For all businesses that operate in or trade with the Gulf Cooperation Council member states, the new value-added tax regime brings with it new obligations and challenges—some of which are specific to international business. Great care should be given to analyzing each specific scenario and transaction to correctly assess the associated tax obligations.
The Time Frame
The Gulf Cooperation Council (“GCC”) value-added tax (“VAT”) agreement signed in 2016 sets out a general framework for the implementation of a VAT regime in the six member states. The United Arab Emirates ("UAE") and the Kingdom of Saudi Arabia ("KSA") implemented VAT under national law on January 1, 2018, with Bahrain implementing one year thereafter on January 1, 2019. Oman is expected to implement later this year, with Qatar and Kuwait delaying until 2020/2021.
As a general guide for international businesses operating in the region, there are a number of key matters to consider.
The first question that all international businesses should ask themselves is—which entity engages in the GCC transactions (according to the supporting contracts and commercial reality) and what is the GCC VAT residency status of that entity?
Generally, the result will be one of the following residency scenarios:
- The relevant entity is a local GCC established company. This entity would therefore have a place of establishment and residency in the GCC, for VAT purposes.
- The relevant entity is a GCC branch of a foreign established company. This entity would therefore have a fixed establishment and residency in the GCC, for VAT purposes.
- The relevant entity has other operations in the GCC (but no local entity or branch). This would create the potential of a fixed establishment and to be resident in the GCC, for VAT purposes. The definition of “fixed establishment” should be analyzed in the context of the extent of the operations in the region. This can be a difficult analysis at times and somewhat ambiguous without clarity from the tax authorities. Guidance from other mature regimes can give insights on how similar legislation has been interpreted by other tax authorities and courts.
- There is no local entity, branch or operations on the ground in the GCC. Therefore, there would be no place of establishment or fixed establishment and the relevant entity would be nonresident for GCC VAT purposes.
Once the residency status of the relevant entity is determined, the registration thresholds in the region should be considered.
No threshold applies to registration where a nonresident entity (see residency status scenario 4 above) is obliged to account for VAT on a transaction—i.e. the first $1 (or local currency) of trade would trigger a VAT registration obligation.
For all resident entities (see residency status scenarios 1–3 above), an obligation to register for VAT purposes will arise when the mandatory registration threshold of approx. $100,000 in local currency is exceeded (or likely to be exceeded). Resident entities may also voluntarily register once the voluntary registration threshold of approx. $50,000 in local currency is exceeded (or likely to be exceeded).
Registration: Transaction Criteria
In assessing whether a nonresident international business is obliged to account for VAT on a transaction or whether a resident business has exceeded the registration thresholds, the following transaction scenarios should be considered:
- A nonresident supplier selling goods/rendering services cross-border to non-taxable persons in the GCC would be obliged to register for GCC VAT, to charge VAT at the applicable local rate, to issue a valid VAT invoice within the required time frame and to comply with all local compliance and documentation requirements.
- A nonresident supplier selling goods/rendering services cross-border to a registered taxable person in the GCC, generally would not be obliged to register for VAT purposes or meet local compliance/documentation requirements. The reverse-charge mechanism will generally apply, making the taxable customer responsible for any GCC VAT due on the transaction
- A resident supplier selling goods/rendering services domestically to any local customer in the GCC would have full VAT obligations in the region, as in transaction scenario 1 above, subject to the registration thresholds.
VAT Status of Customers
The above transaction scenarios show that often the VAT status of customers will impact an international business’s VAT obligations in the region.
Therefore, it is imperative that the status of customers is identified, VAT registration numbers are obtained (validated and retained), and correct customer details are displayed on supporting tax invoices.
The Federal Tax Authority ("FTA") of the UAE, the General Authority of Zakat & Tax ("GAZT") of the KSA and the National Bureau for Revenue ("NBR") of Bahrain have made validation tools publicly available online to assist suppliers with validating customers’ VAT registration numbers.
Tax Agents and Tax Representatives
Where an international business is obliged to register for VAT and meet compliance obligations in the region, it may do so with the assistance of a tax agent or tax representative.
A tax agent acts on behalf of a business with the local tax authority to file returns, submit documentation, engage in communications, etc; whereas a tax representative is jointly and severally liable for the business’s tax obligations. In addition to the activities of a tax agent, a tax representative also generally makes and receives payments, arranges for the retention of documentation, etc.
A tax representative is obligatory for a nonresident business which has a VAT registration and compliance obligation in the KSA. This poses many challenges for international businesses as only a small pool of tax representatives is registered in the KSA and the tax representatives are also familiarizing themselves with the local regime. Practically, this is a challenge which has resulted in many international businesses struggling to meet their VAT obligations in the region on a timely basis.
Payments to Tax Authorities
Today, more options are available to international businesses in making payments to the tax authorities; however, challenges do remain.
In the UAE, a payment can be made via e-Dirham; however, this not a viable option for an international business, in the absence of having a local branch/subsidiary. Alternatively, credit card payments are accepted, but again, these attract a processing fee between 2–3 percent of the total payment amount.
A bank transfer is the most effective option in the UAE for international businesses; however, many have experienced difficulties transferring funds from a foreign bank to a UAE GIBAN number (the number assigned by the tax authority to each taxpayer for payment purposes).
From a KSA perspective, a nonresident business registered for VAT in the KSA must make all payments through a designated tax representative. Otherwise, resident businesses must pay via bank transfer using the SADAD payment system.
In Bahrain, electronic transfer is the initial listed payment method.
Foreign VAT Refund Mechanism
In the event that an international business is not registered nor required to be registered in the GCC, but incurs VAT in the region, schemes are set out within law which would allow a refund of such GCC VAT to be claimed.
Generally, to claim a refund, the international business must meet certain “foreign business” criteria, and there must be a similar refund mechanism available for GCC businesses in the business’s foreign country of establishment. No refund claim is available for goods/services which are “blocked” from deduction for all businesses under national law. Specific refund periods, submission timings and minimum amount thresholds apply.
These refund schemes are not yet fully activated/operational across the region.
Records and Retention
International businesses should retain all books, accounts and documentation which support their residence and registration status in the GCC, together with all GCC transactions and the treatment of the same for VAT purposes.
These may be retained in paper or electronic format (preapproval in Bahrain), subject to certain conditions. If retained digitally there (generally) should be access to them through a computer within the region and they must be able to be produced in hard copy for inspection within a short time frame, if requested.
The most noteworthy obligation is the Arabic language requirements. In the KSA specifically, tax invoices must be issued in Arabic. Also, across the region, records may be required to be reproduced in Arabic upon inspection by the relevant tax authorities.
Generally, records must be retained for five years (UAE and Bahrain) and six years (KSA).
When considering how best to structure current or future trade with the Gulf region, factors such as the absence of a registration threshold for nonresidents, together with the obligation to have a tax representative for nonresidents in the KSA, would be important to consider. The types of transactions undertaken, together with the profile of customers, are also relevant determining factors.
The full fact pattern and supply chain should be considered and then an efficient and optimal structure should be identified. This may include the establishment of a local entity rather than the use of a nonresident entity; the use of a local distributor or agent; VAT grouping options, etc. Of course, VAT is only one factor among the overall consideration of businesses when structuring their organization, and should not generally drive business decisions.
The key takeaway is that VAT should be one of the up-front considerations, and not an afterthought or a clean-up exercise further down the road. The application of penalties in the region are strict, and these should be mitigated, wherever possible.
Joanne Clarke is Tax Director (VAT) with Pinsent Masons, U.K.
The author may be contacted at: email@example.com