Value-added tax will lead to significant change in the operations of multinational corporations operating in the Gulf region—this article analyzes the impact for certain sectors.
Value-added Tax (“VAT”) was introduced in the United Arab Emirates (“UAE”) and Kingdom of Saudi Arabia (“KSA”) from January 1, 2018. The Kingdom of Bahrain has notified that VAT will be implemented from January 1, 2019.
In the state of Qatar and the Sultanate of Oman there are quite good indications given by the Ministry of Finance that VAT will be implemented in either the second or third quarter of 2019. The parliament budget committee of the state of Kuwait notified that VAT may be implemented in 2021, but it is under review.
The Framework Agreement signed by all six nations and the VAT law of the UAE, KSA and Bahrain provide adequate guidance on treatment of VAT on various transactions. There are three categories of VAT rate:
- standard rate of VAT is 5 percent;
- zero rate—for certain supply of goods and services;
- exempted supply.
Impact of VAT
The GCC VAT Framework Agreement allows implementing member states to zero rate international transportation of goods and passengers. Both the UAE and KSA have adopted this in their local legislation.
Article 32 of the Framework Agreement provides that the following transport services will be subject to zero rate:
- goods and passenger transport services from one member state to another member state and supply of transport related services;
- international goods and passenger transport from and to the GCC territory and supply of transport related services.
Article 33 of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No. (8) of 2017 on Value Added Tax of the UAE VAT law adopted Article 32 of the Framework Agreement and considered that international transportation of goods and passengers are zero-rated.
The provisions of Article 33 are summarized below:
The supply of international transportation Services for Passengers and Goods and Transport-related services shall be subject to zero rate in the following cases:
- transporting passengers or goods from a place in the State i.e. the UAE, to a place outside of the State;
- transporting passengers or goods from a place outside of the State i.e. the UAE, to a place in the State;
- transporting passengers from a place in the State, i.e. the UAE, to another place in the State by air or sea or land as part of supply of international transport of those passengers, if either or both the first place of departure or final place of destination is outside of the State, i.e. the UAE;
- transporting goods from a place in the State, i.e. the UAE, to another place in the State if the services are supplied as part, or for the purpose, of the supply of services of transporting goods either from a place in the State to a place outside of the State or from a place outside of the State to a place in the State.
“Transport-related services” is defined as: shipment, packaging and securing cargo, preparation of customs documents, container management, loading, unloading, storing and moving of goods or any other closely related services, that are necessary to conduct the transportation of services.
The KSA adopted similar treatment of VAT at zero rate on International transportation of goods and passengers and transport-related services from and to within the KSA.
The Kingdom of Bahrain notified that “transportation services of goods and passengers which starts or ends in the Kingdom, or passes through its territory, including transport related services and supply of means of transport will be zero rated.”
On analysis of the above provisions, sea freight, freight forwarding services or any transport-related services are subject to a zero rate of VAT. This means that that the services are taxable but the rate of VAT is 0 percent. A taxable person will need to record any zero-rated supplies in their VAT account and report these on their tax return.
Moreover, a business will be required to issue a “tax Invoice” even though international transportation services are taxed as a zero-rated supply.
The business would be able to claim input VAT as credit incurred on providing zero-rated services. If the taxable person were to have another line of business which is taxable at the standard rate of 5 percent, the business would be able to offset output liability with this input credit.
If a taxable person is providing only international transport services, then it has the option to claim refund of input VAT.
Shipping and logistic service companies could expect similar rules from Qatar and Oman on international transportation services of goods and services, where international transport of goods and passengers from and to within Qatar or Oman may be zero-rated. However, the business will be required to comply with VAT regulations.
Supply of Wired and Wireless Telecommunication Services and Electronically Supplied Services
Article 20 of the GCC VAT Framework Agreement states “The place of supply for wired and wireless telecommunication services and electronically supplied services shall be the place of actual use of or enjoyment from these services.”
Article 23(2) of the UAE VAT law covers an exhaustive list of electronic services and an electronic marketplace definition. Under the UAE VAT law “electronic services” means services which are automatically delivered, over the internet or an electronic network or an electronic marketplace, including:
- supply of domain names, web-hosting and remote maintenance of programs and equipment;
- supply and updating of software;
- supply of images, text, and information provided electronically such as photos, screensavers, electronic books and other digitized documents and files;
- supply of music, films, games on demand;
- supply of online magazines;
- supply of advertising space on a website and any rights associated with such advertising;
- supply of political, cultural, artistic, sporting, scientific, educational or entertainment broadcasts, including broadcasts of events;
- live streaming via the internet;
- supply of distance learning;
- services of an equivalent type which have a similar purpose and function.
“Electronic marketplace” means a distribution service, which is operated by electronic means, including by website, internet portal, gateway, store or distribution platform, and meets the following conditions:
- allows suppliers to make supplies of electronic services to customers;
- the supplies made by the marketplace must be made by electronic means.
Article 18 of the draft VAT law of Bahrain states that “place of supply of wired and wireless telecommunication and electronic services shall be in Kingdom, if they are used and utilized in the Kingdom, to the extent of this use and enjoyment, regardless the place of contract or payment.“
Detailed regulations on wired and wireless telecommunication services and electronic services will be separately notified.
Similar treatment is envisaged on the place of supply of wired, wireless telecommunication services and electronically supplied services provided in Qatar and Oman. A business providing supply electronically in GCC countries would be required to obtain registration and comply with VAT regulations.
The Framework Agreement, along with regulations in the UAE, KSA, and the draft regulation of Bahrain, provides sufficient information for businesses to start planning for VAT in the three remaining GCC countries—Oman, Bahrain and Qatar.
VAT will lead to significant change in the operations of multinational corporations operating in this region.
Businesses operating in the shipping and logistic sector should conduct detailed effect assessment of each transaction and check whether each line of revenue satisfies the definition of “international transport services of goods and passengers” to qualify for the zero rate.
Businesses would also require assessment of the impact of input VAT credits from a cash flow perspective. VAT refunds are granted based on a VAT return filed by the business. It is natural that the tax authorities will scrutinize the VAT return and ask the business to provide detailed documentation before granting a refund. It will take some time to obtain a refund of input VAT from the tax authorities.
Information technology and information technology enabled services companies providing electronic services in the GCC member states should assess the impact of VAT on their business.
Businesses will need to take a fresh look at their business model and pricing from a VAT point of view.
Businesses should also assess how they will comply with VAT regulation if services were provided remotely.
Rajeev Agarwal is Head of Global Tax with Qatar Navigation QPSC.
He may be contacted at: email@example.com
Disclaimer: The content of this article is intended for general information purposes. You should always seek professional advice before acting. No responsibility is taken for any loss because of any action taken or refrained from in consequence of its contents.