The UAE has led the way in raising public awareness of value added tax (VAT).
The Ministry of Finance (MoF) has a dedicated section on its website which explains VAT and provides practical guidance on how it applies. The MoF has also begun to roll out a VAT and Excise Awareness Campaign. Phase 1 of that campaign, involving an extensive series of workshops, ended in mid-May.
In all, 14 workshops, with capacity for up to 500-700 attendees at each, were held in seven locations around the Emirates. The workshops ranged from “multiplier” events for influencer-organisations like Chambers of Commerce and PR businesses, to general sessions on VAT and Excise Duty, and more specifically-targeted briefings for both Top 500 companies and SMEs.
Over the past six weeks or so, the GCC Unified Agreement on VAT (GCC UAVAT) has been published and, as was reported on May 23, the UAE was instrumental in the GCC UAVAT and the parallel GCC Unified Agreement on Selective Excise Tax entering into force. The ratification of the GCC UAVAT gave the green light to the publication of draft national VAT laws, which are now beginning to circulate for public consultation.
At a glance
What: With VAT being introduced in the Gulf from January, companies must be prepared.
Why: Some regulations will 'go live' by the third quarter. The Ministry of Finance offers guidance.
On May 29, the General Authority for Zakat and Tax in Saudi Arabia published the KSA Value Added Tax Draft Law on its website. The Saudi draft is in both Arabic and English. Feedback is invited within the month from the public and business community. Importantly, the press release also said that “the accompanying by-laws will be developed and agreed in the third quarter of 2017”.
The most important subordinate legislation will be the Implementing Regulations that are referred to extensively (ie, well over 100 times) in the Saudi draft law. As The National first predicted back in early February, "the complete legislative picture will comprise a number of layers". It is now clear that it involves: 1. the over-arching GCC UAVAT, 2. the national VAT laws in each GCC member state, and 3. more detailed national regulations.
Given the leading position of the UAE at all stages of the process of VAT implementation and the coordinating role of the GCC General Secretariat, it would be a surprise if the UAE’s approach to its national VAT law diverged markedly from the method of implementing VAT that is now being seen.
Some points of interest are beginning clearly to emerge.
First, the importance of the top and bottom legal layers – the GCC UAVAT and the detailed national Regulations – is evident. The KSA draft VAT law contains 12 Chapters, with 77 Articles. More than 50 of the first 55 Articles (ie chapters 1-10, inclusive) expressly refer to either “the Agreement” (GCC UAVAT) and/or “the Regulations”. The remaining chapters (covering penalties and fines, and general provisions) still contain copious references to “the regulations”. In Saudi Arabia, the regulations will be issued under Article 77 of the draft VAT Law, and will come into force on January 1 2018, except those concerning registration for VAT, which shall “apply from the beginning of the day which immediately follows the day on which the regulations have been issued”.
As the whole GCC VAT regime is scheduled for implementation in less than seven months’ time, it would not be surprising if the same urgency to apply for and obtain VAT registration were found in other GCC domestic VAT laws. In any event, the fact that some VAT regulations will “go live” in the Gulf in the third quarter of 2017 should act as a massive “wake-up” call to businesses in the region. VAT is coming. Positive action will be required. Do not sit idly by.
Secondly, when published, the regulations will repay careful study and understanding. The regulations will contain important information including on registering for VAT, which goods and services are exempt from VAT or are to be zero-rated, whether a cash accounting method can be used for paying VAT (and, if so, how), the requirements for a valid VAT invoice and credit/debit notes, the information that the relevant authority may demand for the purpose of imposing VAT, how cases of hardship are to be dealt with, the length of time records must be retained and other important points.
The Saudi draft law says that all of those matters shall be covered by regulations. Many other important aspects may be so regulated, according to the draft law. Though the precise scope of any regulations remains to be seen, they will apply broadly and be of direct effect.
Thirdly, the VAT treatment of intra-GCC supplies of goods and services may be novel. VAT is usually applied on a “tax imports at standard-rate and exports at zero-rate” basis. That rule will apply to goods being acquired from/dispatched to non-GCC countries, but, within the GCC Customs Union, a different regime – whereby inter-GCC transactions remain taxable at the standard rate – may apply. A strong indication can be found in Article 75 of the KSA draft VAT law, which says: “Regulations may provide for cases where VAT collected on a supply or import in [KSA] is transferred to another Member State under the Customs Duties Automated Direct Transfer Mechanism, or [vice versa]”.
A GCC inter-State reciprocal accounting mechanism, as is apparently contemplated, would be innovative. Certainly, the use of such a mechanism is likely to place some responsibility for effective VAT collection on the customs department in each GCC state, as well as the MoF (or equivalent).
The UAE MoF has already made a good start in helping businesses to understand the new law. The roll-out of the next phase of the MoF’s campaign must be imminent and businesses must be receptive to new information and developments.
Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE.
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