Saudi Arabia and the UAE are both set to introduce value-added tax (VAT) at a rate of five percent starting next January, but there are a number of differences in how they plan to implement it.
All six members of the Gulf Cooperation Council (GCC) agreed in 2016 to introduce VAT as a way of diversifying revenue sources, but only Saudi Arabia and the UAE have issued VAT laws and confirmed they will go ahead with its introduction from January. Other GCC states are expected to follow later in 2018.
“They are not mirror images of one another and there are very interesting differences,” Michael Patchett-Joyce, a London-based commercial lawyer who specialises in VAT told a GCC VAT forum in Dubai last week.
Outlining the key difference between the two nations, he said: “Saudi Arabia’s VAT refers very explicitly and expressly to ‘the agreement’ (the GCC framework agreement signed by all six states in 2016). In the UAE, the lack of such direct reference… means that it is a more persuasive environment.”
The first article of Saudi Arabia’s law states that: “Words and phrases contained in those regulations shall have the meanings ascribed to each of them in the agreement…unless the context requires otherwise.”
The UAE, meanwhile, set out its own, long list of definitions for all the words and phrases mentioned in its VAT law without direct reference to the GCC framework agreement.
Shiraz Khan, a Dubai-based senior tax advisor at law firm Al Tamimi and Company, said the key difference between the Saudi Arabian and the UAE VAT laws is the amount of detail each country has included.
The Saudi law is briefer because it incorporates references to the GCC VAT framework agreement and leaves many details, including the treatment of individual sectors, to the implementing regulations. On the other hand, the UAE appears to have adopted a more detailed, standalone VAT law.
“It does not make a difference to investors,” Khan told Zawya in a phone interview. “This is more of a question of how individual countries have gone about structuring their VAT law.”
He said the difference between the two approaches is related to the social and economic considerations that best serve each countries’ policies.
For instance, the UAE has offered a zero rating on residential property leases and sales within three years of completion, while any subsequent sale or lease will be exempt from VAT. In Saudi Arabia, however, there is no zero rating and only leases are VAT-exempt, with sales subject to the 5 percent charge unless a property is to be used as a permanent home.
Khan said that in general, “both the UAE and Saudi have a broad VAT base, but Saudi has more limited exceptions”.
He said the difference between the two approaches to industry sectors is more related to the social and economic considerations that best serve the countries’ policies. “Saudi will tax private healthcare services and the education sector, while [the] UAE is expected to zero rate certain healthcare and educational services. Saudi will tax local passenger transport, while in the UAE it will [be] exempt,” Khan said.
A cross-border approach
The GCC framework defines VAT as a tax imposed on goods and services that should be paid by any individual engaging in economic activity with the intent of making profit.
The agreement also states that every country should issue a local law to specify the products and services that could receive special treatment or exemptions. However, it specifies several services that will be subject to VAT at zero percent, and those that will be exempt from the tax. The difference between the zero rating and exemptions is that the latter does not allow for reclamation of VAT paid on input costs.
The services that will be zero rated include the transportation of people and goods within the GCC countries, as well as exports and re-exports, to countries outside the GCC.
Exempted goods and services include some diplomatic, military and financial services, as well as personal luggage and/or home appliances that citizens living abroad or foreigners coming to live in a GCC country bring with them, along with imports used in charity projects.
Analysts believe the GCC framework has rules on how VAT will be implemented that will need to be adopted by all six countries - including those like the UAE that set their own tax procedure laws.
“The UAE came up with its own tax procedures framework and laws, but it still cannot go against the GCC framework,” Rakesh Pardasani, a Dubai-based partner at accountancy firm RSM, told Zawya in a phone interview.
Investments in precious metals
Many traders are closely watching for more details about the status of investments in precious metals, including silver, gold, and platinum.
The GCC framework states that investments in precious metals that are qualified to be traded in international markets will be subject to VAT at a zero rate, which will allow businesses to reclaim VAT paid on business costs.
“The framework agreement does not give countries a choice on VAT treatment for certain supplies. It basically says that supply of gold, silver and platinum for investment purposes must be zero-rated. That means that all countries are required to zero rate it,” Khan said.
Trading in precious metals is an important business in the GCC, especially the UAE. The total amount of Abu Dhabi’s trade in pearl, gemstones and precious metals grew by 42.2 percent, to 4.7 billion dirhams ($1.3 billion) in the first quarter of 2017, up from 3.3 billion dirhams in the first quarter of the previous year, according to a report issued by Emirates News Agency, WAM, in June.
What is out there and what is next?
Saudi Arabia had issued draft VAT implementation regulations that included details on zero rated and exempt goods and services on July 19. Khan said these became law following a one-month consultation period on August 19, although there has been no official statement made by the Saudi authorities on this matter. The kingdom issued its VAT law on July 28.
The UAE issued a general tax procedures law on August 1, which was followed by a VAT law on August 27. Khalid Al Bustani, director-general of the UAE’s Federal Tax Authority, said last month that its regulatory framework detailing VAT treatment of goods and services will be released in the fourth quarter of this year.
Both countries have also set timelines for businesses to voluntarily register for VAT. Saudi Arabia announced a December 20 deadline for businesses to register. The UAE’s business registration process for VAT started on September 15.
According to Khan, VAT in both countries will be collected on a quarterly basis for most companies.
“Generally, both will collect VAT quarterly, but if you are a large business and have a turnover of more than 40 million Saudi riyal ($10.67 million) in Saudi, then you must file on a monthly basis,” Khan said. “The UAE may also have monthly filing for large businesses and this will be clarified by the executive regulations,” he added.
Khan said companies will need to assess themselves whether they are supplying goods or services that are taxable, zero-rated or exempt, and whether sales are likely to exceed the mandatory registration threshold of 375,000 riyals in Saudi Arabia (or the same figure in dirhams in the UAE) to determine whether they are required to register or not.
He added that businesses that do not meet the mandatory registration threshold, but whose annual taxable supplies or expenses exceed the voluntary registration threshold of 187,500 Saudi riyals or UAE dirhams, should decide themselves if it is worthwhile registering to recover any VAT paid. In Saudi Arabia, companies with a turnover of less than 1 million riyals can defer registration until 31 December 2018, Khan said.
The GCC has long been seen as a tax-free zone that imposes no tax on personal income, but the introduction of VAT as a means to diversify revenue has been praised by the International Monetary Fund (IMF) and various economists. There are others, though, who fear that expected inflation could weaken consumer demand and trigger a negative impact on GCC markets.
When asked if there were challenges facing companies with regard to VAT, Pardasani said: “Yes, they still don’t have enough time to prepare.”
For Zawya’s special coverage on VAT, click here.
© Zawya 2017
All six members of the Gulf Cooperation Council (GCC) agreed in 2016 to introduce VAT as a way of diversifying revenue sources, but only Saudi Arabia and the UAE have issued VAT laws and confirmed they will go ahead with its introduction from January. Other GCC states are expected to follow later in 2018.
“They are not mirror images of one another and there are very interesting differences,” Michael Patchett-Joyce, a London-based commercial lawyer who specialises in VAT told a GCC VAT forum in Dubai last week.
Outlining the key difference between the two nations, he said: “Saudi Arabia’s VAT refers very explicitly and expressly to ‘the agreement’ (the GCC framework agreement signed by all six states in 2016). In the UAE, the lack of such direct reference… means that it is a more persuasive environment.”
The first article of Saudi Arabia’s law states that: “Words and phrases contained in those regulations shall have the meanings ascribed to each of them in the agreement…unless the context requires otherwise.”
The UAE, meanwhile, set out its own, long list of definitions for all the words and phrases mentioned in its VAT law without direct reference to the GCC framework agreement.
Shiraz Khan, a Dubai-based senior tax advisor at law firm Al Tamimi and Company, said the key difference between the Saudi Arabian and the UAE VAT laws is the amount of detail each country has included.
The Saudi law is briefer because it incorporates references to the GCC VAT framework agreement and leaves many details, including the treatment of individual sectors, to the implementing regulations. On the other hand, the UAE appears to have adopted a more detailed, standalone VAT law.
“It does not make a difference to investors,” Khan told Zawya in a phone interview. “This is more of a question of how individual countries have gone about structuring their VAT law.”
He said the difference between the two approaches is related to the social and economic considerations that best serve each countries’ policies.
For instance, the UAE has offered a zero rating on residential property leases and sales within three years of completion, while any subsequent sale or lease will be exempt from VAT. In Saudi Arabia, however, there is no zero rating and only leases are VAT-exempt, with sales subject to the 5 percent charge unless a property is to be used as a permanent home.
Khan said that in general, “both the UAE and Saudi have a broad VAT base, but Saudi has more limited exceptions”.
He said the difference between the two approaches to industry sectors is more related to the social and economic considerations that best serve the countries’ policies. “Saudi will tax private healthcare services and the education sector, while [the] UAE is expected to zero rate certain healthcare and educational services. Saudi will tax local passenger transport, while in the UAE it will [be] exempt,” Khan said.
A cross-border approach
The GCC framework defines VAT as a tax imposed on goods and services that should be paid by any individual engaging in economic activity with the intent of making profit.
The agreement also states that every country should issue a local law to specify the products and services that could receive special treatment or exemptions. However, it specifies several services that will be subject to VAT at zero percent, and those that will be exempt from the tax. The difference between the zero rating and exemptions is that the latter does not allow for reclamation of VAT paid on input costs.
The services that will be zero rated include the transportation of people and goods within the GCC countries, as well as exports and re-exports, to countries outside the GCC.
Exempted goods and services include some diplomatic, military and financial services, as well as personal luggage and/or home appliances that citizens living abroad or foreigners coming to live in a GCC country bring with them, along with imports used in charity projects.
Analysts believe the GCC framework has rules on how VAT will be implemented that will need to be adopted by all six countries - including those like the UAE that set their own tax procedure laws.
“The UAE came up with its own tax procedures framework and laws, but it still cannot go against the GCC framework,” Rakesh Pardasani, a Dubai-based partner at accountancy firm RSM, told Zawya in a phone interview.
Investments in precious metals
Many traders are closely watching for more details about the status of investments in precious metals, including silver, gold, and platinum.
The GCC framework states that investments in precious metals that are qualified to be traded in international markets will be subject to VAT at a zero rate, which will allow businesses to reclaim VAT paid on business costs.
“The framework agreement does not give countries a choice on VAT treatment for certain supplies. It basically says that supply of gold, silver and platinum for investment purposes must be zero-rated. That means that all countries are required to zero rate it,” Khan said.
Trading in precious metals is an important business in the GCC, especially the UAE. The total amount of Abu Dhabi’s trade in pearl, gemstones and precious metals grew by 42.2 percent, to 4.7 billion dirhams ($1.3 billion) in the first quarter of 2017, up from 3.3 billion dirhams in the first quarter of the previous year, according to a report issued by Emirates News Agency, WAM, in June.
What is out there and what is next?
Saudi Arabia had issued draft VAT implementation regulations that included details on zero rated and exempt goods and services on July 19. Khan said these became law following a one-month consultation period on August 19, although there has been no official statement made by the Saudi authorities on this matter. The kingdom issued its VAT law on July 28.
The UAE issued a general tax procedures law on August 1, which was followed by a VAT law on August 27. Khalid Al Bustani, director-general of the UAE’s Federal Tax Authority, said last month that its regulatory framework detailing VAT treatment of goods and services will be released in the fourth quarter of this year.
Both countries have also set timelines for businesses to voluntarily register for VAT. Saudi Arabia announced a December 20 deadline for businesses to register. The UAE’s business registration process for VAT started on September 15.
According to Khan, VAT in both countries will be collected on a quarterly basis for most companies.
“Generally, both will collect VAT quarterly, but if you are a large business and have a turnover of more than 40 million Saudi riyal ($10.67 million) in Saudi, then you must file on a monthly basis,” Khan said. “The UAE may also have monthly filing for large businesses and this will be clarified by the executive regulations,” he added.
Khan said companies will need to assess themselves whether they are supplying goods or services that are taxable, zero-rated or exempt, and whether sales are likely to exceed the mandatory registration threshold of 375,000 riyals in Saudi Arabia (or the same figure in dirhams in the UAE) to determine whether they are required to register or not.
He added that businesses that do not meet the mandatory registration threshold, but whose annual taxable supplies or expenses exceed the voluntary registration threshold of 187,500 Saudi riyals or UAE dirhams, should decide themselves if it is worthwhile registering to recover any VAT paid. In Saudi Arabia, companies with a turnover of less than 1 million riyals can defer registration until 31 December 2018, Khan said.
The GCC has long been seen as a tax-free zone that imposes no tax on personal income, but the introduction of VAT as a means to diversify revenue has been praised by the International Monetary Fund (IMF) and various economists. There are others, though, who fear that expected inflation could weaken consumer demand and trigger a negative impact on GCC markets.
When asked if there were challenges facing companies with regard to VAT, Pardasani said: “Yes, they still don’t have enough time to prepare.”
For Zawya’s special coverage on VAT, click here.
© Zawya 2017
