The six states in the Gulf Co-Operation Council (GCC) decided to introduce a harmonized VAT system as from January 1st 2018 (1). In spite of a difficult context, businesses need to undertake steps now if not already started to implement this significative tax reform.
At the level of the member states, the VAT system will be introduced in their own legislations, based on the framework agreement issued by the GCC. VAT will be levied on most supplies of goods and services. Input VAT incurred for making taxable supplies at 5% or 0 rates will be deductible and no VAT deduction will be available for the exempt activities. VAT credits will be carried forward and refunded if any
The intra-GCC sales of goods by taxable people should be taxed through the reverse charge mecanism. Export of goods to outside the territory of the GCC will be zero rated and import VAT will be paid at the first point of entry in the Region. Similarly, the reverse charge mechanism will be introduced for the taxation of the intra-GCC supplies of services and the services from abroad
A lot of rules will be left to the discretion of each member state. A greatest part of the VAT compliance requirements and most of the procedures rules will be determined by each member state. Same for the rules governing the VAT group, the content and the issuance of the VAT invoices as well as the VAT treatment of the oil and gas sector. The modalities for carry forward or refund of the vat credit will also fall within the competence of each country. The financial services will be vat exempt or zero rated by each country that may opt for a different VAT treatment…
January 1st 2018 leaves a narrow window for the businesses to get ready and avoid risky situations. Some issues are not fixed yet and Saudi Arabia is today the only Gulf Arab country of the six that published its draft VAT regulation. Moreover, the region is going trhough a diplomatic crisis within the GCC itself. Such an environment would rather encourage a wait and see attitude
And yet the framework agreement outlines the VAT treatments and various steps can be undertaken, starting now to facilitate the transition and enable a quicker implementation of the changes as the remaining rules are released. This will also enable to estimate the potential financial impact of the reform on the margin, the purchasing power of the consumer…
The first stage of the VAT regime implementation is to get a clear vision and a detailed picture of the business to identify the various types of vat treatment to be set up and the changes in internal processes, accounting and systems. Action plans can be already drafted accordingly. Similarly, vat sessions can be organized to train and familiarize the key people who will have to implement and apply the new rules.
What happens in the Gulf countries nowadays can recall the implementation of the current VAT system in force in the EU today. Just remember that the European businesses had to deal with a complex and ressource/ time consuming exercise despite a long and real expertise in VAT.
(1) The Gulf Co-operation Council includes Qatar; Kuwait, Saudi Arabia, the United Arab Emirates, Oman and Bahrain.