In a surprise move Saudi Arabia is to increase its VAT rate from 5% to 15% on July 1, 2020. The move comes just two years after the Kingdom first introduced its VAT system.
Saudi Arabia's move - first revealed by the BBC – is an attempt to "shore up state finances". The Kingdom has moved to diversify its economy in recent years to reduce its reliance on revenue from the oil industry.
As a result of this move by Saudi Arabia there is now the potential for a ripple effect across the Gulf Cooperation Council (GCC) member states that also introduced VAT systems, namely the United Arab Emirates (UAE) and Bahrain.
A report on May 12 in the UAE's The National news website stated, however, that the UAE would not be increasing its VAT rate. The UAE Government Communication Office denied - via a tweet - that "there are currently any plans to raise value-added tax in the UAE, which is currently 5 per cent, and confirms its commitment to achieve the county’s development goals and plans."
The VAT rate increase comes into effect the day after the Kingdom's Covid-19 amnesty (March 18 to June 30, 2020) period ends.
So, what has happened with VAT in the GCC?
Elsewhere, Kuwait and Oman are likely to be the next Gulf Cooperation Council (GCC) member states to introduce VAT systems. Most recently Oman's Minister of Commerce and Industry stated Oman's plan to introduce VAT in early 2021 during an interview at the 2020 World Economic Forum in Davos.
Back in June 2016, all six Gulf Cooperation Council (GCC) member states signed the Common VAT Agreement. It was agreed that each GCC Member State would introduce a VAT system at a rate of 5%.
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.
Bahrain introduced its new VAT system on January 1, 2019. Bahrain's National Bureau of Revenue (NBR) has produced this website detailing the country's VAT system.
Back in February 2018, Reuters quoted Bahrain’s Minister of Finance Sheikh Ahmed bin Mohammed al-Khalifa as telling 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.”
An August 2018 report, in the UAE daily Khaleej Times, the introduction date was predicted to be January 2019. This was later confirmed when Bahrain’s parliament approved the VAT agreement for introduction in January 2019.
In February 2017, Saudi Arabia ratified the GCC VAT framework and committed to introducing 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. More here.
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 the 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. More here.
What is next for VAT in the rest of the GCC Territory?
In March 2018 the Kuwait National Assembly pushed back a vote on the implementation of a VAT system. Reuters previously reported that Kuwait's VAT system introduction would be postponed until 2021. An Arab Times report in April 2019 concurred stating that the Kuwaiti tax authorities were set to introduce a VAT system in April 2021.
Oman plans to implement a VAT system in 2021. This was confirmed by Oman's Minister of Commerce and Industry Ali bin Masoud Al Sunaidy. He confirmed Oman's intention to introduce VAT in early 2021 during an interview with Bloomberg TV at the 2020 World Economic Forum in Davos.
Qatar was expected to introduce a VAT system in 2019. However, no definitive date for the implementation has been revealed by the Qatari tax authorities. Previously, there was caution in Qatar around the introduction of the 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. 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.”
Lessons learned from Saudi Arabia & UAE implementations
Difficulties related to that fact that these were 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 were, 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 Arabian 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.