The current state of VAT in the GCC countries
If you live in one of the GCC countries, you have undoubtedly heard about the Value Added Tax (VAT), which has gained much attention over the past year. The United Arab Emirates and the Kingdom of Saudi Arabia were the first countries in the GCC to introduce a 5% VAT that came into effect on 1 January 2018. On the same date this year, Bahrain became the third GCC country to implement VAT. That leaves Oman, Kuwait and Qatar, who have not yet implemented the tax. Let’s dive deeper into the reasoning behind the VAT introduction, who has to pay it, and what it means for businesses in these countries.
Over the last few decades, oil and gas have been tremendously significant to the growth and development of countries in the GCC. However, with the brent crude oil falling from more than $115 per barrel in mid-2014 to around $50 per barrel currently, it is a sustainable move for the countries to diversify from their dependence on its revenues. As a result, the GCC countries are looking for other sources of income, such as tourism and other business-related revenue streams. The VAT introduction is one of these measures; the International Monetary Fund (IMF) estimated the generation of new revenue between 1.5 and 3 percent of non-oil GDP, from the introduction of VAT.
The VAT introduction means that the money has to come from somewhere — the VAT is implemented on business goods and services. However, countries do not want to hamper the economy too much by doing so, as it puts an extra burden on corporations as well as people, as the tax often gets passed on to consumers. Think about groceries, for example, many supermarket chains increased their prices in order to dampen the impact of the VAT on the business. Furthermore, businesses have had to hire specialised employees or companies in order to file their VAT information correctly and be compliant with the newly introduced regulations.
This is not necessarily a problem for larger enterprises, even though they have added expenditure, but could be a bigger problem for small and medium sized enterprises (SMEs), as they often do not have the resources available. For that reason, many countries have implemented a revenue threshold that a business has to meet in order to have to register for VAT. Under that threshold, a business does not have to do anything, thus sparing the smaller enterprises from the large expenditure of time and money.
Bahrain, for example, announced that only businesses with sales exceeding 5 million Bahraini dinars (AED 48.8m) would have to register for VAT by December 20, 2018. In June 2019, the registration threshold will drop to BHD 500,000, and to BHD 37,500 in December 2019. To put this in perspective, 5 million dinars is the highest VAT registration threshold in the world. Singapore’s VAT threshold, which is already one of the highest by comparison, is roughly equivalent to AED 2.5m, which is significantly lower.
Interestingly, the high registration threshold — even if only temporary — technically has Bahrain in violation to the terms of the Unified VAT Agreement, set out in the GCC treaty that developed a common framework for VAT establishment in each country. The reason for this is that Article 50 of the treaty states that the mandatory registration threshold is 375,000 Saudi Arabian Riyals (roughly AED 367,173) or its local equivalent. With the current exchange rates, this gives a registration threshold in Bahrain of approximately 37,500 dinars, the figure it will implement only in December 2019, almost a year after the tax introduction.
Nonetheless, as mentioned previously, the GCC member countries developed the framework to make the transition easier and more consistent across the countries and businesses. This framework stipulates the underlying principles of VAT laws; however, member states retain some flexibility regarding the VAT purposes of the healthcare and education industries, as well as free zones.
Now, what does all this mean for your business? Well, businesses in the UAE and Saudi Arabia will have to brace themselves for official audits in 2019 as the roll-out of the 5 per cent VAT since January 1 2018 comes into effect. Audits will be conducted by the UAE’s Federal Tax Authority and Saudi Arabia’s General Authority of Zakat and Tax in 2019, wherein the government will test the business’ resources and the accuracy of bookkeeping as well as the correct filing of tax returns. Again, this is only for larger business that surpass the revenue threshold in their respective countries — those that do not meet that threshold do not have to adhere to the more stringent VAT rules as stipulated above.
Having said that, it is strongly recommended that you either employ an accountant that specialises in VAT compliance or seek outside counsel to make sure you comply with the required laws and regulations. It can seem like a complicated process, as we have seen with the tax implementation in the last year, but with the right counsel the job can get much smoother. With that, and reading up on VAT rules and regulations wherever you can, your business should be prepared to pass the audits with flying colours, leaving you with more time to focus on running and growing your business.