With value added tax introduced in Saudi Arabia and the United Arab Emirates on 1 January 2018, further to the Gulf Cooperation Council (GCC) VAT Framework Agreement, and the first VAT returns filed on 28 February 2018, businesses are beginning to adapt to the realities of conducting operations in the GCC within the new VAT regime.
Both countries are off to a strong start. The GCC VAT regime is closely modelled on that adopted by the European Union and thus benefits from the experience garnered in the EU for over 40 years. However, although the legislative framework is more advanced than other jurisdictions that have introduced VAT for the first time, teething problems are inevitable in the first phase of implementation. Below are highlights of the key issues businesses operating in the UAE and Saudi Arabia are grappling with.
1. Application of transitional rules
Although VAT Implementing Regulations were published in the UAE and KSA in December 2017 to supplement the GCC and UAE VAT legislation, companies are finding it challenging to understand when and whether VAT applies to advance payments received in 2017 or to payments received in 2018 in respect of work partially or wholly completed before the start of the year. In addition, the seller has the added responsibility of ensuring that the VAT process and documentation, are such that the prices are clearly exclusive of VAT and that the seller does not accidentally bear the VAT chargeable.
2. Supply of goods to, from and within designated zones
Specific issues have arisen in relation to the supply of goods to, from and within designated zones. Article 52 of the UAE VAT Implementing Regulations specifies the VAT treatment of designated zones and a list of UAE designated zones was published in January 2018 (Cabinet Decision 59). There are designated zones in all seven emirates, including Jebel Ali Free Trade Zone, the Hamriyah Free Zone, the Khalifa Industrial Zone, and the free zones at the Abu Dhabi, Dubai and Sharjah Airports. Notably, the Dubai International Financial Centre and the Abu Dhabi Global Markets are not designated zones.
Businesses are still trying to understand the confines of out-of-scope treatment for supplies and the treatment of supplies of goods from onshore to a designated zone and from the designated zones to onshore. In addition, they have to determine whether intra-designated zone supplies are for resale and/or production and therefore outside the scope of VAT.
3. Export of goods and services
The export of goods and the provision of services by a taxable person to non-residents are zero rated (Articles 30 and 31 of the UAE VAT Implementing Regulations). However, companies are struggling to clarify when export of services are zero rated and when exclusions apply (for example, services relating to real estate and moveable assets). Moreover, the rules require specific documentation to be provided and maintained in order to claim zero rating of the supply of goods (direct or indirect) to non-residents, and companies need to ensure that this is done.
4. International transportation
The international transportation of passengers and goods, and certain goods and services provided in respect of the transportation services are zero rated, but companies are still trying to clarify the specifics.
In addition, companies need to understand when domestic transportation can be linked to the international transportation, so as to be treated as an integral part of the international transportation.
5. Intra-GCC supplies
Companies are grappling with the interim treatment of intra-GCC supplies. According to the GCC Framework Agreement and the VAT regulations in the UAE and Saudi Arabia, intra-GCC supplies of goods and services are not treated as exports. Rather, there are specific rules for determining the place of supply for such transactions. However, until the introduction of the Electronic Services System for the GCC, the intra-GCC supply of goods is treated (in both the UAE and Saudi Arabia) as exports to outside the GCC. This temporary position has led to some uncertainties, particularly as a different treatment applies for customs purposes.
6. Sales of commercial property
Those involved in the sale of commercial property are facing a variety of issues. These sales are treated as the supply of goods, so if the supplier is a developer, they will charge VAT at 5%. In the UAE, if the supplier is not a developer, the buyer will have to pay the VAT due on the purchase directly to the Federal Tax Authority before completing the ownership transfer process with the Land Department. The FTA will then issue a Payment Transaction Number, which will need to be provided to the Land Department in order to complete the transfer process. Parties need to be alert. It is unclear how this treatment aligns to the legislative provisions on the VAT trigger points, for example how payments made prior to the transfer of title would be treated.
In addition, companies need to take careful note of issues such as what constitutes commercial property, the distinction between commercial property and bare land, and situations where the sale of commercial property is considered to be the transfer of a business, as all these will have a significant impact on whether and how VAT is chargeable.
Non-residents are required to register for VAT if they make supplies within the UAE or Saudi Arabia and if no other party would be responsible for accounting for VAT under the law (effectively an unregistered consumer). To correctly assess their potential VAT obligations, companies need to understand the place of supply rules, deemed place of supplies for telecommunications and electronic supplies and real estate-related services, the registration status of the customers, and registration requirements.
One of the issues that has arisen so far is how the VAT process would work where a non-resident makes supplies to customers through distributors or agents.
8. Record keeping
The Tax Procedures Law requirements, and the various compliance requirements in the VAT Law and implementing regulations, mean that businesses will now need to keep records and details of their transactions. This is a new imposition on many businesses, and it also means that they will need to be prepared to disclose all their transactions to the authorities.
9. Transfers of businesses
The transfer of all or part of a business to a registered person should be treated as outside the scope of VAT. Accordingly, it is crucial for companies to distinguish the sale of a business from the sale of assets, to determine whether the transaction is subject to VAT. This is a very live issue that businesses are dealing with (for example, in relation to the sale of commercial property with existing tenants), and companies need to structure their transactions accurately and efficiently.
Potential challenges on the horizon
Given that both the UAE and Saudi Arabia are still in the early stages of VAT implementation, there are key areas that businesses should keep an eye on to ensure that they are prepared as this field naturally evolves, in particular:
- Uncertainties of interpretation
- Lack of awareness
- VAT refunds
- Cash flow
- Reviewing and optimizing operating models
Useful tips and guidance
- Document everything, particularly your rationale for adopting certain approaches.
- Keep accurate records in case you are audited.
- Insist your suppliers provide the information you need.
- Review your operating models to reduce inefficiencies and to align with the VAT system.
Baker & McKenzie Tax practitioners are continuously monitoring developments and we provide updates on an on-going basis. Further information is available on our dedicated GCC VAT website.
The challenges are immense. Much needs to be done in a very short time; but so far, so good. The four remaining GCC member states (Bahrain, Qatar, Oman and Kuwait) should be introducing VAT soon with Bahrain expected to do so later this year and Oman in 2019. Kuwait has recently announced that it will introduce VAT in 2021. It is still unknown when Qatar will introduce VAT. These countries will hopefully draw on the experiences of the UAE and Saudi Arabia to confront the early phase challenges. Once the Electronic Services System is implemented across the GCC, it could add an additional yet interesting layer of complexity to doing business with, and within, the GCC. The key to success would lie in simplicity, transparency and harmonization.