On 1 January 2018, Value-Added Tax (VAT) will come into effect for the first time in the Kingdom of Saudi Arabia and in the United Arab Emirates (UAE). Bahrain, Qatar, Kuwait and Oman will follow shortly. So far, these countries have benefitted from significant oil-related income. Yet, a drop in demand and increased global competition have forced them to look for other sources of revenue. As such, VAT is an efficient and transparent way for governments to increase revenue. It could even boost GDP by 1.5 per cent in these economies. The introduction of VAT is a paradigm shift for companies trading in the Middle East. We’re answering five questions about VAT in Gulf countries.
How does VAT work in Gulf countries?
As from the beginning of next year, a 5%-standard VAT rate will be introduced in the UAE and the Kingdom of Saudi Arabia. By way of example, any UAE established company that reports yearly VAT-taxable income of over AED 375,000 will have to register for VAT. They’ll also have to charge 5% VAT on their supplies treated as taxable in this region. Companies which income falls between AED 187,500 and AED 375,000 will have the choice to voluntarily register for VAT.
Entities which are not established in the UAE but making transactions subject to VAT may have to register regardless of any thresholds.
What is subject to VAT? What is exempt?
Even further to the implementation of VAT, the UAE, in particular, will remain tax-free from diverse ways. Indeed, there is no personal income charge on pay rates in the nation.
From a VAT perspective, some goods and services will be subject to a zero-rate VAT rate. In practice, a zero-percent VAT rate means that no positive amount of VAT is actually added to the price. Yet, businesses can still recover the VAT charged on their related expenses. This includes, for instance, oil and gas, health, education as well as social services.
On the other hand, financial services and some real estate supplies will be exempt from VAT. An exemption comes along with the impossibility to recover VAT on the expenses incurred by businesses performing such kind of activities.
Conversely, any other goods and services will be subject to a standard rate of 5%. Typical examples that would fall under the taxed category include: jewellery, smart phones, eating out, watches, cars, entertainment and electronics alongside a wide majority of services.
How will it affect my business?
After implementation, VAT will affect practically every function within a business and will apply on goods and services at each stage of the supply chain, with the ultimate burden being borne by the end-consumer. If not applied correctly, the new tax may become an additional cost to the business, and non-compliance with the VAT law will lead to severe penalties.
Companies therefore need to consider policy, pricing, risks, contractual, operational and IT elements to become VAT compliant by the deadline set by each GCC Member State implementing VAT.
Non-established entities trading in the Gulf will also have to consider potential VAT obligations in the region and how this will impact their business.
Why is it a challenge for companies trading in the region?
Human resources have a crucial role to play in the process of implementing VAT. Thus, training employees is one of the main challenges companies need to take up.
In addition to reviewing pricing policies, another important challenge is the current IT landscape of future tax payers. IT systems are, very often, a combination of a branded Enterprise Resources Planning system and legacy or in-house built systems. Companies need to understand how VAT will affect their system. Then, how to revamp them and, most importantly, how to keep them up to date with legislative changes are actions to take.
Stéphane Rinkin, VAT partner
VAT will impact all industries and all departments within organisations operating in the Gulf. All departments will feel the ripple effects – from operations to human resources. All businesses should act now to understand how VAT will affect them and should start getting ready for it. Let’s keep in mind that failing to plan is planning to fail.
How to gear up?
As VAT will come into effect on 1 January 2018 in the UAE and Kingdom of Saudi Arabia, businesses operating across the Gulf need to activate their VAT implementation plans.
Businesses have to take into account the VAT impact on their transactions now. Then, they need to plan how to have the right VAT systems, financial, tax governance and compliance, training and any relevant other areas to comply with the specific VAT requirements of each Gulf states.
Here’s a typical plan to approach it:
VAT reforms are gaining pace all over the world, discover why in our previous article The beautiful tax.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.