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As the UAE and Saudi Arabia continue to lead the GCC VAT drive, this article compares the key features of the future value added tax (VAT) regime in these countries including the treatment of different industry sectors based on what is currently known.
The latest status
In line with the recent trend where Saudi is the first to circulate any laws agreed at the GCC level, the country has become the first in the GCC to issue its final VAT law - doing so on July 28 after making the draft available for public consultation on May 29.
Saudi Arabia has also published its VAT implementing regulations on July 19 for feedback which is required by August 19. Given the rapid pace at which the country is progressing its VAT related legislation, the regulations are expected to be finalised shortly after the feedback period is closed. The Saudi Arabia VAT law requires the regulations to be issued within 30 days of the issue of the law. No other GCC state has published its VAT law or regulations even in draft form.
The UAE is expected to issue its VAT law and the related executive regulations within weeks.
Saudi Arabia will be implementing VAT with effect from January 1 2018 and this has been confirmed by the final VAT law. The UAE is also fully committed to this date, however, the VAT legislation is yet to be issued.
Scope of VAT
The UAE and Saudi Arabia have adopted a broad tax base with limited exceptions. VAT will apply to the supply of goods and services in the UAE and Saudi and to imports into the countries respectively. Certain supplies of goods and services may be exempt or subject to zero rate. Unless the supply of goods and services falls within a category that is specifically exempt or is subject to the zero rate, VAT will apply at the standard rate. The standard VAT rate will be 5 per cent.
The Saudi tax authority had already started registering large businesses automatically based on existing information on taxpayers held by it. The country's VAT law requires all persons liable to register for VAT to register within 30 days from the issue of the law.
The UAE Ministry of Finance has indicated that electronic VAT registration will be open on a voluntary basis during the third quarter of 2017. VAT registration is expected to become compulsory from the final quarter of 2017.
In both countries, the mandatory registration threshold will be 375,000 dirhams and 375,000 Saudi riyals and the voluntary registration threshold will be 187,500 dirhams and 187,500 riyals. Businesses must register for VAT if their annual turnover exceeds the mandatory registration threshold while it is optional for them to register if the taxable supply and imports are below the mandatory registration threshold but exceed the voluntary registration threshold. In Saudi Arabia, small businesses with turnover of less than 1m will be given the opportunity to delay registration until January 1, 2019. Group registration will be available in both countries for related parties subject to certain conditions.
In the kingdom, it is interesting to note that businesses that make zero rated supplies are not liable to register whereas the UAE may require such businesses to register. Clearly it will be in the interest of businesses to register to recover any VAT paid on their purchases.
VAT treatment of industry sectors
In the light of the flexibility provided by the GCC VAT framework agreement, it is likely that industry sectors may be treated differently for VAT purposes in individual GCC countries. Even where the sector may have the same headline VAT treatment, the definitions may vary from country to country resulting in potentially different VAT outcomes for the same services.
The above can be seen in the case of the VAT treatment in the UAE and KSA for the education and healthcare sectors. Based on Saudi Arabia's draft VAT implementing regulations, where education and healthcare services are neither exempt or zero rated, education and healthcare providers will generally be subject to VAT at the standard rate (with public education and healthcare providers potentially not subject to VAT).
The UAE, however, has announced that certain education and healthcare services will be subject to VAT at the zero rate. It remains to be seen how the Emirates will define the type of education and healthcare services that be taxed at the zero rate and which education and healthcare services will be excluded from this definition. It is possible that the zero-rated VAT treatment is dependent on whether education provider is engaged in pre-school, primary, secondary or higher education and on whether the healthcare provider or educational institute is public or private.
Both nations are expected to treat financial services and insurance in the same way. It is expected that margin-based financial services will be exempt while fee-based products will be subject to the standard rate of VAT. General insurance services will be subject to the standard rate of VAT except life insurance, which will be exempt.
In terms of real estate, both will exempt the supply of residential real estate except that the Emirates will subject the first sale of residential real estate to VAT at zero rate. The UAE will also exempt the supply of bare land. The supply of commercial real estate will be subject to the tax at the standard rate in both countries. As noted above, the definition of “commercial” and “residential” real estate may differ between the two nations.
Subject to certain conditions, the supply of medicine and medical equipment will be zero rated in accordance with the GCC VAT framework agreement in both countries. Although there was a list of 100 items of foods which could have been zero rated under the GCC VAT framework agreement, both are expected to subject these items to VAT at the standard rate.
Another example of different VAT treatment is local passenger transport. The UAE has announced that this will be exempt whereas Saudi's implementing regulations indicate that this will be subject to VAT at the standard rate.
Government authorities that are performing a public function will not be considered to be carrying on an economic activity, as such supplies made by them will not be subject to VAT in both countries. However, where they are involved in the supply of goods and services in competition with the private sector, they will be regarded as carrying on a commercial activity and subject to VAT in the normal way.
In the UAE, VAT returns will generally be required to be submitted on a quarterly basis depending on the returns and payments due within 28 days after the end of the period. In Saudi, companies with annual income in excess of 40m must file returns on a monthly basis while other companies must file their returns on a quarterly basis with payments required to be made within a month of the end of the relevant period.
Both nations will have special rules to protect businesses for contracts that straddle VAT implementation.
In the UAE, under normal circumstances, where the contract is silent on VAT, the price will be deemed to be inclusive of VAT. However, where the contract was concluded prior to the implementation date and a part of the supply is made after the implementation date, suppliers will be able to charge the tax to the customer where the latter is able to recover it.
In the kingdom, for contracts that were entered into before May 31 this year and are silent on VAT, the supply can be treated as zero rated until the end of the contract or December 31 2022 where the customer is entitled to deduct input VAT.
Are you ready for VAT?
As there are less than five months remaining before VAT is implemented, the concern is that there is insufficient time for businesses that have not yet taken any proactive measures to prepare and such businesses will find it very difficult to be ready in time.
It has therefore become critical for organisations to assess the impact of VAT on their businesses and implement any changes necessary to be compliant with the VAT law and minimise costs and cash flow impact.
Shiraz Khan is senior tax advisor at Al Tamimi & Company
Shiraz Khan - The National
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