VAT in the GCC

Latest Developments and Business Impact

 01
Latest Developments

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VAT recent developments
A common VAT framework
The GCC Member states are in the process of agreeing a common framework for the introduction of a VAT
system in the GCC. A formal announcement of the Treaty is expected shortly afterwards. Upon ratification of the
GCC Treaty, each Member State is expected to issue its own national VAT legislation based on the agreed
common principles.
VAT legislation
Each Member State will issue its own VAT legislation in accordance with the common principles outlined in the
GCC Treaty. It is expected that some countries will issue VAT legislation shortly after announcement of the treaty
by the GCC.
VAT regulations
These regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the
VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT
legislation is issued.
Go live
The introduction of VAT across the GCC is expected to take effect from 1 January 2018.

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VAT in the GCC
Our understanding of the
GCC VAT system
VAT on goods &
VAT at Import
services

Expected transition period Exports subject

between 12 to 15 months Standard rate 5%
to 0%
Envisaged system is a
standard fully-fledged VAT
system applying on most
supplies of goods and Possible VAT Minimum annual
services with possible exemptions turnover
exemptions/exceptions

Deduction of Periodical filing

input VAT and reporting
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VAT in the GCC
 Designing the VAT law to deliver a
win-win taxation model
An ideal tax system should help governments raise essential revenue, and should do so without discouraging
economic activity and without deviating too much from tax systems in other countries

Criterion Key results for both the business community and the tax authorities
Simplicity Easy to implement and to apply
Efficiency Low compliance costs
High collections and self-policing
Certainty Limited need for litigation
High voluntary compliance
Broad-based Limited special systems and exceptions
Proportionality Taxable amount not to exceed consideration actually paid
Competitiveness Appropriate exemptions
Non-distortionary Neutrality in competition between the States and Industries

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VAT in the GCC
 VAT/GST design benchmark
The design of the VAT/GST system has a direct impact on cost of compliance and
cost of collection
High Low
Multiple VAT rates Single VAT rate
Multiple exemptions Few exemptions
Complex and inefficient obligations Simple and clear regulation
Lack of facilitating instruments E-filing
Burdensome fines Proportional penalties

EU New Zealand
Brazil Norway Chile Mexico Australia Singapore

High Low

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VAT in the GCC
 02
VAT Key Features

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What is VAT?

Value Added Tax (VAT) is a tax on consumption

Transaction based tax VAT is levied at each stage in the chain of

production/distribution

VAT charged on supplies/VAT deducted on purchases

Collected by businesses on behalf of the VAT Administration

Self-assessment system - Businesses submit a periodic VAT return to the

Tax Authority in which they calculate the Net VAT amount and either
pay or get a refund for this amount
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VAT in the GCC
How VAT works
Business charges VAT on sales
(output VAT)

Less
Business pays VAT on purchases
(input VAT)

Net VAT
(output VAT input VAT)

Equals

Negative
Positive

Payable to the VAT Refundable by the VAT

Administration Administration

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VAT in the GCC
Taxable supplies
A taxable supply at the standard rate is a
supply on which tax is charged at 5% and
for which the related input tax is
deductible
Common Standard rate Supplies
A taxable supply at the zero rate a zero-rated
supply - is a taxable supply on which tax is
charged at zero percent and for which the
related input tax is deductible
Common Zero-Rated Supplies

Medicines and
Retail Car sales and
Basic Food Medical
purchases rentals
Equipment

Repairs and
Hotels and Certain means
maintenance Exports
Restaurants of Transport
services

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VAT in the GCC
Exempt Supplies

An exempt supply is a supply on which tax is not charged and for which the
related input tax is not deductible

Common Exempt Supplies

Domestic
Residential
Healthcare Education Passenger
Dwellings
Transport

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VAT in the GCC
Reverse Charge (Or self
assessed VAT)
UAE

ServiceCo Company X

Service flow

Reverse charge rules typically apply to services received from suppliers established outside the
country
The recipient accounts for the VAT due on the supply on his VAT return (instead of the supplier)
The VAT accounted for by the recipient is deductible as input VAT on the same VAT return

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VAT in the GCC
VAT Groups

General conditions to be met by each member of a VAT group in a country

Legally
independent but
Established and
closely bound to Not a member of
registered for VAT
Corporate entity the other members another VAT group
in the relevant
by financial, in the country
countries
economic and
organisational links

Under VAT groups, independent legal persons are allowed to be treated as a single taxable person
under certain conditions
A VAT group scheme allows for two or more companies to be considered for VAT purposes as a
single taxable person
Intra group supplies are disregarded for VAT purposes

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VAT in the GCC
Example 1 Fully Taxable
Business
Sales VAT Return
$100,000,000 Taxable Supplies VAT due on sales $ 1,500,000

70% of exports sales VAT due on reverse charge $ 500,000

subject to 0% VAT Total due $2,000,000

30% sales subject to Costs

5% VAT $50,000,000 Local purchases/imports VAT deductible on purchases $ 2,500,000
Purchases and imports $20,000,000 Salaries VAT deductible reverse charge $ 500,000
subject to 5% VAT $10,000,000 Services from abroad Total Deductible $3,000,000
Entitlement to claim
input VAT = 100% of Net amount Refundable ($1,000,000)
input VAT

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VAT in the GCC
Example 2 Exempt Business

Sales VAT Return

$100,000,000 Supplies VAT due on sales $ 0

Sales exempt from VAT VAT due on reverse charge $ 500,000

Total due $ 500,000
Purchases and imports
subject to 5% VAT Costs
$50,000,000 Local purchases/imports VAT deductible on purchases $ 0
No Entitlement to claim
input VAT $20,000,000 Salaries VAT deductible reverse charge $ 0
$10,000,000 Services from abroad Total Deductible $ 0

Net amount Payable $

500,000
Non-deductible VAT
$3,000,000

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VAT in the GCC
Example 3 Mixed Business

Sales VAT Return

$100,000,000 Supplies VAT due on sales $ 2,500,000
50% of sales subject to 5%
VAT VAT due on reverse charge $
500,000
30% of sales subject to 0%
Costs Total due $3,000,000
VAT
20% of sales exempt from $50,000,000 Local purchases/imports
$20,000,000 Salaries VAT deductible on purchases $
VAT
2,000,000
Purchases and imports $10,000,000 Services from abroad
VAT deductible reverse charge $
subject to 5% VAT 400,000
Entitlement to claim Total Deductible $2,400,000
(taxable supplies / total
supplies) = 80% of input
Net amount Payable $
VAT 600,000

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VAT in the GCC
 03
Compliance Requirements

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VAT Records Normal
requirements
VAT records must be kept for a specific period of time.
Records may be kept on paper or electronically.
Records must be accurate, complete and readable.
Examples of records that need to be kept

1. Copies of all issued invoices

2. Originals of all received invoices

3. Debit or Credit notes

4. Import and Export records

5. Records of any goods given for free or allocated for private use

6. Records of all zero-rated or VAT exempt supplies and purchases

7. A VAT General Ledger Account

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VAT in the GCC
VAT Invoices Normal
requirements
Only VAT-registered businesses can issue VAT invoices.
Valid invoices should be kept.
VAT invoices are a requirement for deducting input VAT - Invalid
invoice, pro-forma invoice, statement or delivery note are not accepted.

Invoice Serial Number

VAT INVOICE Date

Name of Taxable Person Name of Customer

VAT Registration Number VAT Registration Number
Address and Contact Details Address and Contact Details

Ref Number Description Quantity Unit Price Unit Price Total exclusive of VAT Total inclusive of VAT
exclusive of VAT inclusive of VAT

Total
Applicable VAT rate
VAT amount
Subtotal

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VAT in the GCC
VAT Return example
Self-assessment system
Businesses submit a For the period
regular VAT return to
the Tax Authority
Must report all VAT on
sales and purchases
made in the period,
including intra-GCC
transactions
Calculate the Net VAT
amount and either pay
or get a refund for this
amount
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VAT in the GCC
VAT Return
31-Jan-18
VAT on Sales 1 x
VAT due on acquisitions from other Members States 2 x
TOTAL VAT Due (sum of Boxes 1 and 2) 3 x
VAT reclaimed on purchases and other inputs
4 x
(including acquisitions from the GCC)
NET VAT to be paid to Tax Authority 5 x
Total value of sales and all other outputs excluding any VAT 6 X
Total value of purchases and all other inputs excluding any VAT 7 x
Total value of supplies of goods and related costs, excluding any VAT, to other
8 x
GCC Member States
Total value of acquisitions of goods and related costs, excluding any VAT, from
9 x
other GCC Member States
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 04
Industry Focus

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 Construction
Construction services likely to be subject to VAT
at 5%
Need to consider time of supply / when VAT is
due
Invoicing (progress payments, valuations, etc)
Long term contracts / transitional
arrangements
Refunds
Suppliers / sub contractors
Documentation to reclaim VAT on costs (self
billing / other arrangements)
Unregistered suppliers

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VAT in the GCC
Real Estate
Complex / different types of supplies
- Commercial / Residential
- Land, buildings, or both
- Sales / Leases
Commercial Sales should be taxable at 5%
Residential sales may be exempt
Leases may be exempt (possibly with an option to
tax for commercial)
Long term v short term definitions different
treatment
Time of supply
VAT recovery on costs
Can be complex / apportionment of VAT

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VAT in the GCC
 Education
The institution must not systematically aim to make a
profit;

Any profits made, may not be distributed, but must be

reinvested to improve education or to maintain.

Education most likely to be exempt

This applies to primary education to higher education,

even if carried out by an independent contractor

No output VAT, VAT non recoverable

VAT would be a cost on organization

Providing taxable and non taxable supplies: Pro- rata

deductibility

Only exempt supply: no VAT return

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VAT in the GCC
 Food Services
Basic food (list): zero-rated

Food: standard VAT rate (5%)

Food services: standard VAT rate (5%)

Invoices (B2B and B2C) / till receipts

Reporting

Records, returns

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VAT in the GCC
Manufacturing
Goods manufactured and sold within the country is subject to 5%
VAT
Imports:
Goods imported from outside the country into a (fenced)
Free Zone are considered to be outside the customs / VAT
territory of the relevant country
Goods stored in (fenced) Free Zone are not subject to
customs duties nor VAT
VAT is charged at a rate of 5% on the value of the sale upon
removal from free zone into the country

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VAT in the GCC
 Retail
Rates

5%, 0%, exempt / importance of correct coding

Pricing / Retail price inclusive of VAT

Business promotions Vouchers Gift cards Free products

Free supplies

3 for the price of 2 / buy one get one free / mixed rate goods

Loyalty schemes

Delivery charges

Online sales

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VAT in the GCC
 04
VAT Implementation Considerations

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What does VAT mean for
businesses
Business impacts Technology and Systems
Potential effects on margins and pricing Systems changes for VAT compliance and reporting
Cash tax impact from VAT leakage (e.g. financial and point of sale systems)
Cash flow: funding of timing differences VAT coding of accounts payable and receivable
between paying and collecting/receiving VAT IT architecture impacts
VAT issues when undertaking deals Process and compliance automation
Electronic documentation
Reflecting the VAT law Data and analytics to enhance compliance
Identify correct VAT treatment of
Sales and Marketing
every business transaction
VAT treatment of sales and exports
Industry sector specific issues
Effect on demand
Inter-company transactions What VAT
means for Pricing strategy and payment terms
Intra GCC transactions you
Customer management
Apply any exemptions/Zero rate
Impact on current contracts and
commercial arrangements
Compliance throughout the value chain
Map business flows including procurement,
production, logistics, sales and marketing activities Procurement
Establish VAT management framework covering VAT treatment of purchases and
governance, controls, roles and responsibilities imports
Tax knowledge and training Procurement strategy
Tax registrations and filing requirements Vendor management
Process and procedure guides Contracts and arrangements
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VAT in the GCC
 Claims & Calculations and
Documentation adjustments

Incorrect rates applied to sales/sales Errors in calculation of VAT

omitted due/reclaimable
Delays with VAT payment/invoices Clerical/manual/system errors
Invalid or missing documentation Omitting inter-company
Invalid/insufficient documentation to transactions
support VAT claim Journals adjustments
Invalid VAT claims e.g.: Manual corrections
Claiming VAT in relation to Transactions outside system/one
Exempt/non business off/irregular
transactions
Claiming foreign tax on returns
(i.e. VAT incurred in other
countries)
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VAT in the GCC
Challenges
VAT implementation
Have you the appropriate resources to be compliant
Who will be responsible
Do you understand the new law/regulations
How do you keep up to date with changes
Communication
Educate stakeholders internal and external top down
approach / contractual obligations / financial and
accounting prerequisites / system and accounting
requirements / training and workshops at all levels
Interview sessions with all key stakeholders
Compile information through standard VAT templates line
by line characterization and location analysis of
revenues/expenses
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VAT in the GCC
Interaction with tax authority
Refunds/enquiries/audits
Records/supporting documents to deal with
audits/enquiries
Unclear matters/process to deal
Education/resources/training
Potential delays with refunds/time incurred by business
Manage change
Transitional VAT tax issues existing and future contracts
Understand tax planning and fraudulent VAT practices
Test drive overall VAT commercial chain before going live
Manage increased administrative costs
Manage cash flow, understand possible P&L impact
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 05
VAT Implementation Project

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A phased approach will
facilitate smart choices in
effort and sequencing
Pre Impact Design Implement Operate
announcement assessment
Project management
Build awareness. Business impact Design VAT Implement system Ensure VAT
modelling. approach for: design compliance and
VAT technical Assess high level
Tax technical requirements. efficiency.
business impacts. Undertake a gap
analysis to assess considerations Transitional Monitor new
Review contracts that
the systems, people Governance measures.
Business processes need a VAT action. Financial, sales
developments.
and process changes
and supply chain Training and Ongoing staff
Shape project. required to be VAT
systems communications training.
Technology compliant.
Filing and Simulate and test
reporting. before go-live
People & organization date.

Outcome: Mobilisation VAT readiness assessment

VAT Blueprint Re-configured systems, Ongoing compliance
processes and people and continuous
improvement.

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VAT in the GCC
VAT Implementation What
you can do now
Project Management
Identify VAT implementation strategy: in-house,
outsourced, combined
Identify and engage key stakeholders
Appoint VAT implementation project manager

Understand VAT treatment of business

economic activities
VAT Technical
Perform Financial Modelling to estimate
liabilities and costs

Business Processess Understand how VAT impacts business

functions and processes

High level understanding of existing

Technology systems (i.e. ERP) to identify capability to
cater for VAT

Start VAT awareness

Learning & Development
Assess resourcing and training needs

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VAT in the GCC
 Jeanine Daou
Middle East Indirect Tax Leader
T: +971 (0) 4 304 3744
E: jeanine.daou@ae.pwc.com

Nadine Bassil
Middle East Indirect Tax Director
T: +971 (0)4 304 3688
E: nadine.bassil@ae.pwc.com 2016 PwC. All rights reserved. Not for further distribution without the permission of PwC. PwC
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