Introduction

The Gulf Cooperation Council (GCC) member states are currently working on the introduction of a common Value Added Tax (VAT). The VAT is a GCC proposal and the VAT framework of the individual GCC countries will be drafted according to the common GCC VAT legal framework.

Although the general shape of the tax is already known, the final form of the VAT is still in development. The exact date of implementation of the tax is not yet agreed upon, however it is likely that the VAT will come into effect in 2018.

Introduction of a VAT in the GCC member state will have significant effect on business processes. Below we will briefly discuss the highlights of a VAT system.

VAT

VAT is levied on business transactions, i.e. on most goods and services supplied in the course of business. Generally most VAT systems have some limited exceptions such as basic food items, healthcare and education.

VAT is payable by entrepreneurs. In general, VAT is imposed on goods and services at every production or supply stage in the supply chain (output VAT). Importation of goods and services are in principle also within the scope of a VAT designed according to general applied standards. As a main rule and subject to conditions, entrepreneurs can generally recover VAT paid on its purchases of goods and services (input VAT). Thus, VAT shall be chargeable after deduction of the input VAT borne directly by the entrepreneur.

The entitlement to deduct all the VAT already paid at the preceding stage ensures double taxation is avoided and that tax is paid only on the value added at each stage of production and distribution.

VAT is ultimately borne by the end user and is collected by businesses on behalf of the tax authorities.

Example
A general VAT system with a rate of 5% operates as follows:

(Click here to view table)

Rates and exemptions
The VAT rate is likely to be set at a rate of 5%. Essential food items, education, social services and healthcare will likely be exempt from VAT. With respect to financial services, the VAT regime is yet to be determined.

Some goods and services may be subject to a rate of 0%. Export of goods and services are generally also subjected to a 0% rate. In case a 0% rate applies the related VAT incurred on purchases and costs can be deducted. Some goods and services will be exempt from VAT. In that case, the related VAT incurred on purchases and costs is not deductible.

Impact on business
The implementation of VAT in the framework of each business subject to the VAT demands significant changes. For instance, businesses will be chargeable for collecting VAT and for the transmission of the collected VAT to the tax authorities.

In order to fulfill the VAT requirements and to prepare and adapt such VAT system, businesses should take into account the following necessary changes and recommendations:

  • Understanding VAT registration and administrative obligations;
  • Calculate the overall net amount of VAT payable (taking into account credits, if any, for input VAT);
  • Submit VAT returns, pay the payable VAT and provide required information in your VAT return;
  • Ensure relevant books and records are maintained;
  • Inform the customer about the VAT in the selling price;
  • Identify VAT-relevant contractual agreements;
  • Change invoicing templates to ensure relevant fields for VAT accounting are included;
  • Identify the business transactions, including intercompany transactions and intra-GCC transactions;
  • Understand the impact of VAT on the supply and demand for goods and services;
  • Assess the organization's tax awareness.

Furthermore, in order to avoid unnecessary VAT payments, businesses should ensure they understand when VAT should and should not be charged since some goods and services will be exempt from VAT.