In June 2016 all six Gulf Cooperation Council (GCC) Member States — Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Oman, Kuwait, and Qatar — signed the Common VAT Agreement. It was agreed that each GCC Member State would introduce a VAT system at a rate of 5%.
Since the start of 2018 new VAT systems have been introduced in two of the six member states of the GCC (Saudi Arabia and the UAE). Reports in mid-2018 suggest that Bahrain and Qatar could possibly introduce the new 5% VAT system before the end of 2018. The remaining two GCC member states - Kuwait and Oman - are expected to do so over the next 12 to 18 months.
As VAT has been introduced from scratch every supply of a good or a service provided in the course of business are in scope. This is not a specific law targeting foreign suppliers of digital services. However, the result is the same, non-resident digital service suppliers, with sales in the GCC Territory that introduce a VAT system, must register, collect VAT, and remit it to the relevant tax authority.
So, what has happened with VAT in the GCC?
In early 2018 Saudi Arabia and the UAE became the first GCC Member States to introduce VAT systems.
In February 2017, Saudi Arabia ratified the GCC VAT framework and committed to introduce VAT on January 1, 2018.
The General Authority of Zakat and Tax (GAZT) is responsible for managing the implementation, administration and enforcement of VAT in Saudi Arabia. It does so in close coordination with other relevant entities.
United Arab Emirates (UAE)
On July 31, 2017, President of the UAE His Highness Sheikh Khalifa bin Zayed Al Nahyan issued the landmark Federal Law No. 7 of 2017 for Tax Procedures. This law established the foundations for the planned new UAE VAT system. The Federal Tax Authority (FTA) is the responsible authority in relation to the administration and collection of VAT.
Online registration for VAT in the UAE opened in mid-September 2017. On November 27, 2017, the VAT Executive Regulations were signed into law. The VAT Executive Regulations were issued after His Highness Sheikh Khalifa bin Zayed Al Nahyan issued the Federal Decree-Law No. 8 of 2017 for Value-Added Tax (VAT) on August 27, 2017.
What is next for VAT in the rest of the GCC Territory?
It is possible that Qatar may introduce a new VAT system before the end of 2018. The Fitch Group, named in a recent BMI Research report on Qatar's immediate fiscal outlook, stated that it is factoring in the implementation of a 5% VAT in the second half of 2018. This is backed up by reports from recent International Monetary Fund talks where the Qatari government was adamant that the VAT implementation would proceed as scheduled.
Previously, there was caution in Qatar around the introduction of VAT. According to Doha Bank CEO R Seetharaman the implementation of VAT in Qatar “depends on several factors like the fiscal policy, revenue streams and commodity prices. The recent budget announced by Qatar 2017 is quite comprehensive, and my opinion is that VAT might be deferred here to assess how it works out in countries of the region where it will be implemented soon.”
Bahrain is expected to introduce a VAT system in October 2018 according to numerous local news reports.
In a February 2018 Reuters report Bahrain’s Minister of Finance Sheikh Ahmed bin Mohammed al-Khalifa told a conference in the capital Manama that his Ministry will be “working with parliament on VAT and aim to have everything set up by the end of 2018.”
In early 2018 Oman’s Ministry of Finance postponed the introduction date of the new VAT system, it is expected to be implemented in 2019.
Oman’s Minister of Finance, Darwish bin Ismail al-Balushi, approved the introduction of VAT on March 28 via Ministerial Decision No. 64⁄2018.
In March 2018 the Kuwait National Assembly pushed back a vote on the implementation of a VAT system.
While no definitive date has yet been set for the introduction of a new VAT system, Reuters reports from Kuwait have suggested the possibility of the VAT system introduction being postponed until 2021.
Lessons learned from Saudi Arabia & UAE implementations
Difficulties relate to that fact that these are full introductions of new VAT systems. As a result the main focus was not on foreign suppliers of digital services to consumers in these GCC Member States. The focus and energy of tax authorities was, naturally, that local companies got it right.
One major source of confusion, for example, has been on the issue of a sales threshold. Thresholds only apply to local suppliers. No sales threshold exists (in the Saudi Arabia and the UAE implementations) for foreign-based digital service suppliers with consumers in these GCC Member States.
The rules that specifically relate to foreign-based suppliers were published slightly later than the original VAT rules. This meant that, for example in Saudi Arabia, the requirement for an agent was revealed after the original VAT implementation date of January 1, 2018. This requirement was confirmed in early February, as a result registrations have been slightly delayed.
This situation is expected, of course, with such a major implementation and will have no major consequences. Now the relevant tax authority positions towards foreign-based suppliers and the specific requirements that relate to them are much clearer. This clarity will lead to much smoother registration levels, and increased compliance.