The Gulf Cooperation Council (GCC) – of which the UAE and Qatar are member states along with Saudi Arabia, Kuwait, Bahrain, and Oman – will start implementing the Value Added Tax (VAT) at a rate of 5% from 1 January 2018.

Currently the GCC is in the process of approving a common legal framework for the introduction of a VAT system. This VAT framework is expected to be finalised at the next meeting of the GCC Financial and Economic Cooperation Committee, now in October 2016.

The common VAT framework will form the basis for a national VAT system that will be implemented in each of the GCC states. Each member state would still be required to issue its own national VAT legislation, and will have the authority to determine specific VAT rules in certain areas. The objective of the common VAT framework is to introduce a standard, fully-fledged VAT system in each member state.

What is VAT in the GCC?

The VAT in the GCC will – most likely – be based on the European system and will be charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government. A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to the government reflect the ‘value add’ throughout the supply chain.

If a business doesn’t collect the VAT from its customers where it should, it is actually the business that becomes liable for the VAT. It is therefore very important for any businesses to ensure their VAT compliance process is functioning perfectly. As VAT is a turnover tax, it also means the liabilities, or missed opportunities on the recovery side, can build up fast.

Registering for VAT

Not all GCC businesses will need to register for VAT. In simple terms, only businesses that meet a minimum of AED 3.75m of annual turnover will have to register for VAT. Between AED 1.78m and AED 3.75m the registration for VAT is voluntary.

Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.

What are the VAT-related responsibilities of businesses?

All businesses in GCC member states will need to record their financial transactions and ensure that their financial records are accurate and up-to-date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think they should be VAT-registered should maintain their financial records in any event, in case they later need to establish whether they should be registered.

VAT-registered businesses

These businesses generally:

  • must charge VAT on taxable goods or services they supply
  • may reclaim any VAT they’ve paid on business-related goods or services
  • need to keep a range of business records which will allow the government to check that they are compliant.

A VAT-registered business must report the amount of VAT it has charged and the amount of VAT it has paid to the government on a regular basis. This will be a formal submission. If a business has charged more VAT than it has paid, it must pay the difference to the government. If a business has paid more VAT than it has charged, it can reclaim the difference.