VAT may be simpler in the GCC but litigation will be complex

While the UAE VAT-Decree is significantly shortly than legislation around the tax in the UK and EU, it is still based on that framework and will face similar legal challenges

Dubai, United Arab Emirates, March 24, 2017:     General view of shoppers at the Lulu Hypermarket in the Al Barsha area of Dubai on March 24, 2017. Christopher Pike / The National

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I spent some time in Oman and Bahrain last week, speaking at two conferences on VAT, which is not expected to be introduced in either state until mid 2018 at the earliest.

Earlier this year, there was a widely held expectation that all six GCC states would introduce VAT simultaneously on January 1 2018, not least because a perception that a delay by any one state would give it a competitive economic advantage, an argument which can be overstated.

Once UAE and Saudi Arabia introduce VAT on New Year’s day, Bahrain, Kuwait, Oman and Qatar will be in breach of their international obligations if they fail to follow suit. Most commentators think that Bahrain, Kuwait and Oman will implement their VAT regimes at some stage in the next year. Qatar? No idea.

The organisers of the conferences I was presenting at, asked if I could talk about some VAT legal case studies. So, I focused on the fact patterns that have given rise to litigation in the UK and EU: issues like the treatment of mixed supplies (where a supply consists both of standard-rated and zero-rated products), tripartite supplies (where A contracts with B, but C also gains some benefit under the arrangement) and how loyalty schemes, vouchers and the like should be treated for VAT purposes.

I also spoke about a long-running case involving the retailer, Littlewoods, that last month reached the UK Supreme Court. It concerned the (even for me) extraordinarily dull issue of how interest on overpaid VAT should be calculated. But the money at stake totalled an eye-watering £1.25 billion (US$1.68bn) in that case alone and £17bn (Dh84.05bn) in other cases, which turned on the decision. Littlewoods ultimately lost in the UK Supreme Court, despite having won in both the High Court and Court of Appeal.

During the delivery of my highly technical, legalistic talk, I could see eyes glazing over and delegates checking their smartphones.

In Muscat, one attendee approached me afterwards to say while he had enjoyed my talk, I was wasting my time because “things are much simpler in the GCC”. The GCC legislation is simpler; the GCC revenue authorities and courts will, he said, approach VAT in such a way that, unlike in the UK and the EU, VAT will not be, and will not need to be, litigated so much and, even if it really did come to that, points would be resolved with fewer complications.

It is true that the UAE VAT-Decree is significantly shorter than the UK’s VAT Act. It is also true, undoubtedly, that the Executive Regulation is shorter than the multiples of VAT-related regulations that have been laid and made before the UK parliament.

Furthermore, it is true that, although the UAE’s VAT law ought to be in accordance with the GCC VAT framework, the sanctions, if it falls short of meeting that obligation, are far less severe than the sanctions the EU can impose on a defaulting member state. And the UAE will never be required to have a supra-national court rule on whether its VAT laws are compatible, in the same way the European Court of Justice undertakes that role.


Read more from Jeremy Cape:

Lots of positives from the VAT draft regulation, but challenges remain

New Year's Day VAT dilemma for UAE consumers and businesses

Who will bear the burden of VAT in the UAE?


And yet ... many of the points of law that have been extensively litigated across the EU are to be found in similar, if not substantially identical provisions, in the VAT-Decree Law and the Executive Regulation. GCC VAT is, after all, built on the EU VAT framework.

The real challenge is not applying lengthy, closely-defined, difficult and convoluted legislative provisions; the difficult bit arises in applying an apparently simple rule to a factual matrix, which may itself be remarkably simple.

To take one example from 2016: the Airtours case involved determining whether the travel company, which was encountering some financial difficulties, could recover input VAT incurred on a payment made to its professional adviser, PwC, for restructuring advice and a report provided to it and a number of lending banks.

The commercial logic was straightforward: the banks wanted a professional view on the solvency position of Airtours, and Airtours asked PwC to provide that view to the banks on its behalf. HMRC denied Airtours the right to recover input VAT on PwC’s fees. The case eventually reached, but still managed to divide, the brilliant minds of the UK Supreme Court. Airtours lost the case, three to two but the irony, and perhaps the most telling point arising from the whole bruising experience, is that had a few tweaks been made to the engagement with PwC, it would have been able to recover.

The same simple question could (and I’m sure will) easily arise under the VAT-Decree Law. At its core, the issue to be determined in the Airtours case was nothing more than deciding who the “recipient of services” was, which is defined in the VAT-Decree as a “person to whom services are supplied or imported”.

Sometimes this will be straightforward to determine, but often it will not. In the short term, this precise question is likely to be particularly challenging where one group company contracts for the benefit of a subsidiary. Things can then only start to get even messier: how does the analysis change, for example, where the subsidiary conducts its economic activities in a different jurisdiction from its parent?

VAT always gives rise to difficult legal issues requiring legal solutions. It’s usually better to solve them upfront than in court. There’s little evidence that UAE businesses are doing so.

Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape