13. Obligation to pay tax
Default VAT liability towards the tax authority
Article 40 of the GCC VAT Agreement determines who is the person liable for the payment of tax to the tax authorities. This applies irrespective of who needs to pay the receivable to the supplier. It constitutes purely a vertical relationship of the tax payer with the tax administration and applies irrespective of the horizontal relationship between the supplier and the customer.
The question as to the liability only comes last, once one has determined the place of supply. Only the country where the supply is located can determine who is actually liable for the payment of VAT on the supply. If the place of supply is outside of the GCC, then simply no legislation of any GCC country applies in terms of the liability on the supply.
The second paragraph of article 40 is an article intended to avoid fraud. Any person that will actually state VAT on an invoice is required to pay this VAT to the tax authorities. This situation applies even if the tax was not actually due and the supplier has made a mistake. It also shows that a supplier cannot charge VAT in case he is uncertain about the tax treatment of a certain supply (e.g. he is uncertain whether a zero rate applies and to be on the safe side he charges VAT). Such a safety measure will lead to adverse consequences of the VAT being due by the supplier. On top of this, the charged VAT will generally not be deductible for the customer, since it constitutes unduly invoiced VAT.
Reverse charge mechanism
As explained in the article 40 above, once the place of supply. Is determined in the GCC States then the next question will be who is actually liable for the payment of VAT on the supply. The reverse charge mechanism shifts the liability to pay VAT away from the supplier. It constitutes an exception to the general rule that VAT is due by the supplier.
Under article 41, the reverse charge applies when a supplier of a good or services is not a resident. If such a supplier is making a supply of a good or services in a GCC Member State (the place of supply points to a Member State) and he is making this supply to a taxable customer residing in that Member State, then the liability to pay VAT to the tax authorities shifts to this customer.
The reverse charge mechanism allows the supplier to not have to charge VAT and allows avoiding an obligation to register for VAT purposes in the country of the supply. It is a type of simplification measure allowed to foreign businesses.
Since the customer will pay the output VAT of the foreign supplier, output VAT will still be paid on the supply made to the customer. Depending on the right to recover input VAT, the customer will subsequently be able to deduct input VAT.
The reverse charge mechanism allows a level playing field between a domestic supplier and a foreign supplier. There is no discrimination between the supply made by both of these parties since in both cases the supply is subject to VAT. There is no advantage for a customer to source his goods or services from a foreign supplier.
The only exception to the statement that there is not advantage for a customer to source his goods or services from a foreign supplier is cash flow. When a customer pays his domestic supplier, he needs to pay him the taxable base and VAT and recover this input VAT later in this VAT return.
When a customer pays a foreign supplier, he needs to pay him only the taxable base. He pays the output VAT himself through his VAT return and can immediately deduct it (according to his own right to recover input VAT). This means that there is no bank movement with respect to the VAT, which is more beneficial for the customer.
In the Kingdom of Saudi Arabia this rule applies, since the domestic legislation refers to the Treaty. Although an obligation, this rule does not apply fully in the UAE. It only applies on so-called "imported goods and services" (this term is technically flawed and unnecessary from a conceptual standpoint) which constitute goods and services supplied by a foreign supplier to a customer in the UAE for which the place of supply is the UAE. This article does not cover the situation where a good is already physically located in the UAE and is being sold by a foreign supplier. In this respect, this article is not compliant with the Agreement. In such a situation, the foreign supplier needs to register for VAT purposes in the UAE.
There are additional situations in which the UAE has foreseen a reverse charge, going beyond what is allowed by the Agreement. Although not a reverse charge mechanism, it refers to the situation where goods enter the UAE as the point of entry and are subsequently sent to a final destination state in the GCC.
The second additional situation is that in which crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons, is sold to a reseller or someone who intends to produce or distribute any form of energy. In that case VAT is also subject to a reverse charge. Part of this provision is simply without effect since the supply of crude oil and natural gas is subject to a zero rate.
Liability for import VAT
Article 42 determines that the person obliged to pay import tax on goods is the person liable for the payment of import VAT. This article again underscores that there is no such thing as an import of services conceptually.
The law refers to the Unified Customs Law. According to this Law, an importer is "a natural or legal person importing the goods". Although this is somewhat of a circular definition, effectively it means that the consignee is liable for the payment of import VAT.
In the UAE, the seven separate customs authorities could not agree on a mechanism to collect import VAT and transfer it to the federal authorities. Import VAT payable by taxable traders will therefore not be paid to the customs authorities at the time of import together with the customs duties, but at the time of filing the periodical VAT return. This is wrongly referred to in the legislation as a reverse charge. The liability does not shift though, but merely a timing advantage is granted, allowing the importer to pay import VAT in his VAT return instead of to the customs authorities. A deferral of payment of import VAT is a more appropriate term. Practically though, it comes down to the same with the importer paying import VAT in his VAT return and simultaneously exercising his right to recover input VAT.
When it concerns persons, who do not qualify for this 'reverse charge' (effectively a deferral of the payment of import VAT), these unregistered persons will follow a separate procedure to account for import VAT.
This article tackles VAT fraud (amongst others carrousel fraud). When a person willfully, meaning intentionally, participates in the violating the provisions of the agreement or the domestic law, they shall be held liable for the payment of VAT too.
This rule is placed in the section together with the provisions on the liability to account for VAT vis-à-vis the tax authorities but it serves a different purpose. Where the other articles discuss the effective VAT liability to account for VAT, this article tackles the situation where the provisions of the agreement or domestic law are violated.
If for example a taxable person participates in a VAT carrousel, he can be held liable for whatever VAT his vendor, who participates in the scheme, is not paying.
The liability is not limited to the VAT itself, but also concerns any other amounts (i.e. penalties). It also not discharges the other parties from their VAT liability.
In the absence of tax authorities with sufficient capacity in the GCC, VAT fraud constitutes a very high risk. Article 71 intends to tackle intra-GCC VAT fraud but as the system will not be in place yet, the GCC states will still run a substantial risk.
The second paragraph of article 43 allows an extension of this joint liability to other situations as well.
Article 37 of the KSA VAT law refers to the Agreement and its Implementing Regulations for any provisions around joint liability. However, no further scenarios have been provided by the implementing regulations in the KSA and only Article 67 of the KSA implementing regulations merely mentions that an assessment will be raised.
In the UAE, article 48 of the UAE VAT law refers to a joint liability for the payment of VAT on the sale of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons. This joint liability is partially without effect, since the sale of crude oil and natural gas is zero rated. It also provides for a joint liability in article 26 of its Federal Tax Procedures Law.
Additionally, it needs to be noted that also members of a VAT group are jointly liable for the payment of VAT by the VAT group.