Towards the end of 2016, the Gulf Cooperation Council (GCC) member states agreed and signed a Unified VAT Agreement (the “Unified Agreement”) for the introduction of value added tax (“VAT”). The Unified Agreement sets out the framework through which each individual GCC member state will implement domestic VAT legislation. The intention was that VAT would be implemented by the GCC states by 1 January 2018.
Implementation so far
The United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) introduced VAT in accordance with the terms of the Unified Agreement on 1 January 2018. Both countries enacted a VAT Act together with Implementing Regulations. Bahrain has recently announced that VAT will be introduced in the country on 1 January 2019 and has published the Arabic version of its VAT law. Qatar has indicated that it may introduce VAT later in 2019, while Kuwait may potentially delay implementation until 2021.We understand that the Omani VAT legislation is currently being prepared and that VAT may be introduced as early as 1 September 2019, though it may be delayed until 1 January 2020.
Key terms of the Unified Agreement
Under the terms of the Unified Agreement, VAT will apply to goods and services at the standard rate of five percent. Although the majority of the VAT compliance requirements are left to the discretion of the member states to be determined in their respective VAT legislations, the Unified Agreement requires businesses with an annual turnover of SAR 375,000 (or its equivalent from any other GCC member state currency) to register for VAT. Businesses generating half of the turnover threshold may register for VAT on a voluntary basis.Under the terms of the Unified Agreement, the following must be zero rated (i.e., subject to zero percent VAT rate): medicine and medical equipment; the transport of goods and passengers (intra-GCC and international) and associated ancillary services; export of goods outside of the GCC; and certain transactions in gold and silver. Certain food items (e.g. bread, milk), oil and gas including oil derivatives, and the supply of means of transportation for commercial purposes may be zero rated at the discretion of each individual member state. The member states also have the discretion to exempt or zero rate, as they deem fit, supplies made in the education, healthcare, real estate, and local transport sectors.
The Unified Agreement requires VAT due on import of goods to be paid at the first point of entry in the GCC. However, in the event that goods imported are exempt or zero rated in the country of importation or exempt from customs, such goods will be exempt from VAT. Financial services are also exempt from VAT under the terms of the Unified Agreement.
Preparing for VAT in Oman
Although VAT is unlikely to be introduced in Oman until 1 September 2019 at the earliest, it is best to start preparing for the implementation of VAT sooner rather than later. The UAE did not issue its VAT Implementing Regulations until November 2017, while KSA only issued them in September 2017. In both instances, companies waiting for the issuance of the Implementing Regulations in order to prepare for VAT realised they did not have enough time to fully comply with the legislation.It is imperative for companies to review existing contracts which will continue until 1 September 2019 or beyond and determine if the contracts include clauses relating to the payment of VAT. In the event that such transitional contracts do not have VAT clauses, it may be useful to determine if the counterparty will agree to an amendment to include a VAT clause, and if it is in the company’s interest to do so. It may also be helpful to identify what portion of the supply will be subject to VAT.
In the event that transitional contracts do have VAT clauses, it is worth considering whether the company will practically be able to collect the amount of VAT chargeable in respect of such contracts, particularly if the payment in respect of such contract has already been made. For example, in the UAE insurance companies struggled during the transitional period to collect VAT in respect of individual insurance policies where the premium had already been paid.
All contracts expected to continue until 1 September 2019 or beyond should include relevant VAT clauses and the parties should determine who will be responsible for paying VAT. Companies should also consider the impact VAT will have on cash flow, particularly in instances where customers are invoiced but will not be required to make payment until later (or where a customer usually pays the invoiced amount late). VAT is payable upon the issuance of a tax invoice, regardless of whether the customer has paid such amount. This may have a significant impact on a company’s cash flow, and may require reconsideration of payment terms. Third-party vendors may also be reconsidered on the basis of whether or not they are VAT registered, which will allow the company to deduct input tax. In the event that a company has many customers outside of Oman, yet within the GCC, the treatment of VAT on supplies to such customers should also be considered.
In the case of group companies, the Unified Agreement provides for a group of companies in the same member state to be treated as a single taxable person (a “tax group”). The group of companies will need to determine if it advantageous for them to register as a tax group.
On a practical note, companies will need to ensure that their software takes into account VAT pricing and that they are able to issue tax invoices in accordance with the relevant legislation. For example, in KSA, VAT invoices for amounts over SAR 1000 are required to be in Arabic. As a result, all companies needed to ensure that they had the relevant software to issue VAT invoices in the requisite form from the day the VAT legislation went into force.
