Value Added Tax: proposed introduction in the Gulf Cooperation Council (GCC) Countries

Value Added Tax: proposed introduction in GCC countries

The proposed implementation date of VAT across the GCC is 1 January 2018.

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Background

The GCC member states are in the process of developing a broad framework for the introduction of Value Added Tax (“VAT”). The framework agreement will set out the underlying principles of VAT laws for the six GCC countries, with the likelihood that there will be areas where member states will have some flexibility to determine their own requirements.

The framework agreement is in the process of being finalised and we expect that there will be an announcement shortly, followed by the release of VAT legislation in every GCC member.

The proposed implementation date of VAT across the GCC is 1 January 2018.

VAT Basics

Generally, VAT applies to the supply of goods and services. Businesses selling goods or delivering services that are VAT-able are generally required to register for VAT in order to collect the applicable VAT. Certain businesses can be exempt from being required to charge VAT.

The standard rate of VAT in each GCC member state is expected to be 5% for standard-rated supplies.  Certain goods and services may be subject to VAT at special rates, special-rated supplies, which have yet to be determined. In addition, certain goods and services could be subject to VAT at a rate of 0%, zero-rated supplies, and other goods and services could be exempted from VAT altogether, VAT-exempt supplies.

Goods and services imported into a country are generally subject to VAT at the time of import. VAT in relation to such goods is often collected by the Customs authority at the time of release of the shipment. Generally, VAT on imported goods is applied on landed cost inclusive of the applicable customs duty.

It is normal that only VAT-registered businesses will charge and collect VAT on the supply of VAT-able goods and services, otherwise known as “output VAT”. Businesses are usually entitled to a refund for any VAT paid on VAT-able goods and services procured by the business, input VAT.  The net VAT, output VAT less input VAT, is then remitted to the tax authority.

Standard-Rated Supplies

Most local supplies of goods and services in a country are generally included in this category, for example, wholesale and retail sales, the consumption of food in a restaurant, and the provision of services by law and accounting firms.

Zero-Rated Supplies

Goods and services exported out of a country may be zero-rated, that is, are subject to VAT at a rate of 0%.

VAT-Exempt Supplies

The following businesses are often exempt from VAT in order to reduce its impact on the population:

  • educational institutions;
  • pharmaceutical supplies;
  • financial services, including both banks and life insurance companies; and
  • sale or lease of residential property.

Out-of-Scope Supplies

Supplies where goods and services are delivered by an overseas supplier to another overseas person are generally included in this category as do private and non-business transactions.

Charging and Collecting VAT

Businesses generally need to satisfy certain conditions for claiming input VAT on business purchases and expenses.  For example, only the input
VAT on business purchases may be recovered. 

VAT Returns and Payments

VAT registered businesses are required to submit periodic returns to their respective tax authority summarising different categories of VAT-able supplies subject to output and input VAT and the net amount to be paid or claimed as a refund, or carried forward to be claimed against any future VAT liability. 

The frequency of the returns can be monthly, quarterly, bi-annually or even annually, depending on the magnitude of the input and output VAT amounts.

How VAT could impact businesses

VAT implementation is likely to have a significant impact on business operations, as follows:

  • business processes;
  • IT and other related systems;
  • supply chain:
  • cash flows;
  • human resources;
  • legal;
  • marketing and pricing; and
  • fiscal and accounting.

How KPMG can help

KPMG member firms in the GCC and worldwide have tax professionals with necessary competence and experience to assist businesses and organisations in preparing for the VAT implementation from a consulting, compliance and technology standpoint.

Indirect tax professionals are able to assist clients with questions relating to the upcoming changes, including, but not limited to, nexus studies, taxability reviews, supply chain analysis and review of compliance requirements.

Compliance centres will be able to assist clients with the preparation and filing of VAT returns.

Management consulting professionals will be able to assist clients in the implementation of automated solutions to their transaction tax compliance process.

VAT Transition

When assisting a business in the preparation for the introduction of VAT, our tax professionals may undertake a range of activities to assess readiness and prepare a business for potential changes as outlined above.

We are currently assisting clients with:

(a) Impact Assessment - This involves a review of business operations with the objective to identify the areas where changes may be needed to the client’s operating policies and procedures and accounting, ERP, systems in order to meet compliance requirements.

(b) Implementation Plan - Designing the changes needed to policies and procedures and the accounting, ERP, systems and preparing a roadmap for required changes to be made with minimal disruption to the client’s business.

(c) Implementation Assistance - While the implementation will likely be undertaken by the client, we will review the implementation work and report deviations to management.

(d) Testing and Go-Live Assistance - We will test the systems for effectiveness and accuracy.  This could be by running mock data and VAT returns, or reviewing the actual VAT returns for the initial months.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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