1. Highlights of GCC VAT Treaty and Reasons for Implementing VAT in GCC
By Syed Asif Zaman
On 17 May, 2017
5th Saudi- Pak Accounting Symposium
Riyadh, KSA

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Analysis of GCC VAT Agreement
ANALYSIS OF THE GCC VAT FRAMEWORK AGREEMENT
The Gulf region (including UAE & KSA), has long been considered an attractive and low-tax environment. However, to keep up with the changing economic landscape and as part of wider development reforms, the Gulf Cooperation Council (GCC) member states signed a framework agreement to introduce Value-Added Tax (VAT) on the supply of goods and services at a standard rate of 5%, in The Unified
agreement for VAT was published by Kingdom of Saudi Arabia on 21 April 2017.
Infrastructure development, access to high-potential growth markets in Africa and Asia, free-trade zones, competitive labor costs, few trade barriers and economic and political stability are all factors which add to the region’s appeal. In addition, VAT will have a neutral impact on registered businesses when managed effciently.
Implementing VAT will have implications for businesses and new taxpayers, both in KSA and abroad, directly and /or indirectly.
However, a broad-based VAT at low rate is unlikely to deter investment in the surrounding region, whose appeal stretches much further than its low-tax status.
In this presentation I will try to examines the GCC VAT Framework Agreement and reasons for implementing VAT in GCC.
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2 GCC Value-Added Tax (VAT)

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Background
BACKGROUND
The Unified Agreement for VAT of the GSCC, sets out the framework under which VAT can be implemented in each of the GCC member states. The framework includes agreement on certain matters and in addition, requires member states to mandatory implement local legislation whilst allowing discretion on how to handle other related issues.
Once the agreement is ratified, each member state must integrate the framework into local law and implement VAT. Ministry of Finance in KSA & UAE has announced plans to implement VAT by 1st January 2018, while some member states have indicated an intention to implement VAT some where between 2018 to The framework allows for a basic rate of VAT on supplies of goods and services of 5%, as well as allowing such supplies to be zero-rated or VAT exempt depending ultimately on the domestic legislation of each country.
GCC countries
United Arab Emirates Kingdom of Bahrain Kingdom of Saudi Arabia Sultanate of Oman
State of Qatar
State of Kuwait
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4. VAT Recent Developments
A common VAT framework
The GCC Member states have agreed on a common framework for the introduction of a VAT system in the GCC. A of the A Treaty is formal announcement. Upon ratification of the GCC Treaty, each Member State is expected to issue its own national VAT legislation based on the agreed common principles
VAT legislation
Each Member State will issue its own VAT legislation in accordance with the common principles outlined in the GCC Treaty. It is expected that some countries will issue VAT legislation is expect to be announced shortly in KSA & UAE.
VAT regulations
These regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT legislation is issued.
Go live
The introduction of VAT across the GCC is expected to take effect from 1 January 2018 in KSA & UAE. 4
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Reasons for Introducing VAT
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The fiscal break-even price of oil is the price that balances an oil-exporting country’s budget.
Different institutions and assessors provide varying estimates of the BEP (break-even price), leading to confusion in the minds of many who track the metric.
Below are the break-even oil-price-per-barrel estimates for GCC countries this year, as calculated respectively by the IMF
• Kuwait: $47.80 (IMF),
• Qatar: $55
• UAE: $60
• Saudi Arabia: $79.70
• Oman: $ 77.5
• Bahrain: $ 93.8
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The graph shows the deficit in GDP in
A GCC-wide VAT of 5% is already due to be implemented in 2018 and IMF estimates suggest this could raise as much as 1.5%–2% of GDP across the region.
There is plenty of scope for other tax measures to help close the fiscal. For instance, GCC economies have long been able to spare workers a personal income tax (typically the major contributor to government revenues in high-income economies).
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Another option is the broader application of corporation or profits tax. The highly-regulated nature of several GCC economies means that profits in some sectors are higher than in comparable economies. A broader application of this type of tax is therefore an obvious source of additional government revenue. But applying it to more competitive sectors could undermine companies’ ability to use retained earnings for investment and, therefore, economic diversification.
There are also logistical challenges posed by the implementation of a VAT or profits tax – both would require companies to invest substantially in accounting and financial management systems to deal with potentially complex taxes. This would be particularly burdensome for small and medium-sized enterprises (SMEs) which will be crucial to any successful diversification in the region.
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GCC VAT Treaty
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GCC VAT Mechanism
The question arises that whether the GCC VAT system is based on the EU model or the more modern systems found in the newer VAT implementing countries (e.g. Singapore or New Zealand). If we start by looking at comparators and the only comparator with a multi-country VAT system is the EU. So, for that reason, it has similarities with the EU VAT system. Similarities to the EU are principally around the intra-GCC movement of goods (and some services) between businesses (B2B) as well as to private consumers (distance selling provisions apply so that someone supplying goods over the VAT registration threshold to another country must register there). If you are familiar with the EU system then the ability to not charge VAT on many B2B supplies where your customer is VAT registered in another GCC country will be very familiar. Apart from this similarity GCC VAT system ceases to resemble the EU system (except mechanically in the way all VAT systems are similar) and begins to look more like more modern VAT systems. The primarily manifests is the limited number of exemptions and zero-rates and the very low standard rate – 5%.
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12. GCC VAT AGREEMENT STRUCTURE
The VAT framework comprises of 15 chapters and 78 articles
CHAPTERS
TITLES
Chapter one
Definitions and General Provisions
Chapter two
Supplies within scope of tax
Chapter three
Place of supply
Chapter four
Tax Due date
Chapter five
Tax Calculation
Chapter six
Exceptions
Chapter seven
Exceptions on Importations
Chapter eight
Persons who are obliged to pay tax
Chapter nine
Tax deduction
Chapter ten
Obligations
Chapter eleven
Special treatments of Tax refunds
Chapter twelve
Exchange of information between member state
Chapter thirteen
Transitional provisions
Chapter fourteen
Appeals
Chapter fifteen
Closing provisions
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13. Who will the Law Apply to?
VAT will ultimately impact every business that supplies goods or services in the GCC countries. In particular, businesses that make taxable supplies over the mandatory threshold, must register with the relevant tax authority. There is scope for voluntary registrations and VAT registration requirements will apply to non-resident entities. Additionally, there is scope to register multiple entities as a single VAT group, subject to conditions to be set out in the domestic legislation of each GCC country.

14. Policy choices available to the GCC Countries(1/2)
The following slides summarizes the policy areas which the GCC Countries have discretion to decide upon the approach to be taken;
VAT groups [Article 4,GCC VAT Agreement]
Application of exemption, or zero rating or standard rating of certain supplies [Article 29 (1),GCC VAT Agreement] relating to:
Health
Education
Real Estate
Local Transport
Application of the standard rate or zero rate to:
Oil & Gas [Article 29(2),GCC VAT Agreement]
Food [Article 31,GCC VAT Agreement]
Supply of a means of transport [Article 33,GCC VAT Agreement]

15. Policy choices available to the GCC Countries(2/2)
Exceptions to payment of VAT (or allowing refund) in special cases[Article 30,GCC VAT Agreement] in relation to:
Government bodies, Charities
Some companies in relation to international event hosting agreements
Citizens of a Member State constructing homes for private use
Farmers and Fishermen

16. Example of Policy choices available to the GCC Member Countries
Financial services-exempt or not [Article 36,GCC VAT Agreement]
Input tax deduction-Conditions [Article 44,GCC VAT Agreement]
Input tax apportionment methods [Article 46,GCC VAT Agreement]
Tax period [Article 60,GCC VAT Agreement]
Tax payment-date and method [Article 63,GCC VAT agreement]
Repayment/refund of tax [Article 65,GCC VAT agreement]
Tax refunds for international organization's and diplomatic bodies
-Conditions/limitations and the option to apply zero rating [Article 69,GCC VAT Agreement]

17. VAT liability Planned Zero-rated supplies in the UAE (1/2)
Zero – rated supplies are not subject to VAT – right to an input tax deduction on the corresponding expenses.
Should be applied strictly as they are an exception to the normal rule that VAT should be charged.
Examples of zero – rated supplies include:
International transport of passengers and goods and services related to such transport
Certain supplies of means of transport and related goods and services
New residential buildings

18. VAT Liability Planned zero – rated supplies in the UAE (2/2)
Examples of Zero – rated supplies include:
Newly Converted residential buildings
Charity related buildings
Educational services, in most cases
Exported goods and services
Investment precious metals
Healthcare service, in most cases

19. VAT Liability Exempt Supplies in the UAE
Exempt supplies are not subject to VAT-no right to an input tax deduction on the corresponding expenses.
Exemptions should be applied strictly as they are an exception to the normal rule that VAT should be charged.
Examples of exempt supplies include:
Some specific financial services
Local passenger transport
Residential buildings (other than zero- rated supplies)
Bare land

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Important concepts
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21. SOME IMPORTANT CONCEPTS
Input tax [Article 1(22); GCC VAT Agreement]:
Tax payable by a taxable person on supply of goods and services received or on import of goods and services for the purpose of carrying out economic activities.
Meaning of taxable supply [Article 1(28); GCC VAT Agreement]:
Supplies on which tax is charged according to the VAT Agreement, whether at standard rate of 5% or at zero rate. A deduction of input tax can be claimed against the VAT payable on taxable supplies.
Reverse charge mechanism [Article 1(18); GCC VAT Agreement]:
A mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier, when the supplier is not a taxable person in the member state where the supply has been made.
Tax Group [Article 4; GCC VAT Agreement]:
Member states may allow two or more persons that are residents of same state to register for VAT as a TAX Group; such group shall be treated as a single taxable person for payment and compliance of VAT.
Exempted Supplies [Article 1(27); GCC VAT Agreement]:
Supplies on which no tax is payable and for which deduction for input tax cannot be claimed.

22. Definition of ‘’Supply’’ The supply of goods or services......
It is important to establish whether a taxpayer is supplying goods or services since there are different rules applying to each for the purposes of determining where and when the supply takes place.
Goods
The passing of ownership of physical property or the right to use that property as an owner, to another person.
Services
Anything which is not a supply of goods is a supply of services.

23. VAT Groups-Registration
Each Member State may treat the Tax Group as a single Taxable Person
Two or more persons carrying on a business are able to apply for a single “Group” VAT registration where
Each person has a place of establishment or affixed establishment in the GCC member country e.g. KSA
The persons are “related parties” and
Either one person controls the others, or two or more persons form a partnership and control the others
Two or more persons carrying on a business(subject to grouping conditions)
VAT group-for VAT purposes the persons are now treated as single taxable person

24. VAT Groups-Registration
Effect: Entities within the VAT Group are treated as one entity for VAT purposes
Results:
supplies made between members of a VAT group are disregarded from VAT(i.e. no VAT is due on the supplies)
Supplies made by the VAT group to an entity outside the VAT group are subject to normal VAT rules
No VAT implications
Company A
Company B
Sales + VAT
Company D
No VAT implications
Company C

25. Place of Supply
Place of supply rules will determine whether a supply is made in the KSA or outside the KSA for VAT purposes:
If the supply is treated as made outside the KSA: no VAT will be charged
If the supply is treated as made in the KSA: VAT may be charged
Goods
Basic rule: the place of supply is the location of goods when the supply takes place
Special rules, for example:
Cross-border supplies – that is supplies which involve parties in different countries
Water and energy
Services
Basic rules: the place of supply is where the supplier has the place of residence
Special rules, for example:
Cross-border supplies of services between businesses
Electronically supplies services – where services are used of enjoyed

26. Reverse Charge (Or self assessed VAT)
KSA
ServiceCo
Company X
Service flow
Reverse charge rules typically apply to services received from suppliers established outside the country
The recipient accounts for the VAT due on the supply on his VAT return (instead of the supplier)
The VAT accounted for by the recipient is deductible as input VAT on the same VAT return
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27. Place of Supply Reverse charge mechanism - example
Legal Advice
SAR 10, % VAT
Legal Advice
SAR 10, % VAT
KSA UK
KSA
KSA
International Border
The company declares SAR 500 as input tax paid to the law firm which is recoverable
The law firm declares SAR 500 as tax collected
The UK firm is not registered in the KSA and files no return
The company declares SAR 500 as input tax and SAR 500 as output tax. This is reverse charging
Net result of Reverse Charging = puts local and international suppliers on the same footing

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Impact of VAT- Illustration
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29. Example 1 – Fully Taxable Business
70% of exports sales subject to 0% VAT
30% sales subject to 5% VAT
Purchases and imports subject to 5% VAT
Entitlement to claim input VAT = 100% of input VAT
Sales
1000
VAT Return
VAT due on sales (30% of 100)
Taxable Supplies 15
VAT due on reverse charge
(Services from Abroad 10) 5 20
Costs
Total due
Local purchases/imports Salaries Services from abroad
VAT deductible on purchases
VAT deductible reverse charge
Total Deductable
500
200
100 25 5 30
Net amount Refundable
(10)
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30. VAT Records –Normal requirements
VAT records must be kept for a period of 5 years.
Records may be kept on paper or electronically.
Records must be accurate, complete and readable.
Examples of records that need to be kept
Copies of all issued invoices
Originals of all received invoices
Debit or Credit notes
Import and Export records
Records of any goods given for free or allocated for private use
Records of all zero-rated or VAT exempt supplies and purchases
A VAT General Ledger Account
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VAT Return example
Self-assessment system
Businesses submit a regular VAT return to the Tax Authority
Must report all VAT on sales and purchases made in the period, including intra-GCC transactions
Calculate the Net VAT amount and either pay or get a refund for this amount
VAT Return
For the period 31-Jan-18
VAT on Sales 1 x
VAT due on acquisitions from other Members States 2 x
TOTAL VAT Due (sum of Boxes 1 and 2) 3 x
LESS : VAT reclaimed on purchases and other inputs (including acquisitions from the GCC) 4 x
NET VAT to be paid to Tax Authority 5 x
Total value of sales and all other outputs excluding any VAT 6 X
Total value of purchases and all other inputs excluding any VAT 7 x
Total value of supplies of goods and related costs, excluding any VAT, to other GCC Member States 8 x
Total value of acquisitions of goods and related costs, excluding any VAT, from other GCC Member States 9 x
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Questions?
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33. The End Presented by Syed Asif Zaman
Special thanks to my teacher Kahlid Petiwala
Presented by
Syed Asif Zaman
ACA, AAIA, FPFA, CISA, MBA, B.Sc
Managing Partner Ahmad Alagbari Chartered Accountants
President ICAP – UAE Chapter
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