VAT in GCC

BACKGROUND

The introduction of taxes is a GCC-wide initiative to diversify regional economies. Given the overall reduction in oil prices in recent years, it has been necessary for the GCC member states to explore other revenue-raising measures and reduce dependency on hydrocarbons as the key contributor to the public purse. As a result, the GCC member states have agreed to sign unified framework agreements for the implementation of VAT and Excise taxes. Member states will also implement their own domestic legislation that will govern the introduction of these taxes.

The introduction of VAT and Excise taxes will help GCC member states diversify sources of revenue so that government departments can continue to deliver excellent public services and ensure a high quality of life for coming generations.

EXPLAINING VAT

Value-Added Tax or VAT is a tax on the consumption or use of goods and services levied at the point of sale. VAT is a form of indirect tax and is used in more than 180 countries around the world. All OECD countries except for the US have VAT (or a variation). While it feels exactly the same as a general sales tax to end-consumers, VAT is a more sophisticated tax and overcomes many challenges that affect the general sales tax.

VAT is charged at each step of the ‘supply chain’. End consumers generally bear the VAT cost while registered businesses collect and account for the tax, in a way acting as a tax collector on behalf of the Federal Tax Authority.

DIFFERENCE BETWEEN VAT AND SALES TAX

A sales tax is also a consumption tax, just like VAT. For the general public, there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.

Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.

The Rates

To operate in compliance with the VAT law, every business should understand the difference between exempt, zero-rated, and standard rated (5%) supplies.

Exempt supplies

Article 46 of the Federal Decree-Law no. (8) of 2017 (UAE) specifies exempt supplies, that are not subject to VAT. In this case, suppliers are not allowed to deduct input tax incurred during the production or the delivery of these supplies. In the UAE, the following are considered exempt supplies:

  • The supply of some financial services
  • Residential properties
  • Bare land
  • Local passenger transport

Zero-rated supplies

Article 45 of the Federal Decree-Law no. (8) of 2017 (UAE) specifies zero-rated supplies. The tax rate applied to zero-rated supplies is zero. In this case, suppliers are allowed to claim the input tax paid during the production and delivery of these supplies. In the UAE, the following are considered to be zero-rated supplies:

  • Exports of goods and services to outside the GCC
  • International transportation, and related supplies
  • Supplies of certain sea, air and land means of transportation (such as aircrafts and ships)
  • Certain investment grade precious metals (e.g. gold, silver, of 99% purity)
  • Newly constructed residential properties, that are supplied for the first time within 3 years of their construction
  • Supply of certain education services, and supply of relevant goods and services
  • Supply of certain Healthcare services, and supply of relevant goods and services

Standard supplies

Standard supplies are supplies that are subject to the standard rate of 5%. Just like the case with zero-rated supplies, suppliers can claim the input tax paid during the production and delivery of these supplies.