Monday, January 15, 2018

Effect of VAT Law on Long-Term Contracts

While a value added tax law (“VAT Law”) was originally anticipated to be introduced at the beginning of January 2018, to date Oman has not issued the relevant Royal Decree or law.  It is widely anticipated, however, following a regional framework agreed by the Member States of the GCC that such a law will come into force in the near future.

The UAE has enacted a VAT Law effective from 1 January 2018 and, given the volume of trade between the states, it is difficult to see how trade and commerce will operate efficiently if other GCC members do not enact a similar law prudently.

The Ministry of Finance and Ministry of Legal Affairs (“MOLA”) are expected to draft, amend and review a VAT Law together. Other government bodies may be involved in the consultation process.  Upon approval by the MOLA, the State Consultative Council will add any additional amendments it deems necessary.  The amended draft is subsequently sent to the Cabinet of Ministers who further review and alter as it sees fit.  A final version is sent to the Sultan for his approval and, if granted, the Sultani Decree is published in the Official Gazette.  The law would come into effect upon publication.

VAT is a tax imposed on most transactions in the production and distribution process.  This consumption-based tax is ultimately paid by the customer in the final price for goods and services.  Applicable businesses are assigned the responsibility of collecting the tax when the good or service is produced and/or distributed.

It might be easy to think that the consequences of such a law can be dealt with once it has been promulgated.  Unfortunately, when it comes to entering into any long-term contracts, the time to act is now, if not before.

Before entering into any long-term contract that might span the date a VAT Law might come into force, it would be foolish not to ensure it contained provisions prescribing how to deal with VAT.  In simple terms, VAT provisions would typically allow the party that invoices for goods or services to charge an additional amount for the relevant VAT.  However, this can be complicated in practice, particularly where goods or services are provided over a period that spans the date a VAT Law came into force.  This is because the amount of VAT payable might depend on what proportion of such goods or services were supplied before or after the relevant date.  It becomes even more difficult where there is no draft of the VAT Law available for guidance.

Construction contracts are an example of a type of contract where careful consideration needs to be given.  Related contracts with subcontractors and suppliers may or may not contain clauses in relation to VAT.  Ideally, a head contractor should ensure that its contracts with each of its subcontractors and suppliers have substantially similar VAT clauses in order to enable VAT to be calculated in the same manner, and passed through.  Such a head contractor would of course need to ensure it had the appropriate clause in its head contract to enable the VAT to be claimed from the project owner.