WHAT IS VAT?
A comprehensive levy on all goods and services:
- Transaction based tax borne by the end consumer
- Paid in successive stages, i.e. for each transaction in the manufacturing and distribution process
- Invoice based tax credit mechanism with audit trail for authorities
- Some inputs may be exempted or zero-rated based on public policy. These will not attract VAT.
HOW DOES VAT WORK?
VAT registered businesses charge and add VAT to the value of goods and services they supply. Such businesses can also reclaim VAT incurred on goods and services acquired for business purposes (subject to some restrictions) such as the purchase of raw materials and other consumables used for the purposes of business. For imports, VAT is charged at the first point of entry into home consumption (when customs duty may also apply).
IMPACT OF VAT ON YOUR BUSINESS:
Each member state of the GCC will establish their own separate national legislation concerning VAT and as such, the detailed compliance requirements and the set of rules will be outlined in each respective legislation.
An inherent feature of the VAT is the self-assessment nature, meaning every business which is VAT registered (or required to be VAT registered) must record, assess and report its VAT obligations and entitlements, in accordance with the law, to the tax authorities.
Other requirements of the VAT will include:
- Mandatory registration for VAT for all businesses exceeding the mandatory VAT registration threshold.
- Filing of periodic VAT returns with the tax authorities (either monthly or quarterly). • Remitting any VAT payable by a specified date.
- Record keeping in respect of all business transactions: – Tax invoices – Debit or credit notes – Import and export records – Records of goods/services provided for free or allocated for private use – Zero-rated or VAT exempt supplies and purchases
ALL GCC STATES MUST IMPLEMENT VAT IN 2018
- Most countries will be working to implement by 1 January 2018 to avoid distortions arising from intra-GCC trade where one country has implemented
- VAT and another country does not have mechanisms to deal with charging VAT from business to business and onwards to the consumer
- Based on the 11 month lead time mentioned – requirement for GCC businesses to be compliant by 2018
HOW WILL THE GCC VAT LOOK LIKE?
The GCC VAT Framework Agreement:
- Overarching legislation, allows for derogations
- Each GCC Member State will transpose its provisions into their own domestic VAT law
- EU type VAT model as GCC is a common economic zone
THE KEY PRINCIPLES OF THE PROPOSED SYSTEM ARE LIKELY TO BE:
- VATable supplies of goods and services
- A single standard VAT rate of 5%, 0% and exempt
- VAT exemption to be narrow – Government, health, education, sale/lease of residence
- Financial services – Partial exempted
- Free Zones – outside GCC
- Imports – VATable at the point of entry into the GCC
- Exports – 0% rated
- Intra-GCC supplies of goods and services – reverse charge principle
- Mandatory and Elective VAT registration thresholds
- Restriction on reclaim of input VAT on exempted supplies and non-business expenses.