The Middle East on the verge of implementing Value Added Tax

Posted on Nov 17, 2017

The Middle East on the verge of implementing Value Added Tax

The UAE, along with the other five Arabian Gulf states, including Saudi Arabia and Qatar have agreed to slap VAT and excise taxes as part of measures aimed at surging up the government's income, diversifying government revenues as economies adjust to lower oil prices and ensuring more efficiency in the economy. The IMF said in October 2015 that the Gulf states would have a combined fiscal deficit of between 2015 and 2019 that would exceed US$700 billion if they did not undertake reforms.

The Gulf Cooperation Council has already given the green signal to the imposition of Value Added tax in their respective nations. Now they reached another milestone by publishing the Unified Agreement for VAT in the official gazette of one of the member states, Saudi Arabia. The Agreement provides the blueprint or framework for the operation of VAT across the GCC which will eventually be implemented by each GCC member nation through legislation and other instruments. This Agreement thus gives a final call to all the companies operating in the Middle East to put in place or further their VAT implementation plans.

Oil-rich Gulf countries, which for decades have attracted millions of foreign workers thanks to their reputation as tax-free havens, aim to introduce the value-added tax in 2018 to plug budget gaps.

On top of administrative and technical hurdles, however, the project now faces an unprecedented diplomatic crisis after Saudi Arabia, the United Arab Emirates and Bahrain on June 5 severed all ties with Qatar, their partner in the Gulf Cooperation Council.

Saudi Arabia, the UAE and Qatar are due to introduce VAT in early 2018, with the other three GCC members — Bahrain, Kuwait and Oman — following at a later date.

Companies in the UAE having annual revenues of over Dh3.75 million will be required to register under the GCC VAT system and for companies whose revenues fall between Dh1.87 million and Dh3.75 million, VAT registration will not be mandatory in the first phase. But eventually, each and every organization will be required to register under the new system.

Saudi Cabinet taking the lead in the initiative among other GCC nations, approved the Unified Agreement for Value Added Tax that previously referred to by the tentative title of a framework agreement. This agreement will be concluded by all six GCC nations. 

The unity referred to in the unified agreement is a unity of purpose. It is intended to make sure the implementation should be smooth and easy without any policy paralysis leading to delay of the implementation. Though it does not indicate that each national VAT law will be similar, nor all the nations need to impose the law simultaneously.

The standard VAT in the GCC will initially be 5 percent. Some categories, such as basic food and medicine, as well as exports outside the GCC, will be taxed at zero percent. In other sectors, such as education, healthcare, real estate and local transportation, details of VAT implementation may vary from one state to another.

A lot of surveys from the leading financial institutions clearly indicated that the steep fall in oil revenue in the region is making the GCC nation's fiscal revenue bit unsustainable. Dependency on the natural resources have made them think of an alternating revenue source and thus the genesis of the law came into existence. The shocking result of the survey also highlighted that nearly 60 percent of respondents feel very well-informed about the introduction of the VAT, whereas only a quarter of respondents felt well-informed in the previous survey launched in April. This shows an increase of 33.1 percent of respondents who fall into the category of very well informed, indicating a boosted awareness of VAT among businesses in the GCC.

The delays in passing legislation will make an organized, deliberate VAT implementation process difficult in most GCC countries. Both the revenue authority and the private sector have to go through many steps before VAT operates smoothly. And detailed and clear communications are essential for any organization that hopes to comply with the new laws. Despite possible delays in deadlines, businesses should move ahead as quickly as possible with their own planning in order to be compliant as soon as VAT is introduced. There is no advantage to be gained by delay.

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