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.
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.