of the goods and services is liable to report the VAT instead of the entity supplying the goods. The UAE and Saudi Arabia have both implemented the reverse charge mechanism. This means corporate buyers who are residents of the UAE and KSA shall report the VAT on the various goods and services they purchase which fall under this mechanism.
For the complete list refer to the Federal Decree-Law no. (8) of 2017 on Value Added Tax
6 points you must know to ensure proper VAT compliance and avoid fines
The new VAT system will impact all local companies in the UAE and the KSA as well as the selling price of their goods and services. Here are the key points you must know to ensure proper VAT compliance.
1. Accountable tax authorities have been formed in both countries to manage the new regime; the Federal Tax Authority (FTA) in the UAE and the General Authority of Zakat and Tax in Saudi Arabia (GAZT).
2. It is mandatory for businesses established in the GCC with an annual revenue of more than AED 375,000 /SR 375,000 to be registered for VAT. Companies with a revenue threshold of AED 187,500/ SR 187,500 have an option of voluntary registration.
In Saudi Arabia, if a company is not registered to pay VAT, a penalty equivalent to double the amount of VAT payable will be charged. On the other hand, in the UAE the fine for not registering is AED 20,000.
3. Suppliers who do not make supplies that are taxable under the 5% standard rate can ask for an exception from registration and are not required to submit tax returns.
4. All businesses are required to keep an up to date record of all their financial transactions. All their sources of income and related costs should also be documented.
Failure to do so can lead to a fine of AED 10,000 in the first instance and AED 50,000 in case of repetition in the UAE. In Saudi Arabia, a penalty equivalent to SR 1,000 or 2% of the average value of the monthly VAT supply, whichever is higher will be levied.
5. All VAT registered businesses must disclose the VAT amount charged and the VAT amount paid to the tax authorities. The formal report has to be submitted online.
In Saudi Arabia, the erroneous filing of a VAT return will be penalized for not less than 50% of the undeclared net VAT amount. In the UAE, it will result in a fine of AED 3,000 for the first time and AED 5,000 in repeat cases.
6. Businesses under the same ownership and that are located in the same GCC country can register the entity as a VAT group. They will be allocated a single tax number and need to submit only one VAT Return for the group to the authorities. Additionally, any transactions between the companies of the same VAT group are exempted of tax.
What is the impact on businesses and what measures should you take?
The introduction of VAT will heavily impact businesses in Saudi Arabia and UAE and they need to take proactive measures to prepare for the new system.
Sales and marketing
Companies will have to change their pricing strategies, which in turn, can affect the demand for the goods and services and may affect their profit margins if businesses try to absorb the vat by reducing the net sales price.
Companies will have to ensure all existing and new business contracts, invoices and accounting comply with the new laws and regulations.
All of the IT systems will need reviewing and will have to be updated for VAT compliance.
The human resources in a company as well as the government staff will need to be trained and qualified to be ready and comply with the new system.
All companies will have to register for VAT and be compliant with the VAT systems. This will not only impact cash flow but will also demand finance departments to be more vigilant regarding their input and output VAT liabilities.
The VAT refund scheme in the GCC
The GCC has designed a scheme for business visitors to claim back the VAT on various expenses incurred, which is similar to the VAT refund process followed by the European Union.
- As of now, the Federal Tax Authority (FTA) in the UAE and the General Authority of Zakat and Tax in Saudi Arabia (GAZT) have announced that foreign businesses can claim back the VAT incurred on some services. Even though VAT has been charged since the beginning of 2018, not all details and procedures for reclaiming back the VAT have been announced.Based on communications with the Ministry of Finance, businesses will be able to reclaim the VAT charged on hotels, car rentals, exhibitions, conferences and training courses. However, services like marketing, consulting and legal fees will most likely not incur VAT. The rules for VAT refund on food, restaurants and business entertainment are yet to be defined.
Services for which VAT may be refunded in Saudi Arabia and UAE
|Exhibition Trade Fairs||➧||➧|
|Travel (Taxi, Public)||–||–|
➧ = Refundable
⧪ = Restrictions apply
⧬= Refundable, reduced VAT rate applies
🔺= VAT exempt/zero rated (reverse charge rule applies)
– = Not applicable
- At present, UAE and Saudi Arabia are the only GCC nations that have initiated the VAT system but this will not prevent the other GCC states reclaiming the VAT from the UAE or the KSA.
- Countries eligible for VAT refund from GCC
Companies from the UAE and the KSA have always been allowed to reclaim VAT back from many of the EU member states; those member states who do not apply the rule of reciprocity. Although not confirmed we expect that the UAE and the KSA will reciprocally return the VAT to companies registered in these EU member states. They are:
- Bosnia & Herzegovina
- Countries NOT eligible for VAT refund from GCC
The following countries require a reciprocal agreement to refund VAT and they have not previously given back VAT to companies from UAE and Saudi Arabia. However, if the ministries of these countries establish reciprocity with the individual governments in the GCC, businesses from both countries can claim back the VAT. .
- Czech Republic
- South Korea
- There is still ambiguity and not a lot of information provided by the ministries regarding the refund procedures and reciprocity. Businesses are thus advised to keep all their original 2018 receipts and invoices from the UAE and Saudi Arabia until we can further advise on the whole refund process.
What should businesses know about claiming VAT refunds in the GCC?
- Although the other four Gulf counties were originally to introduce VAT in 2019, it appears they will be delayed and implementation may well take place at different times.
The experts suggest Kuwait will not implement VAT before 2021, but will introduce an excise tax on selected products such as tobacco, energy drinks, and carbonated drinks.The officials in Bahrain are expecting the implementation of VAT by the end of 2018. After the political disputes between Qatar and other GCC states, it is uncertain if or when will VAT be implemented in Qatar.
- To claim VAT in the GCC, the business entity claiming a refund must be a Taxable Person.
- Businesses must have the necessary documentation proving VAT has been charged(e.g. valid tax invoice).
- VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
- The minimum amount claimed by the business entity must reach:
- 2000 UAE Dirham (AED) ; approximately €450
- 2000 Saudi Riyal (SR); approximately €450
- Businesses can submit a VAT claim 6 months after the end of the calendar year in which an invoice is dated. For example, an item bought and invoiced in 2018 must be submitted to the tax authorities by 30 June 2019.
- Returns are expected to be filed through an online filing platform. As per the tax authority guidelines the claim form for businesses shall contain the following details:
- Name and address of the claimant company
- Nature of the business activities of the foreign claimant company
- The VAT registration certificate of the foreign entity issued by the competent authority in the country of established
- Description of the expenses and the reasons for incurring the expenses in the GCC during the period of the claim
- Description of activities undertaken in the GCC by the foreign entity
- The claim shall be accompanied by the related invoices and/or other evidence as may be required by the authorities
- Applications for VAT refund will be subjected to verifications by the authorities to ensure claims are correct and in accordance with the new legislation and procedures. . Once a claim is approved, the authorities will deposit the accepted amount , in the bank account indicated by the taxable person within 60 days of the decision.
Determining the vatable transactions and initiating the VAT process is just the first step for UAE and Saudi Arabia. It appears still a long way to go until all the systems and procedures are in place and streamlined. There are still many questions to be answered regarding the procedure for applying for VAT refunds through an electronic system by claimants or their VAT refund agents. We are closely monitoring all GCC VAT releases and together with our local partner we are working with the authorities to ensure our clients can correctly reclaim their VAT in time. stay tuned.
United Cash Back is a global leader in cross-border VAT recovery and foreign VAT advisory. With new countries implementing VAT and new systems and procedures being implemented, we can assist your business maximise its VAT back whilst staying VAT compliant and submitting accurate VAT claims. Connect with us today!
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