With the introduction of Value Added Tax (VAT) in the Kingdom of Bahrain (Bahrain) on 1 January 2019, there are now three Gulf Cooperation Council (GCC) countries that have introduced VAT on the supply of goods and services at a standard rate of 5%. This follows the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA), which have introduced VAT since 1 January 2018.
The three remaining GCC countries have yet to introduce VAT. Oman is expected to introduce VAT in late 2019 or the beginning of 2020. Kuwait has announced that it will not introduce VAT until 2021, whilst Qatar has announced it will not introduce VAT in 2019.
Although the VAT laws in the UAE, the KSA and Bahrain are based on the GCC VAT Framework Agreement, the rules are far from harmonized.
The tax authorities in the KSA and the UAE have published a significant amount of guidance and clarifications to help companies manage and implement VAT. Audits are being carried out and penalties are being levied in case the company does not comply with the rules.
Businesses are becoming aware that the management of the VAT position is a continuous process that should not be underestimated. Not managing the VAT position pro-actively and effectively may increase the cost of doing business.
Key issues for businesses
As with any new legislation, many aspects of the new VAT law are still unclear. Nevertheless, businesses need to consider the strategic and practical implications of the new VAT regime and to adapt when structuring their businesses, executing M&A transactions and conducting commercial operations.
Areas of concern for businesses include:
1. Impact of registration
Businesses want to understand how the VAT registration rules apply to their existing operating models and impact them, and also consider whether applying for a group registration is beneficial.
2. Managing global VAT obligations of e-commerce and online services
E-commerce businesses providing services online to customers in a GCC country but which do not have any business presence in such country may still be required to register for VAT in that country and account for local VAT, even if the value of the supplies is below the registration threshold.
3. Intra GCC trading and supply chains
Complexities arise with respect to the links between the Customs duty processes and the VAT treatment, on supplies to and from UAE free trade zones, and on supplies from one GCC country to another. Supply chain models may need to be reviewed, to assess whether any refinements are necessary to mitigate the impact of the new legislation. With VAT collected all along the supply chain, all parties will be impacted. While the tax administration infrastructure develops, you need to consider how best to avoid or minimise business interruptions and costs.
4. Risk management and compliance with reporting obligations and disclosure requirements
The introduction of VAT brings a new level of transparency and corporate liability in the GCC states, with penalties for non-compliance, tax evasion and tax fraud coming into play. You not only need to comply with new legal obligations, but also manage your company's new risk profile while doing so.
5. Determining and optimizing cash flow
You will need to determine and optimise your company's VAT and cash flow position and address any interaction with your company's direct and indirect tax liabilities. If not applied correctly you can lose income, and possibly be penalized, so it is key to understand the VAT impact on your cost structure and revenue streams.
When applying for VAT refunds, it is important that the refund request is backed up by supporting documentation to handle queries from the tax authorities efficiently and in a timely manner.
6. VAT treatment of domestic and cross-border M&A deals
VAT can have a significant cost and cash flow impact on M&A deals, requiring careful consideration when structuring transactions, whether business transfers or asset sales, or share transfers. Particular attention should be paid to indemnities, representations and warranties that may be required, as well as to any potential corporate liability issues that may arise.
7. Restructuring business models onshore and in free trade zones
The impact of the new VAT regime on your business or transaction could be influenced by where your company is incorporated, the corporate vehicle in the country the geographical limitations of your business licence and the defined scope of services that you can provide. Accordingly, you will need to consider whether your current business model will comply with the new legislation and still enable you to achieve your commercial objectives.
8. Negotiating commercial contracts with suppliers and customers
Renegotiating the terms of existing contracts is key to address any VAT risks that were not previously relevant, as well as ensuring that new contracts include appropriate provisions outlining how any VAT burden will be borne.
9. Infrastructure projects
Businesses may need to minimise possible disadvantages of the VAT costs which may arise at the initial phase of capital intensive projects. This may require considering efficient structures for undertaking infrastructure projects, including contracts with government entities, and the application of the VAT capital assets scheme in relation to the supplies and importation of plant and machinery.
10. Industry exemptions
Whether or not your organisation falls within a zero rate or exempt sector, you may well be impacted at practical level by the VAT rules that apply to different industries. If you are operating in the financial services, real estate or e-commerce sectors, or your business centres around the movement of physical goods across borders, then the new VAT may have a major impact on the way you do business.
Although national tax dispute resolution mechanisms are being established, so far, there are no plans for a central organization that settles disputes between taxable persons and member states and for the different treatments of cross-border transactions that may result in double (non)-taxation. It is therefore key to align with the federal tax authorities and through the Organisation for Economic Cooperation and Development (OECD) early on in areas of uncertainty, and to consult with them on the practical impact of the legislation.
12. Training and controls
With the introduction of a new VAT system, it is key to have staff prepared as well so they know what to do and how deal with these changes from the start. At the same time, it is important to be in control and to ensure that the right persons are reporting to the correct colleagues (check and controls).
How Baker McKenzie can help you
As trusted tax counsel to multinational companies for over five decades, Baker McKenzie's market-leading Global Tax Practice can help your organisation with the strategic and practical aspects of the GCC's VAT regime.
With 950 tax practitioners — lawyers, economists and advisers — in more than 40 countries, we collaborate across borders and specialties to stay abreast of changing tax laws, practices and dispute resolution techniques around the world. Our unsurpassed global coverage enables us to help our clients design, implement and defend tax strategies for their international operations and transactions everywhere they operate.
With experienced advisors on the ground, we are in a position to guide your business through the challenges that arise with the GCC's VAT regime.
To speak to us in relation to any VAT or tax issues in the GCC, please contact one of the lawyers above.