United Arab Emirates and Saudi Arabia VAT Laws
1 December 2017
The United Arab Emirates and Saudi Arabia have published their final VAT laws, but questions remain over just how ready the GCC and its taxpayers are for VAT with only a month to go.
Taxpayers in Saudi Arabia and the UAE will see a VAT rate of 5% enter into force on January 1 2018. VAT across the remaining four members of the GCC is expected to be implemented later in the year.
These two regimes are likely to be used as test cases by Qatar, Oman, Bahrain and Kuwait to eliminate initial issues identified in the new tax systems before they finalise their VAT laws. But with the UAE only having signed the Executive Regulations for Federal Decree Law No. (8) of 2017 on Value Added Tax into law on November 27, and Saudi Arabia having done the same only a couple of months earlier, there is growing concern that no one is ready for the January 1 start date.
Abdul Aziz Al Ghurair, chairman of the UAE Banks Federation, has called for the VAT plan to be delayed for at least six months to allow taxpayers to have adequate time to digest the final laws and prepare.
"We call to postpone implementing the VAT to give time to all the sectors to implement it correctly, whether in banking, insurance, or other sectors," Al Ghurair told the press. "Neither banks, nor insurance companies, are ready. We need at least six months from the time we receive all the details of the regulations, along with details for each sector and how to calculate the tax for each product."
Businesses are struggling with the change in this region as they try to prepare for the first tax regime to be introduced in this region, which has traditionally gained its tax revenues from the oil sector. A recent survey found that 89% of businesses questioned are yet to complete a VAT impact assessment for the new tax regime.
Understanding the VAT impact and the VAT implementation process are crucial for businesses to achieve effective VAT compliance. A wide range of industries will be affected by the new system, as well as those making zero-rated or exempt supplies. However, some business, like those in free trade zones, are only now coming to grips with the reality that the government is serious and VAT will in introduced.
One of the key questions hanging over the UAE is whether it will implement VAT in the free trade zones (FTZs), where businesses are allowed to operate tax free. According to John Peacock, senior associate at BSA Ahmad Bin Hezeem & Associates, the final regulations mean that the new levy will apply in certain designated zones, which would encompass FTZs like the Jebel Ali Free Zone and Dubai Airport Free Zone.
Despite the fast approaching effective date, the UAE and Saudi VAT laws do include some transitional measures to ease taxpayers into the change.
Firstly, the VAT rate is very low compared to the OECD average of 19%.
Secondly, the threshold for VAT registration has been set at a fairly high level across all the GCC countries. In Saudi Arabia, for example, the new system means that the VAT threshold will be set at SAR 375,000 ($99,900) of annual turnover. Similarly, the threshold in the UAE will be AED 375,000 ($102,000). However, there is an exemption for businesses making less than SAR 1 million/AED 1 million during the first year of the new regime, which may help reduce competitive distortions between registered and unregistered companies.
On compliance and reporting, companies with a turnover of less than SAR 40 million/AED 40 million can file on a quarterly basis. Reporting can be carried out on a cash basis for businesses with less than SAR 5 million in annual turnover.
Overall, these measures may reduce the compliance burden for small-to-medium companies, while the low VAT rate may not hit big business, which are best prepared for the regime, so hard.
But, the Chartered Financial Analysts (CFA) Society disagrees, arguing that VAT will impose some high costs. In a survey within the UAE, Bahrain and Kuwait, the CFA found that 87% of investment professionals believe the 5% rate will increase the costs of real estate companies and will be passed on to investors. While 54% believe the VAT system will hit retail investors much more than institutional investors.
Countering this, CFA Society Emirates has made it clear that the issue about how the policy is viewed and the negative consequences may be marginal in the end. This may partly account for why the UAE and Saudi Arabia have gone ahead with VAT.
"The concerns regarding VAT in the region is largely one of perception rather than policy," Amer Khansaheb, president of CFA Society Emirates, said. "With the government revenue this will generate, liquidity levels in the market are expected to improve; which should increase investor confidence and appetite."
Even though the rollout of VAT across the GCC has major implications for businesses in terms of accounting and supply chain management, Khansaheb is sure that the higher cost of compliance "should not deter regional and international investors in a significant way".
"In the eyes of investors, creating a more regulated environment with greater financial transparency should be a positive development since this is the model in developed economies," said Khansaheb. "Given that taxation at higher rates is a norm around the world, the GCC will continue to be attractive as average tax rates are lower than almost all other major markets."
The question of preparedness is not exclusively a concern for businesses.
Although the GCC treaty framework sets out common principles on VAT across the six member nations, it is left up to each state to enact legislation on a national basis.
Originally, the GCC plan was introduce VAT across the whole economic bloc all in one go. What has changed is the timeline. While Qatar, Oman, Bahrain and Kuwait are still committed to introducing VAT, the rollout of the levy could take a few months into 2018 or even until January 2019. The reasons for the delay vary from country to country.
Observers have claimed that Kuwait may take longer to implement the VAT system because of its slow-moving civil service, whereas the government of Bahrain has struggled to get austerity measures through Parliament. Meanwhile Oman has not clarified its timeline for implementing the tax.
Qatar’s relations with the rest of the GCC have been under strain over allegations that the Qatari government supports terrorism. Saudi Arabia, Bahrain and the UAE have cut diplomatic ties with Qatar over these claims, creating a major rift among GCC member states. Yet Qatar remains officially committed to the plan.
Diversifying the economy away from oil is a major reason to pursue greater economic integration and this means developing a common approach to VAT. The attraction of VAT is that the levy is cheaper to operate and less vulnerable to fraud than other taxes.
Nevertheless, with the VAT regime applying in the UAE and Saudi Arabia from next year, the next test for this former tax free region will not be how easily it can be implemented or even how it helps avoid tax fraud, but what it means for investors.
The above article was published on www.internationaltaxreview.com on December 1 2017 and has been republished with the approval of the Publisher.