The Arabic text of the GCC Unified Agreement on Value Added Tax (GCC UAVAT) has been published in the Saudi official gazette; unofficial English translations are in circulation.
The GCC UAVAT provides the framework for the introduction of value added tax (VAT) in all six GCC member states. As such, the GCC UAVAT contains predictable elements. It also contains some surprises, such as its strong unitary tendencies – although it would allow each statewide discretion in the treatment of financial services. And there are still important details to come, for example the rules for free zones and the list of foods that will be zero-rated (that is, their VAT rate will be 0 per cent).
The context of the GCC UAVAT is set by its opening Recitals, which recall the objectives of the GCC Charter, the goals of the 2001 GCC Economic Agreement and the terms of the GCC Supreme Council Resolution adopted in December 2015.
Respectively, those instruments emphasised the importance of strengthening cooperation between GCC member states in all fields, sought to advance GCC economic integration and take steps towards economic unity, and resolved to establish a “unified legal framework” for the introduction of VAT, that is, a general tax on consumption.
That broad context underlines the economic and fiscal importance of the introduction of VAT to the Gulf.
Some features of the GCC UAVAT are common to VATs the world over: for example, the application of the tax to goods and services (save those which are exempt), the right of deduction (of input tax from output tax), the rates of tax (standard and 0 per cent), rules about what is a taxable supply and the place of supply, obligations imposed on taxable persons to register, to hold the required documents and properly to account. The GCC UAVAT also contains transitional provisions for long-term supply contracts under which some supplies are made before, and others after, VAT implementation.
The first surprise is that the GCC UAVAT is more unitary than might have been anticipated. The essential structure for the introduction of VAT in the Gulf is well known. The GCC UAVAT is an overarching supra-national instrument, below which each member state will enact its own VAT tax law and subordinate legislation, the so-called “local law”. Given the constitutional position of the GCC in relation to its component member states, the GCC UAVAT might have been expected to be purely a soft law/power measure. It has more “bite” than that.
So much is clear from definitions provided at the outset. The “unified GCC” nature of “the Agreement” and of “the tax” is emphasised. There is also repeated reference, in the singular, to the “GCC Territory”. The GCC UAVAT is premised on an indivisibility, which will provide cohesion and promote harmonisation and uniformity of approach across the whole GCC. Definitions of the GCC “Common Customs Law”, and “the Ministerial Committee” (ie, the Financial and Economic Cooperation Committee of the GCC Member States”) are included.
The fabric of the GCC common customs law and ministerial committee is woven into the GCC UAVAT, as both figure prominently in the working of the agreement. By way of example, VAT on certain intra-GCC supplies is to be recovered or adjusted in accordance with the automatic transfer system already followed by the GCC customs authorities. Among other powers, the ministerial committee is named as the body responsible for considering issues relating to the application and interpretation of the GCC UAVAT and “its decisions shall be binding on all the Member States”. The right to amend the registration threshold is also a matter for the ministerial committee (and not, as might have been expected, for individual GCC states), but that can only occur after three years. Such allocations of responsibility show a strong unitary tendency, as regards where power is situated and as to the apparent intention to apply it across the GCC as an integrated bloc.
There is a concomitant need for multilateral cooperation. National tax authorities are to exchange information about the implementation and administration of the agreement and local VAT laws, with the possibility being contemplated of further cooperation between member states in the future, at the instigation of the ministerial committee, for example over the introduction of “synchronised auditing processes”.
In February, Christine Lagarde, the managing director of the IMF, spoke on a visit to the UAE of the need for the GCC VAT system to be simple enough and digital enough to be a success. The GCC UAVAT text sheds light on those arrangements. Under the GCC UAVAT, each member state must create an “Electronic Services System” to enable tax-relevant information to be recorded. The GCC Secretariat General will, in turn, establish a tax information centre and operate a central electronic database to enable the efficient exchange of information between national tax authorities (by, for example, recording the taxation identification numbers of the parties to an intra-GCC transaction, the invoice date and number, a description of the transaction and its value).
The electronic system should be robust enough to provide proof of transfer of intra-GCC supplies of goods to their final destination, and yet sufficiently secure and reliable to maintain confidentiality of data.
The GCC UAVAT is, otherwise, an interesting mixture of the prescriptive and the permissive, mandating GCC member states to take certain actions, yet providing a margin of discretion – sometimes broad – in other respects.
Thus, each member state is required to make provisions regarding tax periods, completion of tax returns, payment and refund of tax, the exchange of tax information via the creation of electronic systems and the right to object and appeal (“Each Member State shall ...”).
On the other hand, member states retain control over whether, and under what conditions, supplies in the education, health, real estate and local transport sectors will be exempt (“Each Member State has the right to ...”), and whether or not foods on a standard list of products are to be 0 per cent-rated (“each Member State may ...”).
Important details are still needed. The “standard list” of products, including food, which may be 0 per cent-rated has not been published as part of the GCC UAVAT. Free zones are not mentioned.
Little is said about financial services and what is said is of modest help. The starting point is that financial services offered by licensed banks and financial institutions are exempt from tax. But that default position is heavily qualified. Banks and financial institutions may recover input tax “based on tax recovery rates determined by each Member State”. Moreover, by way of further exception, each member state will be allowed to apply “any other tax treatment rate on financial services”. It is plain, therefore, that each GCC member state will enjoy a wide discretion about the VAT treatment of financial services. How that breadth of discretion is applied in practice remains to be seen.
The GCC UAVAT also contains a provision imposing joint liability on those who intentionally participate in violating any of the obligations in the agreement or a local law. Each member state must identify any other circumstances in which joint liability would arise. Under EU VAT law, joint liability has been a measure taken to counter VAT fraud, but the scope and application of such provisions has been the source of much debate. The inspiration for this provision in the GCC UAVAT is, doubtless, the same. It may also throw up similar issues.
Articles in the GCC UAVAT refer to Appendices 1-3, which contain provisions, respectively, as to the granting of a Tax Identification Number to a taxable person, the details to be included in a VAT tax invoice, and information to be included when filing a tax return. No translation of those Appendices has yet been located, so further comment on those important provisions must be postponed.
How VAT will affect tourists to the UAE has been much discussed. There has been media speculation that tourists to the UAE might not, at least initially, be able to obtain VAT refunds. The question remains open because, under the GCC UAVAT, tax refund arrangements for tourists are a matter for the local law. However, not making VAT refunds to tourists would blunt the UAE’s attractiveness as a tourist destination, and would run counter to the underlying philosophy of the tax. VAT is a tax on consumption. Queues for VAT refunds occur at departure halls because those goods will be consumed outside the country where the refund is sought (and may well also be subject to VAT in the country of destination).
The GCC UAVAT contains provisions for dispute resolution. Taxable persons in each member state will have the right to challenge decisions of the national tax authority in specialised local courts. The detailed process and procedure will be a matter for each member state. Issues of principle between member states are, if possible, to be determined amicably; if not, those disputes will be referred to arbitration.
Finally, it should be noted that the GCC UAVAT, having been approved by the GCC Supreme Council, will be ratified by member states in accordance with their constitutional process. The timeline for ratification will, therefore, vary between member states according to the constitutional steps that need to be followed.
Although the GCC UAVAT contains measures to promote harmonisation and contemplates unitary action by the whole bloc, the GCC UAVAT expressly stipulates that it will enter into force once the instrument of ratification of the second member state has been lodged with the GCC Secretariat General. Each member state must enact its own “local law” to give effect to the GCC UAVAT. Until a member state has given effect to its local law, it will be considered as outside the scope of the GCC UAVAT. The combined effect of those provisions seems to be that all GCC member states need not enact and implement a VAT simultaneously. That said, coordinated action would plainly be desirable.
Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE.
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