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Impact of VAT on the energy sector

Impact of VAT on the energy sector

An article about the impact of VAT on the energy sector.

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Ali

The energy industry is a key pillar of the economy, as it encompasses companies that are directly and indirectly involved in the production and distribution of the energy required to power the economy and facilitate the means of production and transportation. In Bahrain, oil and gas extraction plays a dominant role in the local gross domestic product (GDP), a role that is expected to grow with recent discovery of the new oil field.

According to Trading Economics (2018), refined petroleum (US$3.63 billion), crude petroleum (US$2.19 billion) and special purpose ships (US$358 million) were the top goods for export from the Kingdom of Bahrain in 2016. With the introduction of value-added tax (VAT) expected by the end of this year, it is important to understand how indirect tax would apply to this sector and, therefore, estimate its impact on the business environment.

The Unified Agreement for VAT of the Cooperation Council for the Arab States of the Gulf states that it is at the discretion of each member state to subject the energy, as well as the oil and gas derivatives sectors, to VAT at 0 percent. If applied in Bahrain, this could mean that oil and gas exports are zero-rated, putting exporters in a VAT refundable position.

The world’s largest oil exporter, the Kingdom of Saudi Arabia (KSA), have applied a 5 percent VAT charge on all streams of domestic oil and gas operations. Therefore, VAT charges apply on royalty payments and production sharing arrangements, and the exchange of crude oil/natural gas between companies within this sector within KSA. However, The United Arab Emirates (UAE) has introduced a relief of 0 percent VAT on supplies of crude oil and natural gas. The relief is placing taxpayers in a continuous net refund position. This means they have to constantly reclaim VAT paid on investment goods or on inputs, which may include drilling services, pipeline installation and maintenance, and storing and handling services at installations.

The primary source of VAT charges associated with the oil and gas sector is expected to be from importation of capital goods, given that the sector is highly dependent on its import needs during project development. However, many countries provide VAT exemptions for imported capital goods, and sometimes imported inputs for crude oil and natural gas extraction.

The local VAT law has not yet been issued in the Kingdom of Bahrain. However, in my opinion, I believe the magnitude of the VAT refunds, particularly during periods with large investment, will cause challenging obstacles when anticipating VAT refunds from authorities. This would include impact on cash flow and investment to be made on systems and training to ensure VAT compliance throughout the entire blockchain cycle.  

© 2018 KPMG Fakhro, a Bahrain partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss entity. All rights reserved.

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