GCC Value-Added Tax framework unveiled

By Conrad Prabhu — MUSCAT: APRIL 29 - A long-anticipated Gulf-wide framework for the rollout of Value Added Tax (VAT) was ratified by GCC member state Saudi Arabia last week, offering for the first time a comprehensive snapshot of what the new tax regime entails when it formally comes into force from January 1, 2018. Riyadh became the first GCC capital to officially publish the VAT framework, although Oman and other fellow GCC member states have made significant headway in preparing the groundwork for its implementation in their respective countries.

In an alert to its clients across the region, multinational professional services firm EY stressed the need for firms in Oman, and indeed across the wider GCC region, to be suitably geared for the looming introduction of VAT. “Businesses operating in the GCC region need to take immediate steps to become compliant with the respective GCC member states VAT laws,” said EY.

“It follows that GCC businesses should initiate a VAT impact assessment immediately in order to determine the impact that VAT will have across their operations. This assessment should consider the impact of VAT on the following key areas: Finance and Accounting, IT and systems, Tax and compliance, Supply chain — goods and services, Contracts, Sales and marketing, Legal structure and Human resources. The impact assessment should be used to develop a clear plan as to the steps that must be taken to be ready for VAT by the go-live date of January 1, 2018,” EY further added.

Importantly, the GCC VAT Framework affirms the application of VAT at a standard rate of five per cent unless a zero rate or exemption is specified. Member states, for example, have the prerogative of subjecting four key sectors — Education, Health, Real Estate and Local Transport — to a zero rate of VAT or exempt them from the new tax altogether.

Also zero rated for VAT is the export of goods to jurisdictions outside of the GCC Member states. 

The VAT Framework also grants Member states the right to affix a zero rate of VAT on oil sector activities, petroleum derivatives, gas, certain foodstuff and medical supplies. Intra-GCC and international transport will enjoy a zero rate of VAT.

As for VAT on financial services, GCC Member states have the right to exempt this sector from the new tax.  EY explained, “The term financial services is not defined but broadly the exemption will generally relate to dealings in money, securities, foreign exchange and the operation and management of loan accounts, deposits, trade credit facilities and related intermediary services. The exemption is not expected to extend to fee based services transacted by a financial institution. However, Member states may choose to apply different VAT treatments to financial services if they wish.”

Additionally, a reverse charge mechanism will be applied on supplies of goods and services from a VAT registered person in one Member state to a VAT registered person in another Member state.  VAT grouping appears to be permitted between two or more legal persons resident in the same Member state, according to the EY update.

The issue of the treatment of GCC free zones is not addressed in the Framework, with each Member state given the discretion to determine its own VAT treatment for free zones.

Oman, along with its GCC counterparts, have already signed the GCC VAT Framework, which commits the six member states of the bloc to implementing VAT between the January 1, 2018 to January 1, 2019 timeframe.

Last week, Oman’s Tender Board announced it had approved spending of around RO 4.4 million towards the installation of a VAT assessment system at the Tax Department of the Ministry of Finance. VAT is expected to generate annual revenues estimated in the order of RO 400 million, helping bolster Omani government revenues amid the current constrained fiscal environment brought on by low international oil prices.