Aurifer commentary on the GCC VAT Framework

This is Aurifer's commentary on the GCC VAT Framework. Although the Framework, except in KSA, has no domestic effects, it is highly important in terms of its guidance for the interpretation of the domestic provisions.

PREFACE

 

The Gulf Cooperation Council (GCC) Value Added Tax (VAT) Treaty constitutes a landmark for the Gulf region. It sets out the framework of a VAT system between the six GCC countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

 

The GCC VAT system largely draws inspiration from the European Union model and also from the more modern systems found in the newer VAT implementing countries (e.g. Singapore or New Zealand).

 

Considering the only multi-country VAT system around the globe is the EU, the GCC VAT system has many similarities with the EU VAT system. Similarities to the EU are principally around the intra-GCC movement of goods (and some services) between businesses as well as to private consumers. The book discusses the areas of similarity and difference in this respect.

 

Currently only KSA and UAE have introduced VAT. Bahrain will be the third State to implement VAT on 1 January 2019. The GCC was traditionally a low to no tax jurisdiction but is now at the forefront of an unprecedented evolution.

 

The GCC VAT system is moderately simple and broad based. As a result, it is likely the GCC countries will be able to sustain low rates of VAT for the foreseeable future. There are also some exceptionally unusual and unique rules around the import of goods into the GCC in line with the Common GCC Customs Law.

 

The treaty takes into consideration that countries cannot always agree on the same rules. Therefore, it does allow for quite a lot of flexibility for the countries to apply different local rules.

 

There are some other choices available to the GCC countries around quite important aspects of the VAT system. Each country may choose to allow VAT grouping and margin schemes for second hand goods.

 

The treaty also provides for transitional provisions on the introduction of VAT, but each country has flexibility in this area.

 

The treaty provides vital clues about what to expect in terms of the VAT system to work. The treaty sets out the ground rules for business, and as a result they may commence quite detailed planning even though the domestic laws and implementing regulations might not be available in the countries which have not implemented VAT yet.

 

The implementation of VAT has been challenging so far on the tax authorities and the businesses and will still prove challenging in the coming years as teething problems become visible.

 

Commentary to the VAT agreement for The Cooperation Council for the Arab States of the Gulf

 

1. Introduction

Pursuant to the Supreme Council decision at its 36th meeting (Riyadh, 9 - 10 December, 2015) with respect to the common imposition by the Gulf Cooperation Council (GCC) States of VAT, the representatives of the Member States of the GCC confirmed the introduction of a formal VAT system across all six Member States through the signing of the VAT Framework Treaty.

The GCC itself has not published the GCC VAT Agreement. The GCC VAT Agreement had first been published by the Kingdom of Saudi Arabia (see Um al-qura, #4667, dated 21 April 2017).

The GCC VAT Agreement constitutes the basis for the domestic implementation in the different Member States of the GCC. Therefore, the tax payers cannot solely rely on the treaty but rather rather follow the local implementing Law to work out the precise mechanics in the respective country.

The Kingdom of Saudi Arabia was the first in the GCC to issue its final VAT law and implementing regulations, doing so on July 28, 2017 and August 30, 2017 respectively.

The UAE issued its VAT law at the end of August and the related executive regulations issued during the fourth quarter of 2017.

The UAE and the Kingdom of Saudi Arabia introduced VAT on 1 January 2018. Bahrain introduced VAT on 1 January 2019, while other Member States have indicated an intention to implement VAT at a later stage.

This book analyses the GCC VAT Agreement from a legal perspective article by article, explains the concepts and rules and analysis how it will impact the domestic legislations. First though, it is important to explain a few general legal concepts with respect to taxes.

1.1 The Basis of domestic fiscal legislation

Domestic legislations usually have a principle of legality enshrined into their domestic legislation. Given the importance, this kind of clause is usually found in the Constitution.

For example:

  • The United States Constitution states in Article 1 Section 8 that:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States”

  • The French Constitution states in its article 34:

La loi fixe les règles concernant (…) l'assiette, le taux et les modalités de recouvrement des impositions de toutes natures (…).

(Free translation: “The law determines the rules concerning the taxable base, the rate and the ways in which taxes of all nature will be collected”)

  • The Belgian Constitution states in its article 170, .§1:

Geen belasting ten behoeve van de Staat kan worden ingevoerd dan door een wet” (in Dutch)

Aucun impôt au profit de l'Etat ne peut être établi que par une loi” (in French)

(Free translation: “Taxes collected for the State can only be introduced by law”)

  • The Constitution of the United Arab Emirates states in its article 42:

“The payment of taxes and public imposts determined by law shall be an obligation upon every citizen” (Free translation from Arabic)

  • The Basic Law of the Kingdom of Saudi Arabia says in its article 208:

Taxes and fees are to be imposed on a basis of justice and only when the need for them arises. Imposition, amendment, revocation and exemption is only permitted by law

All these provisions echo the famous slogan “No taxation without representation”, which was used by American citizens to express their will to emancipate from the rule of the Queen of England throughout the middle of the 18th century until the independence of the United States of America in 1776.

They also clearly indicate that fiscal policy is a domestic matter. The representatives of the people need to adopt a law before a tax can be levied from the people they represent. The power to tax people is almost unlimited in a domestic context.

International treaties therefore in principle cannot create any obligation to pay taxes to a State or an international body. On the contrary, States usually have full authority to levy taxes in their State but will limit their taxing powers by entering into international treaties. The most obvious example of this rules are the double income tax treaties.

1.2 What is a Treaty and how does it interact with domestic fiscal legislation?

Treaty, Agreement, Convention or Accord are all synonyms to indicate a ‘an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation’.

All six Gulf Cooperation Council (‘GCC’) Member States have entered into a Treaty, or an Agreement for VAT purposes, as well as for excise10.

As noted above, the difference in wording has no consequences for legal purposes. The Agreement provides the framework for the adoption of domestic legislation. It is therefore important to analyze to which extent the six GCC countries have committed themselves.

The Treaties which entered into force are binding upon Parties and must be performed by them in good faith. Additionally, a Party may not invoke provisions of its internal law as justification for its failure to perform a Treaty.

1.3 How to read or interpret a Treaty?

Now that we have established that the Agreements are Treaties, the question is how to read them and to what extent the GCC Member States have legally committed themselves to the Treaty.

There are specific rules determining the interpretation of Treaties, which are established in the Vienna Convention on the Law of Treaties of 23 May 1969.

Treaties need to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

The context of the Treaty is not only its text, preamble and annexes, but also any agreement relating to the Treaty which was made between all parties in connection with the conclusion of the Treaty, or related instruments. Treaties are always signed in a certain context, which helps reading them.

The Rome Convention of 1957, which constitutes the basis of today’s European Union was written in a post second World War context and intended, amongst others, to enhance economic and social progress through common action. This is the context of the Treaty and it is also what the preamble says.

Parties can have recourse to additional means of interpretation. This concerns the preparatory work of the Treaty and the circumstances of its conclusion. In other words, this could include the history of the preparation of a Treaty.

Previous Treaties on the same or similar subjects also help to interpret a current Treaty. For instance, the UN Charter of 26 June 1945, which constituted the United Nations, can be interpreted by examining the Treaty establishing its predecessor, the League of Nations.

1.4 How to read the VAT Agreement?

As we saw above, usually Treaties have preambles, which refer to the context in which it is written. In the published VAT Agreement, the preamble is rather short.

The VAT agreement preamble refers to the objectives set out in the Statute of the GCC. It also refers to the GCC Economic Agreement of 2001 which seeks to reach advanced stages of economic integration, and develop similar economic and financial legislation and legal foundations amongst Member States.

The objectives of the GCC are determined in article 4 of the Statute of the GCC. They are (partial excerpt):

To effect coordination, integration and inter-connection between Member States in all fields in order to achieve unity between them.

To deepen and strengthen relations, links and areas of cooperation now prevailing between their peoples in various fields.

To formulate similar regulations in various fields including the following: 

Economic and financial affairs 

Commerce, customs and communications (…)

Article 3 of the GCC Economic Agreement of 2001 states that GCC natural and legal citizens shall be accorded, in any Member State, the same treatment accorded to its own citizens, without differentiation or discrimination, in all economic activities, and especially (amongst others) regarding the tax treatment.

Therefore, the Statute of the GCC and the GCC Economic Agreement of 2001 may help in interpreting the VAT Agreement.

The Vienna Convention also point to history in order to interpret Treaties. The VAT Agreement has no such published history.There have been circulating many versions of the VAT agreement in previous years, as drafting has been going on since 2009, but no published version was known to the public.

2. Commentary article by article

2.1 Definitions and General provisions

 

Chapter One

Definitions and General Provisions

Article 1

Definitions

 

In the application of the provisions of this Agreement, the following words and phrases shall have the meanings set out against each of them unless the context otherwise requires:

The Council: The Gulf Cooperation Council.

Agreement: The Unified VAT Agreement for the Council States.

Tax: Value Added Tax (VAT) imposed on the import and supply of Goods and Services at each stage of production and distribution, including “Deemed Supplies”.

Member State: Any country that has full membership status in the Council in accordance with its Charter.

Council State Territory: All the territories of the Member States.

Local Law: The VAT Law (Regulation) and relevant legislation issued by each Member State.

Person: Any natural or legal person, whether public or private, or any other form of partnership.

Taxable Person: A Person that conducts an Economic Activity independently for the purpose of generating income, who is registered or obligated to register for VAT in accordance with the provisions of this Agreement.

Economic Activity: An activity that is conducted in an ongoing and regular manner including commercial, industrial, agricultural or professional activities or Services or any use of material or immaterial property and any other similar activity.

Taxable Trader: A Taxable Person in any Member State whose main activity is the distribution of Oil, Gas, Water or Electricity.

Place of Business: The place where a business is legally established; or where its actual management center is located where key business decisions are made if different from the place of establishment.

Fixed Establishment: Any fixed location for a Business other than the Place of Business, in which the business is carried out and is distinguished by the permanent presence of human and technical resources in such a way as to enable the Person to supply or receive Goods or Services.

Place of Residence of a Person: The location where Place of Business or any other type of Fixed Establishment is. In the case of a natural person, if he does not have a Place of Business or Fixed Establishment, it will be his usual place of residence. If a Person has a Place of Residence in more than one State, the place of residence will be considered to be in the place most closely connected with the supply.

Resident Person: A person will be resident in a State if he has a place of residence therein.

Non-Resident Person: A person is not resident in a State if he has no Place of Residence therein.

Supplier: A Person who supplies Goods or Services.

Customer: A Person who receives Goods or Services.

Reverse Accounting (Charge): A mechanism by which the Taxable Customer is obligated to pay the Tax due on behalf of the Supplier and is liable for all the obligations provided for in the Agreement and the Local Law.

Related Persons: Two or more Persons; one of whom has supervisory or directive control over the others in such a way that he has administrative power that enables him to influence the business of the other Persons from a financial, economic or regulatory aspect. This includes Persons who are subject to the authority of a third Person that enables him to control their businesses from the financial, economic or regulatory aspect.

Supply: Any form of supply of Goods or Services for consideration in accordance with the cases provided for in the Chapter Two of this Agreement.

Deemed Supply: Anything that is considered a Supply in accordance with the cases provided for in Article 8 of this Agreement.

Input Tax: Tax borne by a Taxable Person in relation to Goods or Services supplied to him or imported for the purpose of carrying on the Economic Activity.

Unified Customs Regulation (Law): The Unified Customs Regulation (Law) of the GCC.

First Point of Entry: First customs point of entry through which Goods enter the Council Territory from abroad in accordance with the Unified Customs Law.

Final Destination Point of Entry: Customs point of entry through which Goods enter the Final Destination State within the GCC Territory.

Consideration: Everything collected or to be collected by the Taxable Supplier from the Customer or a third party against the Supply of Goods or Services inclusive of the VAT.

Exempted Supplies: Supplies on which no Tax is imposed and from which associated Input Tax is not deducted pursuant to the provisions of the Agreement and Local Law.

Taxable Supplies: Supplies on which Tax is charged in accordance with the provisions of the Agreement, whether at the basic rate or zero-rate, and from which associated Input Tax is deducted in accordance with the provisions of the Agreement.

Internal Supplies: Supplies of Goods or Services by a Supplier who resides in a Member State to a Customer who resides in another Member State.

Goods: All types of material property (material assets), including water and all forms of power including electricity, gas, lighting, heating, cooling and air conditioning.

Importation of Goods: The entry of Goods into any Member State from outside the Council Territory in accordance with the provisions of the Unified Customs Law.

Exportation of Goods: Supply of Goods from any Member State to the outside of the Council Territory in accordance with the provisions of the Unified Customs Law.

Competent Tax Authority: The relevant Government entity in each Member State responsible for the administration, collection and implementation of the Tax.

Deductible Tax: Input Tax that may be deducted from Tax due on Supplies for each Tax period in accordance with the Agreement and Local Law.

Capital Assets: Material and immaterial assets that form part of a business’s assets allocated for long-term use as a business instrument or means of investment

Tax Period: The period of time for which the Net Tax must be accounted.

Net Tax: Tax resulting from deducting the Deductible Tax in a Member State from the Tax due in that State within the same Tax Period. Net Tax may either be payable or refundable.

Mandatory Registration Threshold: The lower limit of the value of actual supplies at which the Taxable Person becomes obligated to register for Tax purposes.

Voluntary Registration Threshold: The lower limit of the value of actual supplies at which the Taxable Person may apply to register for Tax purposes.

Ministerial Committee: The Financial and Economic Cooperation Committee of the Council States

 

We will refrain to comment on all of the definitions, but solely highlight those that deserve comments and observations. The tradition of having a long list of definitions at the end of laws seems to be an Anglo-Saxon tradition taken over in lawmaking in the Gulf region.

The Agreement obviously refers to the Gulf Cooperation Council (‘GCC’). This ‘cooperative framework’ was founded on 25 May 1981 and consists of six Member States: The United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar, and the State of Kuwait.

Its basic objectives are to “effect coordination, integration and inter-connection between Member States in all fields in order to achieve unity between them, to deepen and strengthen relations, links and areas of cooperation now prevailing between their peoples in various fields.” It also intends to “formulate similar regulations in various fields including the following: 

  • Economic and financial affairs;
  • Commerce, customs and communications;
  • Education and culture.

Several committees are set up within the GCC, the Ministerial Committee is one of them.

The Agreement refers to the instrument which we are discussing currently. It forms the basis defining the framework for the implementation of VAT in the Member States of the GCC.

The Territory of the Member States is not clearly defined. International public law regulates the claims sovereign states have over territory. As such, within the framework of the UN, states have also reached agreement on the legal status of the territory of states, as well as the sea.

This agreement is called the United Nations Convention on the Law of the Sea of 1982, also referred to as the Montego Bay Convention (hereinafter referred to as “UNCLOS”). The European Union have also ratified the UNCLOS.

Based on the United Nations Convention on the law of the Sea of 1982, simply put, a distinction should be made between three areas.

Firstly, the territorial sea, which can be defined by the sea bordering the coastal state up to 12 nautical miles offshore counting from the baseline. In the territorial sea, the coastal state has full sovereign rights, as if this part of the sea was part of its land. They have the right to enforce any law, regulate any use and exploit any resource.

Secondly, there is the zone of the ‘open sea’, which is not subject to any national jurisdiction. The open sea is considered to be common heritage of mankind. States have no rights there whatsoever.

Thirdly, an area is located between the territorial sea and the open sea. The legal status of this area under the UNCLOS is more complicated.

In an area extending 24 nautical miles (and starting as from 12 nautical miles) from their shores called “the contiguous zone”, coastal states are empowered to enforce certain rights. It can be used to pursue and arrest and detain suspected drug smugglers, illegal immigrants and customs or tax evaders violating the laws of the coastal state in its territory or the territorial sea.

In an area called the exclusive economic zone (henceforth ‘EEZ’), coastal states have “economic” jurisdiction over the resources (i.e. to exploit them). This is especially important for oil exploration. Coastal states have the exclusive right to exploit, develop, manage and conserve all resources – fish or oil, gas or gravel, nodules or sulphur, to be found in the waters, on the ocean floor, and in the subsoil. Within this zone, the coastal state has the exclusive right of exploitation of resources, including fisheries, and is responsible for regulating pollution from sea-bed installations, dumping, and other activities.

The EEZ is geographically defined according to the UNCLOS as ‘an area beyond and adjacent to the territorial sea (…)’. It refers to an area ‘not extending beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured.

Particularly relevant for the subject at hand, the UNCLOS states that the coastal state shall have the exclusive right to construct and to authorize and regulate the construction, operation and use of: a) artificial islands, b) installations and structures c) installations and structures which may interfere with the exercise of the rights of the coastal State in the zone.

In addition, the article specifies that ‘the coastal State shall have exclusive jurisdiction over such artificial islands, installations and structures, including jurisdiction with regard to customs, fiscal, health, safety and immigration laws and regulations.

Based on this legal framework, it is clear that the coastal state may exercise ‘some’ of its sovereign rights in the EEZ.

Still in the same area between the territorial waters and the high seas lies also the continental shelf. Its geographical outer limit coincides with the EEZ. It comprises the seabed and subsoil that extend beyond the limits of its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 miles from the baselines, where the outer edge of the continental margin does not extend up to that distance.

Coastal states often grant concessions to private companies to construct windmills, drill for oil or lay a cable on the seabed.

KSA has explicitly included a reference to international law in its domestic legislation (article 1 of the KSA VAT Law), the UAE has not.

Person is another important concept in the Agreement. It includes ‘any natural or legal person, whether public or private, or any other form of partnership.’ It is intended as wide as possible. In other words, it includes inter alia branches of foreign companies, public or private joint stock companies (JSC’s), joint liability companies, limited partnership companies, joint ventures, limited liability companies (LLCs), simple commandite company, non-profit associations, foundations, charities, philanthropies, unions, high commissions, public service establishments etc.

Logically, after the definition of the word person comes the definition of the word Taxable Person. That Taxable Person: is a “Person that conducts an Economic Activity independently for the purpose of generating income, who is registered or obligated to register for VAT in accordance with the provisions of this Agreement.

The word ‘independently’ is not a coincidence, as any income which is not generated independently is not subject to VAT. In other words, income derived from limited or unlimited employment contracts are not subject to VAT. This holds as well for full time and half-time employment contracts, temporary contracts, special contracts, end of service gratuities and trainee contracts.

The fact that the taxable person is pursuing income does not entail that the taxable person actually needs to be making profit.

The term economic activity or 'business activity’, or being ‘in business’ is important in this context. It is not an easy term to define. In absence of performing any economic activity, a person would not be a taxable person. In other words, the person needs to perform certain transactions. These need to be performed regularly. In other words, it requires repeating certain transactions. This often leads to very factual discussions.

The wording ‘for the purposes of generating income’ can be somewhat misleading. It simply means that the person is receiving income for the transactions he or she is performing. It is important to point out that this concept is completely independent from costs. In other words, even if the person is making a loss, he is still generating income. That is why even a company making a loss, can still be a taxable person. It is also independent from the accounting treatment of the income. Regarding the registration, we will be discussing this in article 50.

The term taxable trader is specified for a taxable person who is carrying out 'business-like activities' for the purpose of earning income from trading in oil, gas water or electricity. This term is linked with the article 14 of the Agreement.

Place of business is a concept which is not further defined in the Agreement. However, together with fixed establishment and place of residence, they are important concepts for the place of supply rules, registration and reverse charge.

The place of business will define the residency of a supplier, i.e. where he is established. This could be important for the general place of supply rule for services provided to non-business customers (see the discussion under article 15 of the Agreement). A taxable person could also have a fixed establishment outside of the country where he is established, and that fixed establishment could be considered as the actual provider of the services. Place of residence is another important concept which will determine where a physical person is established (as opposed to a legal person).

These concepts also determine residency and non-residency. A taxable person can be considered as residing in a certain jurisdiction or country. If he is making a supply in a jurisdiction where he is not established, then he will be considered as a non-resident in the country where the supply takes place.

This is amongst others important for the application of the reverse charge mechanism. This concept entails that an exception is made to the default rule that VAT is due on supplies of goods or services by the supplier. When the reverse charge mechanism is applicable, the liability to pay VAT will shift to the customer instead of the supplier. In other words, the customer will be paying VAT to the authorities instead of the supplier. At the same time, the customer will be able to deduct input VAT to the extent he can recover input VAT. Indeed, it is as if the transaction was actually invoiced to that customer with VAT. The intention of this mechanism is to put a foreign seller on equal footing with a local seller, in order to ensure that VAT is paid on purchases from both types of sellers irrespective of the place where they are established.

Related persons is a concept which is important for article 26 in terms of the taxable base applicable to transactions. This concept will be further discussed together with that article.

The local Laws published by the GCC states so far tend to define more terms and also redefine the terms in the domestic Laws. 

First point of entry and final destination point of entry are concepts which are important for the importation and exportation of goods. These will be discussed under article 2.

Deductible tax is the tax that a taxable person can deduct from his output tax. It is the key element which distinguishes a Value Added Tax from a Single Stage Sales Tax. In a Single Stage Sales Tax, there is usually only sales tax due on the last consumption stage, whereas VAT is applied throughout the supply chain.

Sometimes when a taxable person buys goods or services, these constitute capital assets. This is a special category of assets which is monitored over time for VAT purposes. Any change in their use or a change in circumstances will require a correction from the taxable person either in his favor or in his disfavor.

Consideration is an important concept which will determine the taxable base on which to apply VAT.

The tax period will determine the period during which VAT needs to be calculated. This could be monthly or quarterly, often depending on turnover realized. The net tax would then be the VAT which is due after deducting input VAT from output VAT.

The mandatory and voluntary registration thresholds will be discussed with their respective articles (articles 50 and 51).

 

Article (2)

Scope of Tax

The Agreement shall come into effect in the Council Territory and Tax shall be imposed on the following transactions:

1

Taxable Supplies by a Taxable Person in the Member State Territory.

2

Receipt by a Taxable Customer of Goods or Services supplied to him by a Non-Resident and non-Taxable Person in the Member State in instances where Reverse Tax Mechanism applies.

3

Importation of Goods by any Person

 

The first supply which is in the scope of tax is the supply of goods and services made in a GCC Member State. These need to be made by a taxable person. In other words, if the supplier is not a taxable person, then the income gained from the transaction remains completely out of scope of VAT. If for example a person inherits a book collection from his father and decides to sell this collection on the internet, this will not make him a taxable person since these sales cannot be regarded as an economic activity.

The supplies of goods and services will be discussed in detail with articles 5 and 7 of the Agreement. However, it is important to point out here that the determination of the place of supply of the such goods and services is important. If the place of supply rules point at one of the Member States of the GCC, only then VAT will be due in one of those Member States.

The second supply which is in the scope of tax is imports. We will get back to its definition of imports in a later stage. It basically refers to goods entering the territory of one of the six GCC Member States. It is not required that the importer is actually a taxable person, as anyone bringing in goods into the territory of one of the GCC Member States is making an importation.

The second sub paragraph of article 2 is obsolete in the architecture of the Agreement and makes the language somewhat confusing. It clarifies a situation which would have been in scope in any way. This may also be the reason for the conceptual confusion in the drafting of some domestic VAT Laws.

The reason why this provision is obsolete is that when a non-resident is providing a supply of goods or services to a Taxable Customer residing in one of the GCC Member States, he is in any case a taxable person providing a supply of goods or services. The place of supply rules would then determine whether the supply takes place in a Member State of the GCC and whether this State can levy VAT (potentially the reverse charge mechanism would apply). In other words, regardless of the provision foreseen in article 2 such a supply would have been potentially taxable anyway in one of the GCC Member States.

In addition to that, for this provision to apply the supplier must be a non-taxable person in one of the GCC Member States. The definition of the taxable person  constitutes a deficient wording which is reflecting in this provision. The seller will always be a taxable person since that concept is not geographically limited.

Article (3)

Calculation of Time

Times and periods stipulated in the Agreement shall be calculated according to the Gregorian Calendar.

 

This article indicates that the tax periods will be calculated according to the Gregorian calendar and not the Islamic Hijri calendar, which is a lunar calendar. The Islamic calendar also has 12 months but in total 354 or 355 days. It counts as of the year 622 of the Gregorian Calendar. The Gregorian calendar has 12 months and 365 days. It counts as of the birth of Jesus Christ.

 

Article (4)

Tax Group

Each Member State may treat the Tax Group as a single Taxable Person in accordance with the rules and conditions put in place for that purpose. A Tax Group means two or more Corporate Persons who are Residents of the same Member State.

 

It is optional for Member States to provide the possibility in local law to constitute a Tax Group or VAT group. It is a type of tax consolidation between different members of the same group. Taxable persons wishing to do so can form one single tax payer for VAT purposes. It is required that the members are established in the same Member State. The formal and material conditions to form a VAT group are left to the Member States. As a general principle, the members of the VAT group need to be related.

Group taxation is designed to reduce the effect that the separate existence of related companies has on the aggregate tax liability of the group. This can be attractive to taxpayers because it gives them flexibility to organize their group business activities (e.g. outsourcing of certain activities to a sister company or centralization administrative services in a group company) and engage in internal restructuring and asset transfers without having to worry about triggering taxes. It is also an important planning tool.

In addition, it avoids that group members have to worry about the qualification of intra-group transactions. A VAT grouping is different than forming a corporate group. Although the underlying principle is same but there are few practical differences.

Being part of a VAT Group can also provide VAT cash flow advantages because the input VAT claims attributable to certain members of the group are credited against the output VAT debts of other members. This objective can also be achieved in a different way, as France has shown. France does not have VAT grouping, but allows for offsetting payments of different group companies (article 1693 ter of the French Tax Code).

Generally, the consequences of constituting a VAT group is that all members are considered as one single taxable person for VAT purposes. This entails that all supplies between the members are considered as out of scope for VAT purposes and that VAT recovery and formalities are determined and complied with on a group level. Every VAT group will choose a representative among the members who will comply with the obligations on behalf of the other members. Vis-à-vis the tax authorities it is as if the representative member is conducting all of the transactions.

The benefits of constituting a VAT group could be administrative simplification (depending on how it is set up) and VAT savings could be obtained by grouping certain members. In terms of the administrative simplification, although the consequence is indeed that only one VAT return needs to be filed and only one payment to be made, operationally constituting a VAT group changes the closing process in a significant way. It adds an additional step to the operations, having to perform first a closing on the level of the group members and later on the level of the VAT group itself, consolidating the turnovers and canceling intra-group transactions.

One of the potential downsides is that the members are jointly and severally liable for the payment of VAT towards the administrations. Furthermore, since the group registration is an optional provision, the group registration requests are generally subject to strict review by the authorities against the tax avoidance. The acceptance or rejection of a group registration request is generally left at the discretion of the tax authorities.

Other considerations for forming a group can be:

  • Frequency and materiality of taxable inter-group transaction
  • VAT recovery ratio of the group versus the members
  • Potential complex qualifications avoided
  • Existing group reporting structure
  • Readiness of IT system for group reporting
  • Projection of cash flow prior or after grouping

Every VAT group will choose a representative among the members who will comply with the obligations on behalf of the other members

VAT grouping is currently available in approximately over half of the Member States of the European Union.

2.2 Supplies within the Scope of the tax

 

Chapter Two

Supplies within the Scope of the Tax

Article (5)

Supply of Goods

 

1

A Supply of Goods means the transfer of ownership of such Goods or the right to dispose of the same as an owner.

2

A Supply of Goods includes the following transactions:

 

a

assigning possession of Goods under an agreement that provides for the transfer of ownership of these Goods or the possibility of transferring the same at a date subsequent to the date of the agreement, which shall be no later than the date on which the Consideration is paid in full;

 

b-

granting rights in rem deriving from ownership giving the right to use real estate;

 

c-

compulsory transfer of ownership of the Goods for Consideration pursuant to a decision of the public authorities or by virtue of any applicable law.

This article defines what a supply of goods is. The definition is quite broad and includes any type of moveable or immoveable goods which are supplied.

The Agreement lists some additional examples. It includes the option to buy a good in a later stage (e.g. an option to buy a stock of oil or real estate).

Rights in rem are mentioned as well. Those rights are usually associated with a property, not based on any personal relationship (in personam rights). For example, in the Kingdom of Saudi Arabia, a mortgagee acquires a right in rem over specific land (and takes precedence over all creditors). In the UAE, these aspects are regulated on an Emirate level. The purchase of an apartment in a freehold constitutes the supply of a good. Building rights can constitute the supply of goods.

In the EU, the supply of a good does not require that the actual material putting at the disposal is done to the taxable person deducting the VAT.

Whenever the public authorities would summon or seize goods and compensate the owner for it, then this will constitute a supply too.

Article (6)

Transporting Goods from One Member State to Another

 

1

A Taxable Person who transports Goods forming part of his assets for the purposes of his business from the place where they are in a Member State to another place in another Member State shall be deemed to have made a Supply of Goods in the first State.

2

A transportation of Goods as provided for in subsection 1 above shall not be considered a Supply of Goods in the first State if it was done for one of the following purposes:

 

a-

to use the Goods in the other Member State temporarily within the conditions of temporary entry provided for in the Unified Customs Law;

 

b-

where the transportation of goods is done as part of another Taxable Supply in the other Member State.

 

This article discusses the situation where a taxable person has assets in one Member State and moves them to another Member State to use them for his business. There is no sale because it is the businesses itself which is moving its own goods. For that reason, it is considered as a deemed supply of goods.

This could happen when for example a Saudi business has a stock of goods in Oman, in order to shorten delivery times for its Omani customers.

In absence of such a provision, the transfer of these goods would escape VAT. The rule locates the deemed supply in the country of departure of the goods. This constitutes a special place of supply rule for goods. It awards jurisdiction to the departure state to claim VAT over this supply.

Although not specifically mentioned, most likely the rules in paragraph 2 needs to be read together with article 12 of the Agreement (Paragraph 3). This determines that a supply of goods with transport from one GCC Member State to another takes place in the Member State of arrival. The conditions for under which such transportation of the goods will not to be considered as a supply of good in the state of departure are the temporary admission in other Member Sate or a supply of goods done as part of a taxable supply.

It is important to note that in the case of paragraph 1 of the article 6 there is no supply, only a deemed supply in case of transfer of goods. Therefore, it must not be confused with the provisions of article 12. If one would use article 12 as well for the purposes of transfers of own goods, it would create a situation of double taxation, since both the Member State of departure and arrival can claim VAT on the transaction.

Since the provisions are not sufficiently clear, it is necessary to analyze the provisions in the light of their context and their intent. These rules were based on the EU VAT directive. In the EU, a similar provision exists which concerns transfers of own goods. The effect of the provision in the EU is that there is a (potentially) exempt intra-community supply in the Member State of departure and a taxed intra-community acquisition in the Member State of arrival. The aim of it is to be able to follow the goods for tax purposes. The business transferring the goods should register for VAT purposes in the Member State of arrival.

The provision in the Agreement does not seem fully in line with this, since it only taxes the transfer in the Member State of departure. Most likely, if the aim is to follow the goods, the business transferring the goods from the Member State of departure should not have to pay VAT on the transfer in the Member State of departure provided he can prove that the goods have been shipped to another Member State and in the Member State of arrival these goods should be taxed and trigger an obligation to VAT register in the Member State of arrival.

Article (7)

Supply of Services

Any Supply that does not constitute a Supply of Goods under this Agreement shall be considered a Supply of Services.

 

This rule excels in its simplicity. This provision needs to be read together with Article 5. Since for VAT purposes all supplies are either supplies of goods or services, services are defined in a negative way. Therefore, any supply which a taxable person makes is either one or the other. Any supply which is not a supply of goods, is a supply of services.

There are no further examples given in the Agreement of supplies of services.

Some examples could be:

  • Supply of consultancy services
  • The obligation not to perform a service (e.g. a compensated non-compete)
  • The right to broadcast, …

This does not necessarily mean that all income received by these taxable persons is a supply and thus potentially subject to VAT. The receipt of dividends, salary, a general grant or subsidy for example is not considered an economic activity and thus these are not subject to VAT.

Article (8)

Deemed Supply

1

A Taxable Person shall be deemed to have performed a Supply of Goods when disposing of Goods that form part of its assets in any of the following cases:

 

a-

assignment of Goods, for purposes other than Economic Activity, with or without a Consideration;

 

b-

changing the use of Goods to use for non-taxable Supplies;

 

c-

retaining Goods after ceasing carrying on an Economic Activity; and

 

d-

supplying Goods without Consideration, unless the Supply is in the course of business, such as samples and gifts of trivial value as determined by each Member State.

2

A Taxable Person shall be deemed to have made a Supply of Services in any one of the following cases:

 

a-

use by him of Goods that form part of his assets for purposes other than those of an Economic Activity; and

 

b-

Supplying Services without Consideration.

3

The provisions of this article shall apply if the Taxable Person has already deducted Input Tax related to the Goods and Services mentioned in this Article.

4

Member States may determine the conditions and rules for the implementation of this Article.

 

This article is important in the sense that it provides for a correction of VAT when goods or services are not used for business purposes. It targets the situation where a taxable person has purchased goods or services and (at least partly) recovered VAT on the purchase. The initial use that the taxable person intended for the goods or services has now changed. These situations are sometimes referred to as ‘self-supplies’ and should be taxed in order to ensure the neutrality of VAT. In absence of the application of taxes, these goods or services would end up in a stage of final consumption without taxing them.

The first four situations concern goods.

The first situation concerning goods is the one where a taxable person has purchased goods and these are subsequently used for other purposes than economic activity, with or without consideration. It could be the case where goods were previously used for a taxable activity and are now used by the same business for a non-taxable activity, such as a holding function of the same business. If these goods are assigned for consideration, then this may have to be taken into account when calculating the taxable supply for these goods.

The second situation concerning goods is the one where goods are used for non-taxable supplies. Since a supply which is out of scope of VAT is technically not a supply, this could only refer to an exempt supply. If a business has a mixed activity and has both taxable supplies and exempt supplies, it can recover only part of its input VAT. If it has goods which it used for taxable supplies (which grant the right to recover input VAT) and which it now uses for exempt supplies (which do not grant the right to recover input VAT), it will have to make a correction on the deducted input VAT. It does so by taxing this situation as if it were a supply which was made. In that way, it will be as if the taxable person had never deducted input VAT.

The third situation concerning goods is the one where a taxable person has previously bought goods and deducted VAT on them (e.g. his stock) and now stops his business. When such a taxable person stops his business, the goods which he previously bought will now be freely at this disposal. Since this would not be neutral for VAT purposes compared to an end customer, the taxable person ending his business should be put on the same footing as an end customer. Therefore, if the taxable person retains goods after ceasing his economic activity, this situation should be taxed.

The fourth situation concerning goods is the one where a business has purchased goods and is now supplying them for free. This can be the case for example when a business buys a number of goods to then give them away to staff or clients (perhaps against a fee or a lower fee). Unless this is for the furtherance of his business, the goods given away will be used for other purposes than the economic activity of the taxable person. The same thing holds for samples and gifts of trivial value.

The same above rule applies to the supply of services without consideration provided to promote the economic activity of a taxable person or provided to employees in as a part of carrying on the economic activity.

An additional provision is provided in the Implementing Regulations of the KSA VAT Law which is related to an exception for a supply to be treated as a deemed supply.

The first one is the case where the goods are not used for the economic activity of a taxable person due to the destruction, theft or loss of those goods. In that case there is no deemed supply.

The maximum overall annual value of supplies of gifts, samples and goods or services which a taxable person may make without consideration, is SAR 50,000 in any calendar year. This is based on the fair market value of those gifts, samples, goods and services.

Article 9

Receiving Goods and Services

1.

If the Taxable Person in a Member State receives taxable Goods or Services from a Person who is a resident in another Member State, then he shall be deemed to have supplied these Goods or Services to himself and the Supply shall be taxable in accordance with the Reverse Charge Mechanism.

2.

If a Taxable Person residing in a Member State receives Services from a person who is not resident in the GCC Territory, then that Person shall be deemed to have supplied these Services to himself and the Supply shall be taxable according to the Reverse Charge Mechanism.

This article is superfluous in the structure of the Agreement. In absence of this article, its provisions would still apply because the place of supply rules would designate a certain Member State and the transaction would still potentially be reverse charged. It has a certain value in clarifying the treatment of certain transactions though, but it has confused the drafting of the UAE VAT law. This is explained in detail in the comments on article 41.

2.3 Place of Supply

Chapter Three

Place of Supply

Part One

Place of Supply of Goods

Article (10)

Supply of Goods without Transportation

The place of a Supply of Goods that occurs without transportation or dispatch thereof shall be the place where the Goods are located on the date they are placed at the Customer’s disposal.

This article determines that when goods are supplied but they are not transported, then the jurisdiction where the goods are located is the jurisdiction which is competent to claim VAT on the supply. Although the article does not mention it, traditionally the ‘without transportation’ needs to be read as transport out of the Member State. In other words, the goods can be transported inside the same Member State, and this provision will still apply, as shown by the example below.

If goods are sold by a Saudi business in Khobar to another Saudi business in Jeddah and they are transported to Jeddah from Khobar, then the goods are located for VAT purposes in Saudi.

If goods are sold by a Saudi business in Khobar to a business in the Emirates and the goods remain in the warehouse in Khobar, then the goods are located for VAT purposes in Saudi, even if the customer is located in the Emirates.

This rule determines the general rule for the situation when goods are supplied with transport. It determines that when goods are supplied with transport, the jurisdiction that can claim VAT on this supply is the jurisdiction from where the goods are leaving.

Article (11)

Supply of Goods with Transportation

The place of a Supply of Goods that occurs with transportation or dispatch thereof by the Supplier or to the account of Customer shall be the place where the Goods are located when the transportation or dispatch commences.

 

In other words, if goods are sold from Oman and sent to customers in Ethiopia, the jurisdiction that can claim VAT on the supply is Oman.

This does not necessarily mean that the supply is actually subject to VAT, as it could potentially be zero rated (see article 34).

In the EU, this provision would be applicable to intra-community supplies and exports, which could be VAT exempt with right to deduct input VAT (or alternatively called ‘zero rated’) if certain conditions are met (in the jurisdiction of arrival, the goods are then taxed as an intra-community acquisition). In the GCC this provision does not apply to intra-community supplies since that concept is not known under the VAT Agreement.

Article (12)

Special Case of Internal Supplies with Transportation

1

As an exception to the provisions of Article 11 of this Agreement, the place of supply for an Internal Supply of Goods with transportation or dispatch thereof from one Member State to another shall be in the State in which the transportation or dispatch of the goods terminates in the following cases:

 

a.

if the Customer is taxable.

 

b.

without prejudice to subsection 2 of this Article, if the Customer is not taxable and the Supplier is registered in the country where the Customer resides or is obligated to be registered.

2

The place of an Internal Supply of Goods with transportation or dispatch thereof but without installation or assembly by a Supplier who is registered for Tax purposes in a Member State in favor of a Customer who is not registered for Tax purposes in another Member State shall be the place where the Goods are located on the date the transportation or dispatch begins, provided that the total value of the Supplies of that Supplier during any 12 months period does not exceed an amount of SAR 375,000 or its equivalent in GCC currencies, in the State to which the Supply is provided. In the event that the total value of the supplies exceeds this amount, this shall result in the Supplier registering in that State.

3

If transportation of Goods from one Member State to another cannot be established through compliance with the obligations provided for in Article 6 of this Agreement and the Local Laws, the place of supply shall be where the Goods are located on the date the transportation or dispatch begins.

4

In the event of a Supply of Goods that occurs without transportation or dispatch, and it is later established that transportation or dispatch of such Goods to a Member State took place in the circumstances provided for in subsection 1 of this Article, the State in which the transport or dispatch ends has the right to recover the Tax from the Member State where the transportation or dispatch started in accordance with the Automated Direct Transfer Mechanism in force with Customs or any other mechanism approved by the Ministerial Committee.

 

This article provides for an exception to article 11. In summary, it provides for an exception to the rule that supplies of goods with transport are located in the Member State of dispatch. They are labelled here as ‘internal supplies’. Internal needs to be read here as internal to the GCC Member States as defined in article 1 of the Agreement.

The first type of supply is the supply of goods transported from one Member State to another and whereby the customer is taxable. In that case the supply is not located in the Member State of departure but in the Member State of arrival.

In other words, if an Emirate business is supplying goods to a Saudi business and transporting them to Saudi, then the supply will be located in Saudi. It constitutes one single supply. This is different from the rules in the EU where such an ‘internal supply’ would qualify as a (possibly exempt) intracommunity supply and a taxed intra-community acquisition.

No simplifications for triangulation are provided under the VAT Agreement.

If that same supply is made to not to a taxable customer, but to a non-taxable customer (e.g. a private individual), then again, the place of supply is changed to the country of arrival of the goods when the supplier is registered in that country (or should be registered). The supplier could be registered in that country for other reasons, e.g. he holds a stock there from which he sells, he imports into that country, etc.

But even if the supplier is supplying to a non-taxable customer and is not registered, the next provision may require him to register. This is the case when the supplier is making supplies to a certain Member State the annual value of which exceeds 375.000 SAR. This provision is similar to what in Europe is called a ‘distance sales’ provision.

The consequence according to the Agreement is that the supplier should register in the country of arrival. The wording of this provision is however inefficient. It should actually say that the sale made by the supplier is located in the country of arrival. The supplier is then liable for the payment of VAT on this supply to the tax authorities (no reverse charge applies). Therefore, the supplier needs to register for VAT purposes. Because of regulatory reasons though, this will often not be possible.

The reasoning here is somewhat circular as the place of supply changes to the country of destination of the supplier is required to register and the supplier is required to register when he makes supplies to the country of destination.

However, as stated in the first part of the paragraph 2, if the supplies are less than SAR 375,000 and supplier is not registered then the supply will be taxed in the place from where the transport or dispatch of goods begins.

In the same paragraph, it is suggested that supplies with installation or assembly would be qualified differently for VAT purposes. However, there is no other provision with respect to the place of supply of supplies with installation or assembly. It is unclear whether this was intended. The UAE has gone ahead and drafted an internal place of supply rule anyways with respect to supplies with installation or assembly in its domestic legislation.

The third paragraph is a fall back rule stating that when transport from one Member State to another cannot be proven, by default the Member State of departure can claim VAT on the supply. This provision is merely for clarification purposes, as it is clear from the structure of the Agreement that supplies with dispatch are the exception to general rule of supplies without dispatch. There, any reason for deviation needs to be proved.

The last paragraph is well intentioned. It allows the Member States that establish that goods were sent to them to recover VAT from the Member State of departure through the Customs Duties Automated Transfer Mechanism. Such a provision does not exist in the EU. This is due to the fact that the customs duties constitute revenue of the European Union itself, not of the individual Member State. It is to be foreseen that there may be some practical issues with applying this provision, such as issues around delivering proof that the goods have arrived and Member States of departure not wanting to hand over the revenue (e.g. in cases where they themselves did not receive any revenue for the supply).

 

Article (13)

Internal Supplies to Non-Registered Persons

Each Member State has the right to claim from another Member State the tax paid if the value of the Supply exceeds the amount of SAR 10,000 or its equivalent in other currencies of the GCC to individuals and non-registered persons, and the settlement of Tax shall be according to the Customs Duties Automated Direct Transfer Mechanism applicable under the framework of the Customs Union of the GCC. The Ministerial Committee may propose any other mechanisms.

The Member State may also impose Tax on these supplies at its points of entry to such State if no evidence is presented that the Tax was paid in the other Member State.

This article is quite unique. The rationale behind it is that some GCC Member States wish to preserve their fiscal revenues. Regional shopping destinations such as Dubai or Bahrain account for much spending in the GCC and thus also in the future for VAT. The article allows that one Member State can claim from the other the VAT which was paid on a supply in the other Member State. A concrete example could be the purchase by a Saudi private individual of an expensive designer purse in Dubai during a shopping trip.

The provision allows that the KSA can claim from the UAE the VAT which was paid by the Saudi private individual in Dubai. In other words, the UAE will have to transfer this VAT to the KSA. Since there is already a Customs Duties Automated Direct Transfer Mechanism in place for customs duties, this mechanism will also be used to transfer VAT. The process does not involve the supplier of the customer in this case. The big challenge of this article will be its policing by the tax authorities.

It looks like on top of this, if a private individual cannot substantiate it paid tax in another Member State (e.g. through the invoice or receipt), the Member State in which the private individual resides can claim VAT on the purchase. This presents a high burden on the individual that has to keep its proof, but also a challenge for the tax authorities which is potentially policing the borders. If there is no proof of payment, how will it determine the value on which to levy VAT? There is definitely a cost and benefit analysis to be made of the application of this provision.

Since there is no refund mechanism foreseen for this case, the private individual will end up paying VAT twice, once in the Member State of purchase and once in his country of residence.

Article (14)

Supply of Gas, Oil, Water and Electricity

As an exception to the provisions of Articles (10) and (11) of this Agreement:

1

The place of supply for gas, oil and water through the pipeline distribution system and Supply of electricity by a Taxable Person who is established in a Member State to a Taxable Trader established in another Member State shall be the place where the Taxable Trader is established.

2

The place of supply for gas, oil and water through the pipeline distribution system and Supply of electricity to a person who is not a Taxable Trader shall be the place of actual consumption.

 

The supply of gas, oil, water and electricity generally follows the main principles described above. The remarkable thing though is that electricity is assimilated with a supply of goods (as this is the case also in other jurisdictions like the EU).

The special exception in this provision is that where these goods are supplied to a trader, i.e. someone who has the intention of reselling the goods, an exception applies to the general principles. In order not to burden the trader with potential registration and other obligations in these other Member States, the place of supply of this kind of supplies is different when they are supplied to a trader. In that case, the place of supply of these goods is the country where the taxable trader is established. This solves the issue with the purchase. However, if the onwards supply of these goods is not subject to a reverse charge, the taxable trader will still be required to register in that state.

Where there is a supply of gas, oil and water through a pipeline to a person who is not a taxable trader, i.e. both a taxable person or a private consumer, then the place of supply will take place where the actual consumption is done. The same holds for the supply of electricity to these same persons.

 

 

Part Two

Place of Supply of Services

Section One

General Principle

Article (15)

Place of Supply of Services

The place of supply for Services provided by a Taxable Supplier shall be the place of the Supplier’s residence.

There are two sets of general rules for services. The first one determines that by default the place of supply for services provided by a taxable supplier shall be the place of the supplier’s residence. In other words, a service supplied by a business in Oman will be deemed to take place in Oman.

Article (16)

Place of Supply of Services between Taxable Persons

As an exception to the provisions of Article 15 of this Agreement, the place of supply for Services provided by a Taxable Supplier to a Taxable Customer shall be the place of Customer’s residence.

This article has to be read together with article 15. It determines that the place of supply of services supplied by businesses to another taxable customer (‘B2B services’) will be the country where that customer is located. Generally, one can conclude on the basis of the VAT number awarded to the customer that that customer is a taxable person. If the country of the recipient does not have a VAT legislation applicable, other documents can be used as well.

Section Two

Special Cases

Article (17)

Conveyance Leasing Services

As an exception to the provisions of Article 15 of this Agreement, the place of supply for conveyance leasing Services between a Taxable Supplier and a Non-Taxable Customer shall be the location where these conveyances were placed at the Customer’s disposal.

 

This article concerns an exception to article 15. It determines that the place of supply of the lease of a transportation mean to a non-taxable customer is the place where these goods are put at the disposal of the customer.

In other words, if a rental company rents a car to an Omani tourist in Bahrain and that tourist drives it immediately to the Kingdom of Saudi Arabia, Bahrain VAT will still be applicable.

This article may cause widespread abuse in such cases, as well as lead to cases of non-taxation. In the EU, this provision was already adapted in 2013 on the basis of an amendment to the VAT directive adopted in 2008 (Council Directive 2008/8/EC of 12 February 2008 amending Directive 2006/112/EC as regards the place of supply of services).

Article (18)

Supply of Goods and Passenger Transportation Services

As an exception to the provisions of Article 15 of this Agreement, the place of supply of Services for the transportation of Goods and passengers and related Services shall be the place where transportation begins.

This article determines that when a service to supply the transport of a good (e.g. a delivery) is made to any type of customer, the supply of goods will be located where the transportation begins.

When a business is providing a passenger transportation service, it is located in the place where transportation begins. In other words, a bus service from Bahrain to Saudi is located for VAT purposes in Bahrain. When buying a plane ticket for a trip from Abu Dhabi to Muscat (Oman), the service is located in the UAE. This service will be zero rated though (see comments under article 32).

It is substantially different from how passenger transportation services are treated in the EU. There the place of supply is determined according to the length of the journey on the territory of a Member State. It means that a journey has to be split up according to where it takes place. A train ride between Amsterdam and Paris is therefore subject to three different VAT regimes, the Dutch, Belgian and French one, because the train crosses the territories of these three countries.

Article (19)

Supply of Real Estate Related Services

1

Real Estate related Services shall mean those that are closely linked to real estate, including:

 

a-

real estate experts and agent services;

 

b-

granting the right to possess or use real estate;

 

c-

services related to construction work;

2

As an exception to the provisions of Article 15 of this Agreement, the place of supply of real estate related Services shall be where the real estate is located.

This is a classic exception to the general rule. Any services related to real estate are located where the actual land or building is located. The article provides for some limited examples. It is an article which is often contrasted with the general B2B rule in article 16, as applying it may cause pre-financing issues for a foreign recipient of the service. Indeed, insofar as the foreign recipient is not registered for VAT purposes, it will have to make use of a specific VAT refund mechanism which takes more time.

In the OECD model Tax Convention on Income and on Capital 2014, income from immovable property is also an exception to the general rule.

It is important that the GCC Member States will provide for more examples or clarity in applying this article, as it is often contentious. The domestic legislations in the UAE and the KSA have included some additional examples. These examples include, the grant, assignment or surrender of any personal right, interest in or right over real estate or a licence to occupy land or any other contractual right exercisable over or in relation to real estate, including the provision, lease and rental of sleeping accommodation in a hotel or similar establishment. Also, but not limited to, the services involving the preparation, coordination and performance of construction, destruction, maintenance, conversion and similar work.    

The EU has been facing these interpretation issues for a long time and has provided guidance through Council Implementing Regulation 282/2011 and Explanatory Notes on the place of supply rules with respect to services connected with immovable property.

Article (20)

Supply of Wired and Wireless Telecommunication Services and Electronically Supplied Services

The place of supply for wired and wireless telecommunication Services and electronically supplied Services shall be the place of actual use of or benefit from these Services.

This article is more or less a copy of rules which entered into force in the EU on 1 January 2015 (see for a discussion on these rules the study performed by Deloitte for TAXUD 'Options for modernizing VAT for cross-border E-Commerce' as well as abundant literature). In the EU though, broadcasting services were also included in this category. Additionally, in the EU these rules only apply to B2C services, whereas in the Agreement, the application is not limited to B2C services. In the absence of specific wording, the legal interpretation of the Agreement would require that it also applies to B2B services. The impact of this lack in the Agreement is very important for roaming services, which are B2B services charged between telecommunications businesses but actually enjoyed in another country.

The wording of the article hints towards a use and enjoyment provision, i.e. a provision which is intended to provide for a correction for the application of the normal place of supply rules where the application of the normal rules could lead to abuse.

However, we are not in the presence of such a situation. Instead the rule foreseen in article 20 just follows the destination principle in that it aims to tax services in the country where they are consumed, in conformity with the OECD VAT/GST guidelines.

Additionally, it is noteworthy that the same guidelines recommend a simplified VAT reporting mechanism for such services. The Agreement has ignored this suggestion. In other words, foreign suppliers will have to register for VAT purposes as local companies would. This will certainly have a negative effect on compliance.

Article (21)

Supply of Other Services

 

The place of supply for the following Services shall be the place of actual performance:

 

a.

restaurant and hotel Services and Services for the supply of food and beverages.

 

b.

cultural, artistic, sport, educational and recreational Services.

 

c.

services linked to transported Goods supplied from a taxable Supplier residing in a Member State to a non-taxable Customer residing in another Member State.

 

Parts of this article are fairly standard in the EU. In the VAT directive, one can find back similar provisions to a. and b. However, insofar as b. is concerned, since 2013 it is merely limited to the actually entrance for these services. Strangely enough, this article does not distinguish between providing these services in a B2B or B2C context.

The article determines that restaurant and hotel services and services for the supply of food and beverages are taxed at the place of actual performance. This means that when a person is served in a restaurant or hotel, irrespective of the capacity as a customer, the supplies made to that person will have local VAT. A German tourist staying at a hotel on the Palm in Dubai will therefore be charged with UAE VAT. The same will hold for any restaurant visits that person might undertake in the UAE.

Cultural, artistic, sports, educational and recreational services are also located where they are actually performed. What is mainly targeted here (implied) are actual events, such as concerts, art exhibitions, sports events and other types.

The last part of the article, i.e. c., is also absent in EU law. It is not clear what is actually meant with the place of actual performance for services linked to transported goods. Most likely it tries to target so-called distance sales and intends to make sure that when distance sales are made, both the actual supply of the good and the transport of it are both taxed in the country where these goods arrive.

Part Three

Place of Import

Article (22)

Place of Import

1

The place of import for Goods shall be the State of the First Point of Entry.

2

When Goods are placed under customs duty suspension under the Unified Customs Law immediately upon entry into the GCC Territory, then the place of import shall be in the Member State where these Goods were released from the duty suspension status.

 

This article sets out an important place of supply rule for imports. Wherever goods are brought into the territory of the GCC, the import shall take place in the country where the goods entered first. If goods are imported into Oman and subsequently shipped to Saudi Arabia, the first point of entry is Oman. Therefore, Oman can decide whether to levy VAT on the import.

If the goods are however placed under customs duty suspension, then the place of supply of the import will be in the country where the goods are released from the duty suspension status.

This article makes an important bridge to the Customs legislation which is applicable in the GCC. Although there are common rules, exceptions exist in terms of the rates applied (e.g. Saudi applies higher customs duties rates) and formalities still exist for movements between the Member States. To some extent the customs union in the GCC is less integrated than the customs union the EU has with Turkey, which is not even a member of the EU. The GCC VAT framework took the EU laws as a guideline however, but appeared not to have taken into account that the GCC does not operate in an integrated customs union. This explains also to some extent why the UAE law and the KSA laws are so different. It also shows why article 71 of the Treaty could be obsolete for goods movements.

The cases in which the payment of customs duties is suspended are described in the Common Customs Law (article 69 and following). They concern the transit transport of goods, the storage of goods in a customs warehouse, the import of goods into free zones or duty-free shops, the temporary admission of goods and the re-exportation of goods.

This entails that when goods come into a certain Member State and are put under one of the above regimes, not only the payment of customs duty is suspended, but also the payment of VAT. However, the financial guarantees might be obtained to secure the payment of taxes and the guarantee amount is refunded upon the release of goods. Goods can also be released from one suspension regime and put under another. The goods also do not necessarily have to actually be released in the GCC, but can be re-exported.

The application of customs duties rates is entirely independent from the application of VAT. As is shown in the below table, broadly 9 scenarios could apply:

Customs duty

VAT

 

Rate of 5% applicable

5% VAT applicable

Zero rate (e.g. foodstuffs)

Exempt (e.g. import for embassies)

 

0% customs duties

5% VAT applicable

Zero rate (e.g. foodstuffs)

Exempt (e.g. import for embassies)

2.4 Tax Due Date

 

Chapter Four

Tax Due Date

Article (23)

Date of Tax Due on Supplies of Goods and Services

1

Tax becomes due on the date of the supply of Goods or Services, the date of issuance of the tax invoice or upon partial or full receipt of the Consideration, whichever comes first, and to the extent of the received amount.

2

The date of supply provided for in subsection 1 of this Article shall be as follows:

 

a.

the date on which the Goods were placed at the Customer’s disposal in connection with supplies of Goods without transportation or dispatch;

 

b.

the date on which transportation or dispatch of Goods began in connection with supplies of Goods with transportation or dispatch;

 

c.

the date on which the assembly or installation of Goods was completed in connection with supplies of Goods with assembly or installation;

 

d-

the date on which the performance of the service was completed;

 

e-

the date of occurrence of any of the events referred to in Article 8 of this Agreement.

3

As an exception to the provisions of subsections 1 and 2 of this Article, in connection with supplies of a repetitive nature leading to the repetitive issuance of invoices or payment of Consideration, the Tax is due on the payment date specified in the invoice or the date of actual payment, whichever comes first, and at least once in every period of 12 consecutive months.

4

Each Member State may determine the date on which Tax becomes due with regard to supplies not referred to in the foregoing subsections of this Article.

 

This article discusses when VAT is actually due. In other words, we have already determined that VAT is due but the person liable for the payment of VAT needs to know when exactly to charge VAT. This determines when the tax authorities can actually claim VAT from whoever is liable for the payment of tax. This is sometimes referred to as the 'time of supply' or 'tax point'.

Separate rules apply for supplies of goods and services on the one hand, and imports on the other hand (for imports, see article 24).

VAT is due on the earlier of either the issuance of a (advance) tax invoice, receiving partial or full payment or on the date of supply. The determination of the date of supply depends on the factual circumstances. There are multiple possible scenarios:

  • The goods are placed at the customer's disposal and are not sent. In this case the time of supply is the moment on which the goods are put at the disposal of the customer
  • when the goods are transported (either outside or inside the country), then the date of dispatch determines the time of supply
  • When goods are installed or assembled, the time of supply is when the assembly or installation is completed;
  • Concerning services, the relatively vague notion of "completing the performance of the service" is used;
  • Finally, the last scenario refers to the deemed supply provision in article 8 of the Agreement. The determination of the tax point is necessary since there is no real supply. The tax point for these deemed supplies depends on the specific scenario applicable.

The tax points are illustrated in the diagram below and VAT will be due on the point which come earlier. 

With respect to so-called continuous supplies, which are supplies of a repetitive nature leading to the repetitive issuance of invoices or payment, the tax is due on the payment date specified in the invoice or the date of actual payment, whichever comes first, and at least once in every period of 12 consecutive months. What is target here is amongst others the supply of electricity. In practice, this time of supply rule with respect to the 12 months does not lead to many discussions, since business will have an incentive to invoice earlier. In the EU, this provision is optional (article 64, paragraph 2 of the VAT Directive 2006/112/EC).

The scope of the situations targeted by the last paragraph of article 23 is very wide.

Article (24)

Tax Due Date on Importation

Tax becomes due on the date of importing Goods into the Member State, subject to the provisions of Article 39 related to cases of Tax suspension upon importation and Article 64 related to the mechanism for paying Tax due upon importation.

This article determines when VAT is due on imports. That is the moment on which the liability arises for the person that is liable for the payment of import VAT. The Goods are imported into a GCC Member state in the following two ways

    1. directly to a port in that Member State,
    2. indirectly through a port in another Member State.

The opening phrase of the article is referring to (a). It is saying that when goods are imported into a Member State through a port at that Member State then the VAT is “due” by the person liable for the payment of VAT. The VAT is then required to be paid by filing the import return with customs. Usually VAT is then deductible in the VAT return with the import document as supporting evidence of that deduction. In the UAE, import VAT on goods will be automatically paid in the VAT return, and not to the customs authority.

The exception to this rule is where there is a customs suspension regime applicable according to the Common Customs Law (Article 39). This could for example be the case when the goods are put into a customs warehouse. This is where goods physically enter a Member State, but are not in free circulation in the country, because they are stored in a special warehouse. In these cases, the VAT is not collected until the goods leave the special customs regime. In these cases, the VAT will not be “due” in the sense of being liable for the payment of import VAT until the goods are removed from the warehouse.

The final clause talks about situation (b) (cf. Also article 64) where the goods enter Member State 1 and they are transported on land to Member State 2 where they meet the customs people from Member State 2. In this case however the VAT was paid at the port in Member State 1, put into a special account for Member State 2. When the goods cross into Member state 2 on that date the tax is due (and deductible) in the return of Member State 2. The money has already been paid, and gets transferred out of the special account at that time.

2.5 Calculation of Tax 

Chapter Five

Calculation of Tax

Article (25)

Tax Rate

1

Tax shall be applied at the basic rate of 5% of the Supply value or the value of Imports, unless this Agreement provides for an exemption or the zero-rate on such supplies.

2

Without prejudice to the obligations provided for under this Agreement and the Local Laws, published prices in the local market for Goods and Services must include VAT.

 

The GCC has determined the applicable rate in the Treaty. It is 5%. The rate is applied on the taxable base (see article 26 for a discussion on the taxable base). In principle, all implementing Member States of the GCC will apply that rate. Should they wish to increase or decrease the applicable rate, they will need to amend the Treaty.

The 5% rate applies across the board and is the default rule. There is no defined limited list of taxable supplies, which limits it to certain supplies.

The exception to this rule is when the Treaty or the GCC Member States provide for an exception to the general rule. These can be zero rates or exemptions. A zero rate in other jurisdictions is sometimes also called an "exemption with the right to deduction", which is likely closer to its actual meaning.

A number of zero rates and exemptions are mandatory under the Treaty. They are discussed under the relevant article (see article 31 and following).

The difference between zero rates and exemptions lies in the possibility to deduct input VAT. In both situations, the supplier does not charge VAT, but a zero rate means that the supplier can still deduct input VAT whereas the application of an exemption means that the supplier loses that right.

 

Output Tax

Input Tax deductible

Standard rated

5%

Yes

Zero rated

0%

Yes

Exempt Supplies

Nil

No

Outside of scope supply

Not applicable

Not applicable

 

The second paragraph discusses how pricing should be done by sellers. It prescribes that prices must include VAT. In other words, a shopkeeper cannot display a price that does not take into account VAT. That is how prices are generally displayed in the EU. In the USA when something sells for 100 and the tax rate is 5% the price of the newspaper is 100 and is shown exclusive of taxes. The buyer is confronted with a surprise at checkout since the price is now increased with the taxes.

Article (26)

Supply Value of Goods and Services

1

The fair market value is the amount at which Goods or Services can be dealt in in an open market between two independent parties under competitive conditions determined by each Member State.

2

The value of a Supply shall be the value of Consideration without the Tax and includes the value of the non-cash portion of the Consideration determined according to the fair market value.

3

The value of the Supply shall include all the expenses imposed by the Taxable Supplier on the Customer, the fees due as a result of the Supply and all the Taxes including Excise Tax, but excluding VAT.

4

In the case of Deemed Supply and transportation of Goods from one Member State to another, the Supply value shall be the purchase value or cost. If the purchase value or cost cannot be determined, then the fair market value shall apply.

5

Each Member State shall determine the conditions and rules for adjusting the Supply value between Related Persons.

6

The Supply value is reduced by the following amounts:

 

a-

discounts in prices and deductions granted to the Customer;

 

b-

the value of subsidies granted by the Member State to the Supplier;

 

c-

amounts paid by the Taxable Supplier in the name of and to the account of the Customer; in this case, the Taxable Supplier may not deduct Tax paid on these expenses.

7

If any of the components of the Supply value is expressed in a foreign currency, it shall be converted into the local currency based on the official exchange rate applied in the Member State on the Tax due date.

8

Each Member State may determine the value of the Supply in certain cases not referred to in this Article.

This article defines the taxable base on which the VAT rate of 5% needs to be calculated. Several potential scenarios can apply, which are defined in this article.

The first paragraph defines the fair market value. It defines an objective standard, as opposed to a subjective standard (i.e. what a person is prepared to pay for it). It is defining fair market value for use elsewhere.

The second paragraph prescribes that the taxable base of a supply is the consideration without VAT. The consideration is the price of a good or a service. This can be monetary or non-monetary. This constitutes somewhat circular reasoning. Consideration and taxable base are certainly different concepts but this rule only upholds in a B2C environment, where prices are generally agreed inclusive of taxes. In a B2B environment prices are generally agreed exclusive of any taxes. The rule only creates confusion and is unnecessary.

What is important though is that it indicates that where parties agree to consideration which is not necessarily monetary (e.g. an exchange of services), then the taxable base takes into account also the non-monetary part.

The third paragraph indicates that whatever expenses charged in addition by the supplier to the customer have to be included in the taxable supply. These could be for example a subcontractor issues invoice to the contractor of SAR 63 including VAT. The contractor will add the expenses, margin and any other cost with respect to the taxable base except for the VAT.

 

Expenses (SAR)

Margin (SAR)

VAT (SAR)

Total (SAR)

Subcontractor

50

10

3 (5% of 60)

63

Contractor

60 (as per subcontractor invoice)

20

4 (5% of 80)

84

In cases where deemed supplies are made or transfers of goods from one Member State to another without their sale, then the VAT legislation assimilates those situations to supplies (see article 6 or 8). This article determines the taxable base for those situations. It prescribes that one takes into account the purchase value or cost, or alternatively the fair market value which will likely be higher.

As a measure to target the situation where related parties would be inclined to lower the taxable base to reduce the VAT cost for the recipient, the Member States can prescribe that in those cases the value of the supply is adjusted upwards.

Additional provisions determine the cases in which the taxable base is reduced. This is the case for example when discounts and deductions are granted to the customer. This needs to be interpreted as the situation where these discounts and deductions are granted before the actual supply is made.

Contrary to how price subsidies are treated in the EU, in the GCC subsidies are simply not part of the taxable base. The provision prescribes that the taxable base needs to be reduced by the subsidies granted by the Member State to the supplier. Subsidies in generally do not constitute consideration for a service or a good supplied. This provision intends to avoid that subsidies granted by the government are subject to VAT. The adverse effect though of this provision is that a private supplier sees the price charged for his service entirely subject to VAT, whereas a supplier that receives subsidies for the same service sees the taxable base reduced and only has part of the consideration subject to VAT. In other words, a subsidized provider will be able to not only offer his services at a lower price but also the tax burden will be lower.

Disbursements finally are also not part of the taxable base to the extent that the supplier is asking for the refund of costs he has incurred in the name and for the account of the customer. Disbursement refers to the recovery of a payment made on behalf of another party by you as an agent. A disbursement does not constitute a supply and hence, is not subject to

Although the article is not worded entirely correct, it also indicates that that same supplier on charging those expenses cannot recover input VAT on those costs.

In terms of the situation in which the supplier charges an amount in a foreign currency, this currency needs to converted in the local currency based on the official exchange rate applicable on the due date. The official exchange rate is usually published by the Central Bank or Monetary Agency of the respective country. The risk lies in suppliers charging in one amount and being due the amount in another currency and experiencing financial losses because of the fluctuations in the currency. In the end, VAT will have to be paid in the local currency. In terms of the currencies used, this risk will especially present itself when dealing in EUR or GBP, whereas the USD is pegged to a number of currencies in the Gulf. This rule is not flexible, as in other jurisdictions it is allowed to contractually override this rule.

The last paragraph finally gives flexibility to the Member States in terms of other situations not foreseen in this article where they deem it necessary.

 

Article (27)

 

Adjustment of Tax Value

A Taxable Person may adjust the value of the Tax imposed upon the happening of any of the following events at a date later than the Supply date:

1

total or partial cancellation or rejection of a Supply;

2

reduction of the Supply value;

3

total or partial non-collection of the Consideration in accordance with the conditions applicable to bad debts in each Member State.

This rule allows a downward adjustment of the taxable base in certain situations after the actual supply is made.

 

If the domestic transaction is canceled or rejected by the buyer, whether in whole or in part, or if the value of the supply is reduced, the original taxable base of the VAT shall be reduced. These situations usually also trigger the obligation to issue a credit note to the customer, causing the customer to amend his input VAT deduction and pay back VAT which was initially deducted.

 

 

 

A credit note or credit memorandum is a commercial document issued by a seller to a buyer. The credit notes act as an evidence of the reduction in sales.

 

In addition, if the supplier does not manage to collect his receivable from his customer, then the Member States can prescribe so-called bad debt rules.

 

These rules allow businesses that have charged VAT to their clients and paid it to the tax authorities, to reclaim this VAT from the authorities in absence of any settlement by their clients. This should mitigate some of the negative effects caused by the time of supply rules which do not take into account actual settlement by the customer, causing businesses to having to remit tax to the authorities before receiving payment from their customers. To the extent that the individual Member States impose strict formal conditions, this rule could be rendered useless.

 

 

Article (28)

 

Value of Imported Goods

1

The value of imported Goods will be the customs value determined in accordance with the Unified Customs Law plus Excise Tax, Customs duty and any other imposts apart from VAT.

2

For Goods temporarily exported outside the GCC Territory for completion of manufacturing or repair thereof abroad, these Goods shall be taxed when reimported on the basis of value added to them as provided for in the Unified Customs Law.

 

This rule prescribes that for the purposes of determining the taxable base for imports, the value for customs purposes is taken into account in first instance. As mentioned above, imports are a separate taxable transaction, for which it is of no importance whether these goods have actually been sold.

 

In order to determine the value for the purposes of calculating import VAT, one needs to take into account the customs value, as determined in the unified customs law, and adding a number of elements to it.

 

In the GCC, the calculation of the customs value is determined according to the implementing regulations of the GCC Customs Agreement (see article 26 of the GCC Common Customs Law). As in other jurisdictions, there are multiple ways of determining the customs value, which apply alternatively. The most straightforward method is the transactional value. It is however not the only method.

 

 

Alternatively, the transactional value of identical or similar goods can be used, the deductive value (i.e. roughly the commercial value on the domestic market), the computed value (i.e. roughly the cost of production adding a profit margin and costs) or the value based on a flexible method (i.e. reasonably applying the previous methods in a flexible way).

 

A number of elements need to be added to that customs value. For example, excise duty and customs duty need to be added to the customs value to calculate the taxable base for VAT purposes. Excise duty and customs duty are both not recoverable and thus constitute part of the cost for the importer. VAT, which applies on top of that value is recoverable though.

 

If the customs value of an import of goods is 100, and the customs duty is 5%, then the customs value for VAT purposes is 105. Import VAT at the rate of 5% needs to be calculated on top of that, triggering a payment of 5,25. That means that the total value inclusive of VAT is 110,25. Since that VAT is deductible, the final cost for the importer is 105. The same principle applies for excise duties. Another more detailed example is given in the form of a table below:

 

 

Amount (SAR)

Customs Value

100

Customs duty - 5%

5

(100x5%)

Other cost

2

Excise duty - 50%

53.5

[(100+5+2) x 50%]

Taxable base for import VAT - 5%

160.5

(100+5+2+53.5)

Import VAT - 5%

8.025

[(100+5+2+53.5)x5%]

 

Usually import VAT is paid to the Customs department. However, the United Arab Emirates have already stated they will deviate from this rule for internal policy reasons and require registered taxable persons to pay VAT through their periodical VAT returns.

 

The second paragraph refers to the returned goods regime foreseen in article 105 of the GCC Customs Agreement, which provides for an exemption of customs duties for goods which have left the GCC and are reimported (under certain conditions). Although the wording in this Agreement is slightly different than the wording in the GCC Customs Agreement, this does not seem intentional. VAT only applies to the increase in the value of the goods. The motivation behind this is to not tax the same value twice.

 

 

2.6 Exceptions

 

 

Chapter Six

 

Exceptions

 

Article (29)

 

State Rights to Exempt Certain Sectors or to Apply the Zero-Rate

1

Each Member State may exempt or apply the zero-rate to the following sectors in accordance with the conditions and rules set by that Member State:

 

a-

education;

 

b-

health;

 

c-

real estate; and

 

d-

local transport.

2

Each of the Member States may subject its oil, oil derivatives and gas sector to Tax at zero-rate in accordance with to the conditions and rules set by each Member State.

 

This article allows to deviate from the rule that all supplies of goods and services and imports are subject to a 5% VAT rate.

 

The GCC Member States can decide to apply an exception to that rule in the form of an exemption or a zero rate. We use exempt to say that the seller does not charge VAT, but also is not allowed to deduct VAT. When we say zero-rate, we mean that the seller also does not charge VAT, but he can still deduct VAT paid on purchases.

 

Member States have the right to exempt or zero-rated some sectors such as education, health, real estate and local transport. Transactions in the oil and gas sectors can be zero rate.

 

The application of this exceptions to 'sectors' can be somewhat misleading. VAT is a tax on transactions, not on specific sectors. This means that even if a certain sector would be exempt, not all of its supplies would be. If we assume for example that a Member State would exempt health. This would mean that the services in the health sector would be exempt from VAT, but not the provider of the health services as a whole. A hospital could be providing exempt health services, but if it is renting televisions to its patients then VAT applies on that rent (CJUE 1 December 2005, C-394/04 and 395/04, Diagnostiko).

 

The mentioned sectors of education and health care are politically sensitive sectors and in the GCC often organized by the government. Zero rating transactions means that the government is in essence subsidizing the organization of these activities. Exempting transactions means that the suppliers offering these services will indeed not add any VAT to their sales prices. However, since their suppliers will charge them VAT which is not deductible, the prices of their purchases will increase. A higher cost in turn means a reduced profit margin or a trigger for the exempt suppliers to increase their prices.

 

 

Article (30)

 

Exceptions to Tax Payment in Special Cases

Each Member State may exclude the following categories from paying Tax upon receipt of Goods and Services in that State, and each Member State may allow these Persons to reclaim Tax borne upon receipt of the Goods and Services in accordance with the conditions and rules determined by that Member State.

These categories include:

-

Government bodies designated by each State;

-

Charities and Public Benefit Establishments designated by each State;

-

Exempted companies under international event hosting agreements;

-

Citizens of the Member State when constructing their homes for private use;

-

Farmers and fishermen who are not registered for Tax.

 

This provision concerns not the sales by suppliers but certain purchases made by specific categories. The individual Member States can put a policy in place whereas certain purchasers can reclaim the VAT they paid to their suppliers from the tax authorities in their country.

 

In other words, it is not an exemption, but merely a mechanism which takes place after the sale. This means that for the sellers the application of this mechanism does not change anything.

 

In the event that these suppliers supply goods or services to a ministry which can reclaim VAT from the tax authorities, the supplier will simply charge VAT to that ministry.

 

This reclaiming scheme for governments is used in the UK and in the Netherlands and is mostly based on a political agreement inside the same State. It is different from zero rates (or exemptions which do not disallow the right to recover input VAT) applicable on sales to international organizations (such as those who apply for sales to NATO, the EU, etc.).

 

The DYI scheme for builders of their own homes has been copied from the UK. It is implemented in the UAE solely for UAE nationals.

 

In terms of the other types of persons that can benefit from an exception to payment, charities in other countries usually benefit from a VAT exemption on their supplies, not an exception to pay VAT on their purchases. The exception made for companies under international event hosting agreements is also relatively unusual. Regarding farmers and fishermen, in the EU the Member States can provide for an optional lump sum system to calculate VAT liability for farmers.

 

 

Article (31)

 

Supply of Foodstuffs, Medicines and Medical Equipment

I: Foodstuffs:

All foodstuffs shall be subject to the basic Tax rate. Member States may apply the zero-rate on foodstuffs mentioned in a unified list of Goods approved by the Financial and Economic Cooperation Committee.

II: Medicines and Medical Equipment:

 

Medicines and medical equipment shall be subject to the zero-rate in accordance with unified controls proposed by the Committee of Ministers of Health and approved by the Financial and Economic Cooperation Committee.

 

These articles allow for additional exceptions applying to the principle that the supply of goods and services is subject to the standard rate of 5%.

 

In principle, a rate of 5% applies to the sale of all foodstuffs. The individual Member States can choose to apply a zero rate on the supply of these goods. In principle, this should be based on a list approved by the Committee of Financial and Economic Cooperation. To date, neither the UAE or KSA planned to introduce a zero rate for the sale of foodstuffs.

 

On the basis of a strict lecture of this provision, this excludes restaurant meals. It is not uncommon in other jurisdictions that different VAT treatment apply to the sale of food versus restaurant meals (see CJEU 10 March 2011, Manfred Bog C-497/09, C-499/09, C-501/09 and C-502/09).

 

Medicines and medical equipment can also be subject to a zero rate if they are put on a list proposed by the Ministers of Health and approved by the Financial and Economic Cooperation Committee.

 

To date, these lists have not been published by the GCC the Financial and Economic Cooperation Committee. However, Saudi Food and Drug Authority has published the list of approved medicine and medicine products which qualify for the zero rate. On the other hand, in the UAE no such list has been published. Only the medicine and medical products registered or imported with the approval of Ministry of Health and Prevention UAE qualify for zero rate.

 

 

Article (32)

 

Internal and International Transportation

The following transportation transactions shall be subject to Tax at zero-rate:

1

Goods and passenger transport from one Member State to another and the supply of transport-related Services;

2

International Goods and passenger transport from and to the GCC Territory and the supply of transport-related Services.

 

The transport of goods and passengers between the Member States is subject to a zero-rate. Similarly the international transport outside GCC will also subject to zero rate. Along with the transportation of goods and passengers, services related such transportation will also be zero rated. For example, food provided during the flight from Dubai to Paris will also be zero rated.

 

In the EU, the application of an exemption or a zero rate depends on the implementation in the different countries. Note that in the EU the place of supply of passenger transportation is different, it is taxed according to where the transportation takes place.

 

Not all EU Member States subject this to the normal rate, often applying reduced rates or exemptions. This is contrary to the GCC where passenger transportation takes place where the transport commences.

 

 

 

 

 

 

 

 

Article (33)

 

Supply of Conveyances

Each Member State may apply the zero-rate to the following supplies:

1

Supply of sea, land and air conveyances allocated to the transportation of Goods and passengers for reward for commercial purposes;

2

Supply of Goods and Services related to the supply of the conveyances mentioned in subsection 1 of this Article allocated to the operation, repair, maintenance or conversion any of these conveyances or for the requirements of the conveyances or their cargo or passengers;

3

Supply of rescue airplanes, rescue boats and aid by land and sea and boats allocated to sea fishing.

 

This provision allows for the zero rating of certain supplies of transport means and associated services. It is an optional provision, allowing Member States to deviate from the general rules and to subject the supplies to a zero-percentage rate. This is also sometimes referred to as an exemption which still allows the right to recover input VAT.

It concerns sea, land and air transportation means. These are amongst others boats, land transportation means, airplanes and helicopters. These transportation means need to be used though for the transport of goods or passengers against remuneration. In other words, vehicles used for logistics can potentially be zero rated. The same holds for vehicles used for the transport of passengers, such as airplanes.

 

Any types of goods and services related to the abovementioned means of transportation and which are used for the operation, repair, maintenance or conversion of these means of transportation can also be zero rated.

 

The supply of specific types of means of transportation can also be zero rated. It concerns the supply of rescue planes, rescue boats, aid provided by land and sea as well as boats allocated to sea fishing.

 

 

 

 

 

 

 

 

 

 

Article (34)

 

Supplies to Outside the GCC Territory

1

The following supplies shall be subject to the zero-rate:

 

a-

the exportation of Goods outside the GCC Territory;

 

b-

supply of Goods to a customs duty suspension situation as provided for in the Unified Customs Law and the supply of Goods within customs duty suspension situations;

 

c-

re-exportation of moveable Goods that have been temporarily imported into the GCC Territory for repairs, refurbishment, conversion or processing as well as the Services added to these Goods.

 

d-

supply of Services by a Taxable Supplier residing in a Member State for a Customer who does not reside in the GCC Territory who benefits from the service outside the GCC Territory in accordance with the criteria determined by each of the Member States, except for the cases provided for in Articles 17 to 21 of this Agreement that determine the place of supply as being in a Member State.

2

The supply of Goods and Services out of the GCC Territory shall be subject to the zero-rate when such supply is exempt from Tax inside the Member State.

Article 34 is a mandatory provision. It lists four situations in which supplies are compulsory subject to a zero rate. This is also sometimes referred to as an exemption which still allows the right to recover input VAT. The Member State in which the supply takes place can obviously also impose certain conditions to the application of the zero rate.

 

The first one of the list is the export of goods from the territory of one of the Member States to a place outside of the GCC territory. The zero rate does not require a direct transport from the Member State to the third country. It can also concern goods which are transported from one Member State and are subsequently transported through another Member State to a third country. It is up to the Member State where these goods leave from (see article 11) to determine the conditions for this supply so that it can benefit from a zero rate.

 

The second one on the list is related to customs duty suspensions. The VAT legislation will broadly follow the principles of the customs legislation. In principle, any time that the payment of customs duties is suspended, then the payment of VAT is also suspended. This article confirms this principle in that it states that when goods find themselves in a situation where the payment of customs duties over those goods is suspended, then the supply of those same goods is zero rated (not out of scope since). The article also mentions the supply of goods to a customs suspended situation. Presumably what is meant here is the supply of goods which are brought into a customs duty suspension regime upon their purchase. KSA prescribes this zero rate in article 32 paragraph 7 of its Implementing Regulations, the UAE in article 30 of the VAT Executive Regulations law.

 

The cases in which the payment of customs duties is suspended are described in the GCC Common Customs Law (article 69 and following). They concern the transit transport of goods, the storage of goods in a customs warehouse, the import of goods into free zones or duty-free shops, the temporary admission of goods and the re-exportation of goods. The cases in which the supply of goods is zero rated concern mainly the scenarios involving a customs warehouse.

 

The third scenario specifically covers re-exports of goods, although the second scenario also refers to it. Whenever goods are move out of the territory of a Member State as a re-export, then that transaction is zero rated. This may be somewhat surprising since the actual re-export does not involve a supply since there is no consideration. The movement of these re-exported goods should therefore be out of scope of VAT. The scope of the article is goods which are repaired, refurbished, converted or processed. The services which relate to these goods are zero rated as well.

 

The fourth scenario is the case where a service is rendered by a taxable person to a customer residing outside of the GCC and benefiting from the service there. This is a rule which applies outside of the application of the normal rules described in articles 17 to 21 of the Agreement. In other words, this is the case where none of the special rules apply and in principle article 15 of the Agreement would apply and the taxable person would have to charge local VAT. This is the equivalent of article 56 of the VAT directive, but it applies broader than its equivalent in the VAT directive. Article 56 of the VAT directive only applies to 'immaterial services'. It hints at a so-called use and enjoyment rule, which allows a deviation from the normal place of supply rules whenever services are enjoyed in a different place than the place designated by the place of supply rules and the deviation makes more sense from the perspective of the destination principle. That principle determines that tax is levied ultimately only on the final consumption that occurs within the taxing jurisdiction.

 

Paragraph 2 is a somewhat strange provision in that it prescribes that supplies of goods or services outside of the GCC are zero rated when they are exempt domestically. This could for instance be the case when a supplier of financial services has a client residing outside of the GCC. In that case, his supply will be "zero rated" and therefore grant input VAT deduction. Applying this rule to goods, leads to somewhat odd situations, where a UAE seller of bare land would see his domestic transaction exempt and thus his input VAT deduction limited. If, on the contrary, he sells bare land abroad, he will be able to claim input VAT deduction domestically.

 

Article (35)

 

Supply of Investment Gold, Silver and Platinum

1

For the purposes of this Article, Gold, Silver or Platinum shall be considered as an investment when it is at a purity level not less than 99% and tradable on the Global Bullion Exchange.

2

The supply of investment gold, silver and platinum shall be subject to the zero-rate.

3

The first supply after extraction of gold, silver and platinum shall be subject to the zero-rate.

Gold, silver and platinum when the purity is not less than 99% and tradable in the global bullion market is an investment and therefore the Member State can have them tax zero-rated. In addition to that the first supply after extraction of gold, silver and platinum is also subject to a zero rate.

 

In other words, the supplies of investment gold, silver and platinum with a purity of less than 99% will be subject to VAT. The same holds for any supply after the first supply of gold, silver and platinum.

 

The retail sale of gold, silver and platinum is also subject to VAT. This may impact the local Gold and Diamond retail markets. The sale within a GCC state will subject to VAT whereas, the sale to the customers outside GCC may subject to zero rate as per article 34, provided certain conditions are met.

 

Contrary to what is applicable in the important competitive market of Antwerp (Belgium), the sale of diamonds by traders is not subject to a zero rate in the GCC. However, the UAE has prescribed a reverse charge mechanism for the retail sale of diamonds and gold between taxable persons but for the end consumers the purchase will subject to VAT.

 

Article (36)

 

Financial Services

1

Financial Services performed by banks and financial institutions licensed under the laws in force in each Member State shall be exempt from Tax. Banks and financial institutions may reclaim Input Tax on the basis of the refund rates determined by each State.

2

As an exception to subsection 1 of this Article, each State may apply any other tax treatment to financial Services.

 

Financial services carried out by banks and financial institutions licensed by each Member State shall be exempt from tax. The provision of the GCC Agreement links to the exemption here to the licensing. In other words, non-licensed banks and financial institutions cannot benefit from the exemption.

 

Following the example of Singapore, Member States can determine fixed refund rates for banks and financial institutions. However, to date neither KSA or the UAE have modelled their legislation in such a way. If the other Member States adopt a different position, then they may give a more favorable treatment to the financial sector in their state and thus motivate businesses to relocate.

 

In addition to this, the second paragraph basically allows Member States to adopt any position they want on the VAT treatment of financial services.

 

Remarkably, KSA and the UAE have broadly chosen the same stance on how to treat financial services. Although they have not chosen the fixed refund rates system of Singapore, the treatment of financial services is broadly the same, exempting life insurance and taxing other types of insurance and exempting margin based products and taxing fee based products. Singapore exempts expenses charged to operate bank accounts though.

 

 

Article (37)

 

Taxation of Supplies of Used Goods

 

Each Member State may determine the conditions and rules for the imposition of Tax on the supply of used Goods by the Taxable Person based on the profit margin.

 

It is relatively common in the EU also to have a local used goods rule. This rule taxes the supplies of goods not on the normal sales value but on the difference between the purchase value and the sales value of the specific goods. Other types of expenses are generally not taken into account. This scheme is sometimes referred to as "the margin scheme".

 

In the EU, the margin scheme applies compulsory to second-hand goods, works of art, collectors' items or antiques. The motivation behind this scheme is that these goods are often bought from private persons. When the goods came into the hands of these private persons they already ended up in a final stage of consumption. Subjecting the full sales price charged by the reseller to VAT would imply that VAT is charged twice on a good which had already ended up in a final stage of consumption.

 

The provision in the Agreement allows the individual Member States to decide to introduce such a rule. KSA has decided to introduce it only on the domestic sale of used cars. The UAE has implemented it more broadly.

 

There is no place of supply rule foreseen in the Agreement for the supply of used goods. In the EU, the place of supply of used goods is the Member State of departure (article 32 and 35 of the EU VAT directive 2006/112/EC).

 

In KSA the issue of the absence of this rule has been solved by stating that the margin scheme only applies domestically (article 48, 2, a) of the KSA Implementing Regulations).

 

The margin scheme does not apply on imports of goods.

 

Summary Table

 

Must

zero-rate

May

zero-rate

May exempt or

zero-rate

Must

exempt

Medicine and medical equipment

Certain food items

Education

Financial services

Cross - border goods and passenger transportation

Supply of means of transportation for commercial purposes

Healthcare

Imports of zero-rate or exempted goods

Goods export outside GCC territory

Oil, oil derivatives and gas sector

Real estate

 

Certain transactions in gold, silver and platinum

 

Local transport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.7 Exceptions on Importation

 

Chapter Seven

 

Exceptions on Importation

 

Article (38)

 

Exemptions on Importation

The following shall be exempt from Tax:

1

Importation of Goods if the supply of these Goods in the final destination country is exempted from Tax or subject to Tax at zero-rate.

2

Importation of the following Goods that are exempted from customs duty under the Unified Customs Law:

 

a-

diplomatic exemptions;

 

b-

military exemptions;

 

c-

Imports of used personal luggage and household appliances which are brought by citizens residing abroad and foreigners who are coming to reside in the country for the first time.

 

d-

Imports of requisites for non-profit charity organizations if they are exempted from Tax under Article 30;

 

e-

Imports of returned Goods.

3

Personal luggage and gifts arriving accompanied by travelers as specified by the Member State.

4

Requisites for people with special needs as specified by the Member State.

 

The wording of this article is somewhat confusing, as it does not stick to the distinction used elsewhere in the Agreement between exempt and zero-rated supplies (see article 29). It is to be noted that for customs purposes there is no distinction to be made between zero rates and exemptions from customs duties. Both terms simply mean that no customs duty is due.

 

The first paragraph lays down the principle that all supplies which are domestically exempt or zero rated in the country of destination, are also not subject to VAT when they are imported. The rationale behind the provision is to put domestic sales and imports on the same footing.

 

In this article, goods that exempted from tax or taxed at zero-rated, exempted goods in the importing country as well as exempted from customs such as: diplomatic, military, personal effects and household items used by citizens residing abroad or foreigners coming to the country for the first time. Charitable associations which do not aim to make a profit are exempted from tax in accordance with Article (30) of this Law, as well as returned goods and accessories of special needs as determined by each Member State.

 

 

Article (39)

 

Suspension of Tax

Tax shall be suspended on imports of Goods that are placed under a customs duty suspension situation in accordance with the conditions and rules provided for in the Unified Customs Law. Each Member State has the right to link the suspension of Tax to the provision of security for the value of the Tax.

 

The tax may be suspended on the imported goods, which require payment of customs duties, according to the conditions in which the suspension of the payment of customs duties is determined according to the provisions of the unified customs law.

 

The cases in which the payment of customs duties is suspended are described in the Common Customs Law (article 69 and following). They concern the transit transport of goods, the storage of goods in a customs warehouse, the import of goods into free zones or duty-free shops, the temporary admission of goods and the re-exportation of goods. The cases in which the supply of goods is zero rated concern mainly the scenarios involving a customs warehouse.

 

Furthermore, the article allows Member States to add the provision for the financial guarantee to securitise the payment of taxes from an importer who imports goods which are considered under customs duty suspension. The importer would be required to provide a financial guarantee equal to the value of VAT which would be due on import, before the goods are allowed to be considered under customs duty suspension. However, such guarantee will be refundable if the goods were not imported in the State.

 

 

 

 

 

 

 

 

 

2.8 Persons who are Obligated to Pay Tax

 

 

Chapter Eight

 

Persons who are Obligated to Pay Tax

 

Article (40)

 

General Principle

1

The Taxable Person is obligated to pay Tax due on taxable supplies of Goods and Services to the concerned Tax authority in the Member State where the place of supply is located.

2

Any Person that states a Tax amount on any invoices issued by him becomes obligated to pay this Tax amount to the concerned Tax authority in the Member State where the place of supply is located.

 

Article 40 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 this article 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.

 

 

 

 

 

Article (41)

 

Customer Obligated to Pay Tax According to the Reverse Charge Mechanism

1

If the place of supply for Goods or Services is in a Member State where the Supplier is not a resident, then the Taxable Customer residing in that Member State shall be obligated to pay the Tax due.

2

Tax due under subsection 1 of this Article shall be paid pursuant to a tax return or independently of it as determined by each Member State.

 

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 that the making of a supply triggers the 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.

 

 

 

 

 

 

Article (42)

 

Person Obligated to Pay Tax in respect of Importation

The Person appointed or acknowledged as an importer pursuant to the Unified Customs Law shall be obligated to pay Tax due on imports.

This article 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.

 

 

 

 

 

 

 

 

 

 

Article (43)

 

Joint Liability

1

A Person who willfully participates in violating any of the obligations provided for in this Agreement and the Local Law shall be jointly liable with the Person obliged to pay the Tax and any other amounts due as a result of the violation.

2

Each Member State may determine other instances of joint liability other than those provided for in this Article.

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 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.

 

2.9 Deduction of Tax

 

Chapter Nine

 

Deduction of Tax

 

Article (44)

 

Tax Deduction Principle

1

The Taxable Person may deduct from the Tax due and payable by him in a Member State the value of deductible Tax borne in the same State in the course of making Taxable Supplies.

2

The right to make a deduction arises when a Deductible Tax is due pursuant to this Agreement.

3

A Customer who is obligated to pay Tax pursuant to the reverse charge mechanism may deduct deductible Input Tax related thereto provided that he has declared the Tax due under Article 41 (2) of this Agreement.

4

Each Member State shall determine the terms and rules for Tax deduction.

The deduction of input VAT is the key concept which distinguishes a multi staged consumption tax such as VAT, from a single stage consumption tax (such as certain sales taxes).

 

The principle is that domestic input VAT can be deducted from domestic output VAT. This usually happens in the periodical VAT return filed by the taxable person. The most important condition however is that the deduction of input VAT for a taxable person only is allowed to the extent that the makes taxable supplies. If the taxable person does not exclusively make taxable supplies, then his right to deduct input VAT can also not be complete. In article 46 is mentioned how a taxable person should calculate his right to recover input VAT when he does not make exclusively taxable supplies.

 

The time of supply or tax point rules described in articles 23 and 24 of the Agreement determine also when the taxable person receiving supplies of goods or services or importing can deduct this VAT as import VAT. As such, the time of supply will not only determine the liability for the supplier of importer to account for VAT but will also determine on the receiving side when this person can deduct the input VAT.

 

When a supply is subject to a reverse charge mechanism, the deduction is only allowed when the output VAT has also been paid.

 

Finally, it will be up to each Member State to determine the rules for determining the deduction of input VAT.

 

 

 

Article (45)

 

Restrictions on Input Tax Deductions

Input Tax that has been borne cannot be deducted in either of the following cases:

1

If it is for purposes other than Economic Activities as determined by each Member State;

2

If it is paid on Goods that it is prohibited to deal in in the Member State according to applicable laws.

 

This article excludes the deduction of input VAT on certain purchases of goods and services or imports. The principle laid down in paragraph 1 is an unnecessary repetition of the underlying principles of the GCC VAT Agreement. If goods and services purchases are not used for an economic activity then VAT on these purchases is not deductible.

 

A person that does not have an economic activity falls outside of the scope of this legislation anyways and cannot claim the deduction of input VAT. However, a taxable person could have income which comes from a non-economic activity, such as the passive receiving of dividends. In that case, any input VAT related to that income is not deductible for VAT purposes. There are no rules in the Agreement with respect to the situation where a taxable person makes taxable and exempt supplies and receives income which is outside of the scope of VAT. Since this is subject to great controversy in the European Union, this may have been a missed opportunity.

 

What the first paragraph also targets is the situation where goods or services are acquired and they are consumed, i.e. they are in a stage of final consumption.

 

In KSA, article 50 of the Implementing Regulations excludes the deduction of input VAT on entertainment, sporting and cultural services on this basis. The same holds for catering services in hotels, restaurants and similar venues. Any VAT with respect to goods and services related to Restricted Motor Vehicles is also not deductible. Finally, in the same article there is a catch all provision stating that VAT on any goods or services used for a private or non-business purpose is not deductible.

 

The UAE VAT law in its article 54 refers to the Executive Regulations for rules around the deductibility of input VAT. They are provided in article 53 of the Executive Regulations.

 

The second paragraph concerns prohibited goods. An example of such a prohibited good is the sale of alcohol in KSA. Any VAT which would have been charged to a taxable person in KSA with respect to such goods will not be deductible.

 

 

Article (46)

 

Proportional Deduction

1

If Input Tax is related to Goods and Services used to make Taxable Supplies and non-Taxable Supplies, then Input Tax cannot be deducted save within the limits of the proportion referable to the Taxable Supplies.

 

2

Each Member State may determine the methods of calculating the deduction rate and the conditions for treating the value of non-deductible Input Tax as zero.

 

This article determines how taxable persons should treat the situation where they are not solely making taxable supplies (taxed and zero-rated supplies), but also other types of supplies. These are designated in the Agreement as non-taxable supplies. It is not clear whether this is meant to include only exempt supplies or also income which is out of scope for VAT purposes.

 

This article puts forward the principle that not all of the input VAT can be deducted by a taxable person when he does not exclusively make taxable supplies.

 

It is then left up to the individual Member States to develop a methodology. This methodology should respect the underlying principle of neutrality for VAT purposes. VAT should not constitute a cost for a business and should flow through a business.

 

 

 

 

In the European Union and jurisdictions worldwide based on the same legal framework, many different types of methodology are used. Although based on the same legislation, i.e. the European VAT directive, the methods are diverse. Where they differ, the most is in their approach towards tackling the calculation of input VAT when a taxable person receives income which is out of scope for VAT purposes.

 

In KSA article 22 of the KSA VAT law refers to the Implementing Regulations. In article 51 of the KSA VAT IR a direct attribution method is set out.

 

In such a direct attribution method, all purchases are directly attributed to either taxable supplies (which makes VAT on them fully deductible) or exempt supplies (which makes VAT on them not deductible). Any types of purchases for which it is not possible to link them directly to either taxable supplies or exempt supplies are deductible based on a proportion method (sometimes referred to as a "pro rata").

 

This pro rata is the default method in the Agreement and KSA, in line with most countries in the EU. It is a fraction calculated on the basis of turnover. In the numerator, the value is included of the taxable supplies made by the taxable person in the last year. In the denominator that same value is included, but it is increased with the exempt supplies.

 

Percentage of allocation=

The value of taxable supplies made by the taxable person in the last calendar year (T)

The total value of taxable supplies and exempt supplies made by the taxable person during the last calendar year (T+E)

 

 

In the UAE, articles 58 and 59 refer to the VAT Executive Regulations. The calculation will be relatively complicated because of the staggered introduction of VAT in the UAE (taxable persons which need to file on a quarterly basis will not file their returns according to calendar quarters).

 

In the UAE, the default rule is the direct attribution method (mirroring the UK approach). If it is not possible to make a direct link, then the proportional method needs to be applied. In the UAE, this method is designated as the "partial exemption method". These need to be apportioned between the taxable and exempt components of the supplies and only the proportion of VAT incurred on expenses for provision of taxable supplies can be classified as ‘recoverable input VAT’ while all other classifying as ‘irrecoverable input VAT’.

 

 

 

 

 

Post direct attribution, a standard method should be applied to calculate recoverable portion of ‘mixed’ input tax through the ratio of: input tax relating to taxable supplies (T) to the sum of the input tax relating to taxable supplies (T) plus the input tax relating to exempt supplies (E).

 

Recoverable ‘mixed’ input tax = T/T+E

 

This designation is only used in the UK since it is relatively confusing terminology, since not the exemption is partial, it is the turnover of the taxable person which is partially exempt. This triggers a consequence on the input tax side.

 

There is no method to address the situation where a taxable person receives income which is outside of the scope of VAT.

 

Alternative methods are also proposed based on outputs, transaction counts or sectoral methods. In the UAE, the use of such a special alternative method is subject to approval of the FTA and will only be able to be applied as of 2019 and is subject to certain conditions.

 

 

Article (47)

 

Adjustment of Deductible Input Tax

1

A Taxable Person must adjust the value of Input Tax deducted by him when receiving Goods or Services supplied to him if it is more or less than the value of the Input Tax deduction of which is available to him, as a result of changes in the determining factors for Deductible Tax, including:

 

a-

cancellation or rejection of a Supply;

 

b-

reduction of the Supply Consideration after the date of the Supply;

 

c-

non-payment of the Supply Consideration, whether in whole or in part according to Article 27(3) of this Agreement;

 

d-

changing the use of Capital Assets.

2

The Taxable Person is not required to adjust the Input Tax in any of the following cases:

 

a-

where the Taxable Person establishes loss, damage or theft of the supplied Goods in accordance with the conditions and rules applicable in each Member State.

 

b-

where the Taxable Person uses the supplied Goods as samples or gifts of slight value as specified in Article 8 (1)(d) of this Agreement.

This article targets the situation where a taxable person has deducted input VAT but is required to adjust the deduction at a later date. Such a situation is triggered by certain specific situations.

 

The first situation is that of a cancellation or rejection of a supply. In such a case, the supplier will be reducing his output VAT as well, generally by the means of issuing a credit note. The customer then needs to also adjust the deduction of his input VAT (which is the output VAT of the supplier) on the basis of this credit note.

 

The second situation is the case where the consideration for a supply is reduced after the supply. In such a case, the same mechanism applies as in the first situation but here the adjustment applies only on part of the supply. The supplier will reduce his output VAT generally by means of a credit note and the customer will have to do the same.

 

The third situation is the one where a customer does not pay the input VAT to his supplier, we find ourselves in a situation often referred to as "bad debts". This article is the logical correlation of article 27 (3). In such a case where the supplier reduces his output VAT due to the fact that the customer has not paid the receivable to the supplier, the customer also needs to adjust the input VAT he deducted and pay it back to the tax authorities. This article is meant to make the situation VAT neutral for the treasury.

 

The fourth situation is a much more complicated situation that applies irrespective of the supplier. Capital assets are defined in article 1 as: "Material and immaterial assets that form part of a business’s assets allocated for long-term use as a business instrument or means of investment".

 

The taxable person that has acquired the capital assets intends to use them for a longer period of time. Since their use could vary over time, this article intends to monitor that use over a longer period of time. A taxable person that has acquired a building for example which it only uses for taxable purposes during one year should not be allowed to enjoy a full input VAT recovery right if in the second year he uses it for private purposes.

 

It is left up to the Member States to determine what capital assets are, the potential threshold and the period during which the use will be monitored. Capital assets are the material and immaterial assets that form part of a business’s assets allocated for long-term use as a business instrument or means of investment. Any change in their use or a change in circumstances will require a correction from the taxable person.

 

 

 

Article 22 of the KSA VAT law refers to the article 52 of the KSA VAT IR. It determines that the adjustment period for moveable tangible or intangible capital assets is 6 years, whereas where such assets are immovable the period is 10 years. The period starts from the date of purchase. A permanent change in use triggers a permanent adjustment of the input tax.

 

Article 60 of the UAE VAT law refers to the UAE VAT ER. The adjustment period is 5 years for capital assets others than goods, and 10 years for buildings or parts of buildings. A threshold of 5,000,000 AED applies below which an asset cannot qualify as a capital asset. The useful life of the building or part thereof must be in excess of 120 months and for other goods in excess of 60 months.

 

The second paragraph indicates the incidents where the input tax is not required to be adjusted.

 

The first one is the case where the goods are not used for the economic activity of a taxable person due to the destruction, theft or loss of those goods. Second one is is the supply of gifts, samples and goods or services which a taxable person may make without consideration.

 

 

Article (48)

 

Conditions for Exercising the Right of Deduction

 

1

For purposes of exercising the right of deduction, the Taxable Person must hold the following documents:

 

a-

the Tax Invoice received pursuant to the provisions of this Agreement;

 

b-

the customs documents proving that he imported the Goods in accordance with the Unified Customs Law.

 

2

Each Member State may allow the Taxable Person to exercise the right of deduction in the event that a Tax Invoice is not available or does not meet the requirements provided for in this Agreement, provided that the value of Tax due can be established by any other means.

 

This article reflects the very important formal condition a taxable person needs to comply with in other to exercise his right to recover input VAT.

 

 

 

The taxable person needs to be in possession of a valid tax invoice compliant with the VAT legislation and in the case of imports be in possession of a valid customs declaration. Any person that does not hold the appropriate documentation cannot exercise his right to recover input VAT.

 

The second paragraph mitigates to some extent this very strict condition by stating that Member States can still allow the input VAT recovery even if the strict formal conditions of the first paragraph are not complied with.

 

Article 22 of the KSA VAT law refers to the KSA VAT IR in its article 49 (7) which in turn refers back to article 48 of the Agreement. According to that same article, input VAT deduction is also allowed on the basis of a simplified invoice.

 

In article 55 of the UAE VAT law, the same principle is repeated in the sense that in order to be able to deduct input VAT, the customer must hold a compliant invoice.

However, the UAE VAT law imposes another condition, which is that the customer must actually have paid the VAT to his supplier. This type of condition is relatively unusual in the European Union. The UAE wants to avoid that customers deduct input VAT before they have actually paid it to their suppliers. This makes the provisions it has around bad debt (article 64 of the UAE VAT law) less effective.

 

 

Article 49

 

The Right to Deduct Input Tax Paid Prior to the Date of Registration

 

1

A Taxable Person may deduct Input Tax paid on Goods and Services supplied to him prior to the date of his registration for Tax purposes after meeting the following requirements:

 

a-

Goods and Services are received for the purpose of making Taxable Supplies;

 

b-

Capital Assets were not fully depreciated before the date of registration;

 

c-

Goods were not supplied prior to the registration date;

 

d-

Services were received within a specific period of time prior to the date of registration as determined by each Member State;

 

e-

the Goods and Services are not subject to any restriction related to the right to make a deduction stated in this Agreement.

2

For the purposes of applying this Article, Input Tax shall be deductible for Capital Assets in accordance with the net book value of the assets as on the date of registration as specified by each Member State.

This provision again is relatively unusual in the European Union. There are provisions though in some countries to reclaim VAT on non-consumed supplied goods and services and on capital goods for which the adjustment period has not expired.

 

In certain situations where a person was not registered for VAT purposes and thus was unable to recover input VAT on purchases of goods and services at the time that these were supplied to him, the legislation still allows to recover input VAT at a later stage if the recipient meets certain requirements.

 

The goods and services are received for the making of taxable supplies is one of the requirements, which also applies generally to any type of taxable person.

 

In case it concerns capital assets, the additional requirement is that they are not fully depreciated before the date of registration. The third part of the sentence seems to defeat the purpose of the article which is to allow the deduction of input VAT for goods acquired before registering for VAT purposes. In terms of services, there should be a specific time defined by each Member State which determines the time period during which a service can be received by a person allowing him to later on deduct the input VAT paid on the acquisition of such a service when he registers. The UAE has fixed this time at 5 years.

 

Finally, the last requirement is in a way a repetition of the general rules around the deduction of input VAT, only allowing the deduction of input VAT on certain goods or services.

 

With respect to capital assets, a somewhat different approach has been taken, which is to take into account the net book value of the assets on the date of registration. This is a specific rule which deviates from the general rule for capital assets, allowing Member States to choose how they deal with the possible adjustment of input VAT for capital assets (article 47 of the Agreement). This situation is foreseen in article 49 (3) of the KSA VAT IR and in article 56 of the UAE VAT law.

 

 

 

 

 

 

 

 

 

 

2.10 Obligations

 

Chapter Ten

 

Obligations

 

Part One

 

Registration

 

Article 50

 

Mandatory Registration

1

For the purposes of implementing this Agreement, a Taxable Person shall be obliged to register if:

 

a-

he is resident in any Member State;

 

b-

the value of his annual supplies in that Member State exceeds or is expected to exceed the Mandatory Registration Threshold.

 

2

The Mandatory Registration Threshold shall be SAR 375,000 (or its equivalent in the GCC State currencies). The Ministerial Committee has the right to amend The Mandatory Registration Threshold after it has been in force for three years.

3

A non-resident of a Member State shall be required to register in that State regardless of his business turnover if he is obliged to pay Tax in that State under this Agreement. Registration can be done directly or through the appointment of a tax representative with the consent of the concerned Tax authority. The tax representative shall take the place of the Non-Resident Person in all its rights and obligations provided for in this Agreement, subject to the provisions of Article 43(2) of this Agreement.

4

A Taxable Person who makes only zero-rated supplies may request to be excluded from the Mandatory Registration requirement for Tax purposes in accordance with the conditions and rules determined by each Member State.

 

In order to determine when a business actually has to register for VAT purposes, a distinction needs to be made between resident taxable persons and nonresident taxable persons. Residence means that a taxable person is established and conducting business in a country.

 

 

 

For example, a business incorporated in Dubai is resident in the UAE. If that same business has a branch in the KSA, it is also resident in the KSA.

 

For the resident taxable persons two types of thresholds apply, a mandatory one and a voluntary one.

 

The thresholds apply on an annual basis and solely take into account taxable supplies (supplies subject to VAT and zero-rated supplies). The thresholds can be exceeded either under a prospective test or a retroactive test. The mandatory registration threshold is set at 375,000 SAR (or more or less 100,000 USD) and the voluntary registration threshold is set at 187,500 SAR (or more or less 50,000 USD).

 

If a taxable person only makes zero rated supplies, he can opt to be excluded from the obligation to register.

 

For a non-resident taxable person, no registration threshold applies. In other words, as from the first income a non-resident taxable person receives in one of the GCC Member States, it will have to register for VAT purposes. Naturally, this requires that the supplies the taxable person makes are taxable in one of the GCC countries and that it is liable for the payment of VAT. This could be the case for example for the supply of electronically supplied services to a private person established in the GCC.

 

The registration can be done either directly by the taxable person himself, or by someone who will represent the business. In the KSA, there is a concept of fiscal representation (article 9 and 77 of the KSA VAT IR) for this purpose.

 

Before a taxable person gets registered, it cannot recover any input VAT. Exceptions apply however, which are determined in Chapter 12. Any invoices which it issues before getting registered for VAT, do not have to comply with the VAT legislations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Article 51

 

Voluntary Registration

1

A Person who is not required to be registered under Article 50(1) of this Agreement who resides in any Member State may request to be registered therein, provided that the value of his annual supplies is not less than voluntary registration threshold.

2

A Member State may allow the registration provided that the annual expenses of a person who is not obliged to register in that State exceed the Voluntary Registration Threshold in accordance with the conditions and rules determined by that State.

3

The Voluntary Registration Threshold is 50% of the Mandatory Registration Threshold.

 

Even if the taxable person is below the threshold, it may still apply for registration if it has exceeded the voluntary registration threshold. Even if registering entails that the taxable person will have to start charging VAT and will have a compliance burden, the taxable person may have an interest in registering.

 

Without a registration, the taxable person cannot recover any input VAT. For the voluntary threshold to apply, either the sales must exceed the threshold, or potentially the expenses made.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Article 52

 

Calculating the Value of Supplies

1

For the purposes of applying the provisions of this Agreement, the value of annual supplies is calculated on the basis of any of the following:

 

a-

total value of supplies – excluding exempted supplies – made by the Taxable Person at the end of any month plus the previous eleven months;

 

b-

total value of supplies – excluding exempted supplies – expected to be made by the Taxable Person at the end of any month plus the following eleven months in accordance with the criteria and period determined by each Member State.

2

Total value of supplies consists of the following:

 

a-

the value of Taxable supplies except for the value of Capital Assets Supply;

 

b-

the value of Goods and Services supplied to the Taxable Person who is obliged to pay Tax pursuant to the provisions of this Agreement;

 

c-

the value of Internal Supplies the place of supply of which is in a Member State other than the State where the Taxable Supplier resides and these supplies would have been taxable in the State where the Supplier resides had the place of supply been located in that State.

3

Each Member State may determine the conditions and rules for the aggregation of the business revenue of Related Persons who conduct similar or related activities and register each of them mandatorily on the basis of the total business revenue.

 

This article details the manner in which the threshold needs to be calculated. The first paragraph details the prospective and the retrospective test which span 12 months. In the UAE though, the Agreement has been implemented in a different way where only the next 30 days are taken into account for the prospective test (article 30 of the UAE VAT law).

 

In terms of the supplies to be taken into account, in principle as a first step all of the taxable supplies of the supplier are taken into account. This means both standard rated and zero-rated supplies. Secondly, the supply of capital assets is excluded from the calculation. The reason is that the supply of these capital assets is often rare and a one off and may cause distortions when calculating if a business exceeds the registration threshold or not. The domestic legislation and guidance slightly deviate from these rules.

 

The second rule determines that also goods and supplies acquired by the taxable person for which he is liable for the payment of VAT on the basis of the reverse charge mechanism need to be taken into account to calculate the threshold. In other words, services received from abroad, as well as (in KSA) domestic purchases from a foreigner and (in UAE) imports need to be taken into account.

 

 

Article 53

 

Tax Identification Number (TIN)

When registering for Tax purposes in any of the Member States, each Member State shall allocate a TIN for the Taxable Person provided that The Ministerial Committee shall determine the controls for issuing the TIN.

 

A registration means that the business is awarded a VAT number (also sometimes referred to as a TIN number, which stands for Tax Identification Number, or a TRN number, which stands for Tax Registration Number). In the EU, the VAT numbers of taxable persons start with the country designation and then have 8 and 12 digits or characters. For example, the VAT number of Finland would look like FI99999999 and that of Sweden SE999999999999.

 

In the GCC, the TIN should be composed as follows:

 

  • The first number designates the country. The UAE is number 1, KSA is number 3.
  • The next 8 numbers are the Emirates Identification Number.
  • The next number is a check digit.
  • The next three numbers are potentially to be used as branch numbers
  • The next two numbers then are the program extensions. 03 is used for VAT and 07 for excise.

 

In total, there should be 15 numbers. This system was adopted by copying the UK system. Many countries in the EU are trying to simplify the use of different numbers for their administration. It is a missed opportunity in the GCC not to use one single simple number with letters as the country designation. There is no specific motivation or need to simply copy a system applicable in another country which is relatively complicated whereas a number constitution both the tax registration number and the tax identification number would have been sufficient.

 

 

Article 54

 

Deregistration

1

A Taxable Person who is registered for Tax purposes must apply for deregistration in any of the following cases:

 

a-

cessation of carrying on of the Economic Activity;

 

b-

cessation of Taxable Supplies;

 

c-

if the value of the Taxable Person’s supplies falls below the Voluntary Registration Threshold pursuant to the provisions of Article (51) of this Agreement.

2

The Taxable Person may apply for deregistration if the total annual revenue of its business falls below the Mandatory Registration Threshold but exceeds the Voluntary Registration Threshold.

3

For the purposes of applying items (b) and (c) of the first and second paragraphs of this Article, each Member State may determine a minimum period to keep the Taxable Person registered for Tax purposes as a condition of deregistration.

4

Each Member State may determine the conditions and rules necessary to reject an application for the deregistration of a Taxable Person or to deregister him in cases other than those provided for in the first and second paragraphs of this Article.

5

The Tax Authority shall notify the Taxable Person of his deregistration and the effective date of the same.

 

A business or taxable person may also come at the end of his life cycle. This could happen when that taxable person no longer has an economic activity, when it stops making taxable supplies or when the value of its sales has fallen below the voluntary registration threshold. In those cases, it is mandatory to deregister.

 

A business can also deregister on a voluntary basis when the value of its supplies has fallen below the mandatory registration threshold but is still above the voluntary registration threshold. There may be a minimum period determined by the relevant Member State during which the registration needs to be kept. In KSA this is twelve months, as in the UAE .

 

 

 

 

Part Two

 

Tax Invoice

 

Article 55

 

Issuance of the Tax Invoice

1

The Taxable Person must issue a Tax Invoice or similar document in the following cases:

 

a-

Supply of Goods or Services including a Deemed Supply as provided for in Article 8 of this agreement;

 

b-

Full or partial receipt of Consideration prior to the supply date.

2

Each Member State may except the Taxable Person from issuing the invoices provided for in to this Article for exempted supplies, provided these do not pertain to Internal Transactions between Member States.

3

Subject to the provisions of Article 56 of this Agreement, each Member State may allow the Taxable Person to issue summary tax invoices; each including all the supplies of Goods and service made in favor of a single Customer that were taxable over a period of one month.

4

For the purposes of applying this Agreement, the Member States must accept the invoices in form, whether issued on paper or electronically, in accordance with the conditions and procedures determined by each Member State.

This provision determines the obligation for a taxable person to issue a tax invoice when he is making a taxable supply. It foresees that for any supplies of goods or services, a tax invoice needs to be issued. Although a deemed supply is not a real supply, it is assimilated to a supply and hence for such a deemed supply a taxable person needs to invoice an issue too. Although unnecessary (1) b repeats the rule from the time of supply rules (i.e. the tax point rules). In case where no supply is made but an advanced tax point arises due to the advance receiving of consideration a tax invoice needs to be issued too.

 

The second paragraph provides that Member States can exempt taxable persons from issuing invoices when it concerns exempt supplies insofar as these do not concern intra-GCC supplies.

 

 

 

 

In KSA, article 23 of the KSA VAT law refers to the Implementing Regulations. In article 53 (7) of the KSA VAT IR reference is made to the issuance of simplified tax invoices. KSA also logically limits the issuance of tax invoices to cases where supplies are made to taxable persons (because they will require them to exercise their right to deduct input VAT) and supplies made to non-taxable legal persons. In other cases, such as making supplies to private persons, the issuance of a tax invoice is not required. In the UAE, simplified invoices can be issued and it is allowed to hold records for sales to private persons in a different way.

 

 

Article 56

 

Contents of the Tax Invoice

1

Each Member State must determine the contents of the Tax Invoice and the period within which it must be issued, provided that The Ministerial Committee shall determine the minimum details required to be included in the tax invoice. Each Member State may allow for the issuance of simplified invoices in accordance with the conditions and rules determined by it.

2

Tax invoices can be issued in any currency, provided that the value of the Tax is written in the currency of the Member State where the place of supply is located based on the official currency exchange rate in force in that State as on the Tax due date.

In terms of the time within which an invoice must be issued, this is an element to be determined on a Member State basis. In KSA, the invoice must be issued by the 15th of the month following the month in which the taxable supply took place (article 53 of the KSA VAT IR). In the UAE, the invoice must be issued relatively fast since it needs to be issued within 14 days of the supply (article 67 of the UAE VAT law).

 

In terms of the contents of the invoice, this is defined by article 53 (5) of the KSA VAT IR. The list of compulsory items is fairly standard and follows international principles. What is noteworthy is that there is no requirement for domestic supplies to mention the VAT number of the customer. This is only required for intra-GCC supplies. The UAE is follows a different approach and requires the VAT number of the customer on the invoice.

 

Both KSA and UAE also allow to issue simplified invoices, but under different conditions. The issuance of simplified invoices is meant to be a simplification for businesses to release them from the burden of having to mention too much information on their tax invoices.

 

 

As article 26 indicates, there could be situations where a supplier charges an amount in a foreign currency. In that case, the currency needs to converted in the local currency based on the rules foreseen in that article. The Agreement requires as a minimum that the applicable VAT is mentioned on the invoice in the local currency.

 

 

Article 57

 

Amendment of Invoices (Credit Notes)

A Taxable Person who adjusts the Supply Consideration must include this adjustment in a document (credit or debit note “Tax Invoice”) correcting the original Tax Invoice. This document shall be treated in the same way as the original Tax Invoice according to the procedures determined by each Member State.

This article prescribes how Member States should handle the issuance of documents intended to adjust the consideration for a chargeable supply. Such a document corrects the original tax invoice and should be treated in the same way as the original tax invoice. This usually means that the document adjusting the original tax invoice, which is a credit note, should refer to the original tax invoice. It is up to the individual Member States to further define the legal requirements for the issuance of such a document.

 

 

Article 58

 

Special Provisions

1

A taxable Customer who receives Goods or Services supplied to him from a Taxable Supplier may issue Tax Invoices provided that the Supplier consents and the Tax Invoice is marked as a self-issued invoice with the approval of the concerned Tax authority. In this event, a self-issued invoice shall be treated as an invoice issued by the Supplier.

 

2

A Taxable Person may engage the assistance of others to issue Tax Invoices on his behalf with the approval of the concerned Tax authority and provided that all the obligations provided for in this Agreement and the Local Law are fulfilled.

 

Article 58 discusses self-billing and third-party billing. By default, invoices are required to be issued by the supplier for the supplies of goods and services. However, these two concepts allow another party to take over the billing of the supplier.

 

 

In the case of self-billing it is the customer who is taking over the billing, whereas with third party billing it is a third party, i.e. not the supplier or the customer, who takes over the billing.

 

The motivation behind a supplier giving up the control over his billing process could be because the customer asks him to. The customer may ask to do so to facilitate his own accounts payable process by taking over the bills of his suppliers. In the same way, a third party could potentially be more efficient in issuing invoices and in following up the payment of the receivables.

 

 

Part Three

 

Retention of Tax Invoices, Records and Accounting Documents

 

 

Article 59

 

Retention Period for Tax Invoices, Records and Accounting Documents

Without prejudice to any longer period stipulated under the laws of the Member State, Tax Invoices, books, records and accounting documents shall be retained for a period not less than five years from the end of the year to which the invoices, books, records and accounting documents relate. This period shall be extended to fifteen years for the retention of Tax Invoices, books, records and documents pertaining to real estate.

This article prescribes the obligations for a taxable person to keep the books, records and information pertaining to VAT. It sets a minimum term of 5 years and a minimum term of 15 years for documents related to real estate.

 

In KSA such books and information needs to be kept for six years (article 66 of the KSA VAT IR) and for an additional five years after the adjustment period for capital assets has ended (maximum ten years – article 52 of the KSA VAT IR). The UAE's FTA has declared that taxable persons should keep books and information for at least 5 years.

 

 

 

 

 

 

 

 

 

 

Part Four

 

Tax Period and Tax Returns

 

Article 60

 

Tax Period

Each Member State must determine its own tax period or periods, and provided that no tax period shall be less than one month.

 

This article refers to the tax periods, this is the time limit within which a taxable supply takes place. It is also the time defining the period over which a taxable person needs to be calculate his output VAT liability and file his VAT return.

 

Both in the UAE and in KSA the tax period is either quarterly or monthly. They both have different thresholds though. In KSA, it is required to file monthly if the taxable turnover exceeds 40 million SAR (article 58 of the KSA VAT IR). In the UAE, it is required to file monthly if the taxable turnover exceeds 150 million AED. In order to mitigate adverse cash flow effects upon the introduction of VAT, the UAE has introduced staggered filing of quarterly returns. Therefore, the quarters for the filing of the VAT returns imposed by the FTA do not necessarily correspond with the quarters of the Gregorian calendar.

 

 

Article 61

 

Submission of Tax Returns

Each Member State shall determine the periods, conditions and rules for submission of Tax Returns by a Taxable Person for each tax period, provided that The Ministerial Committee shall determine the minimum data required to be included in the tax return.

 

This article allows the Member States important freedom to set the conditions for filing VAT returns. Although there is a reference to a Ministerial Committee, no such decision is publicly available. The VAT returns of the UAE and KSA are substantially different.

 

 

 

 

 

 

 

Article 62

 

Amending the Tax Return

Each Member State shall determine the conditions and rules that allow a Taxable Person to amend a Tax Return that has already been submitted.

 

This article allows the Member States important freedom to set the conditions for amending VAT returns. In a move copying the VAT return in the UK, a threshold has been set in both KSA and UAE below which an amendment of the VAT return is not necessary. If however, the correction is in excess of the threshold, then the original VAT return needs to be amended. In KSA this threshold is set at 5,000 SAR (article 63 (3) of the KSA VAT IR). In the UAE, the threshold is set at 10,000 SAR.

 

This type of process is often criticized by companies since it leads to a significant administrative burden for businesses wanting to spontaneously disclose past errors. In most European Member States, one can simply correct a previous tax return in the current tax return.

 

 

Part Five

 

Payment and Refund of Tax

 

Article 63

 

Payment of Tax

Each Member State shall determine the periods, conditions and rules for payment of Net Tax due by the Taxable Person.

This article is self-explanatory. It is up to the individual Member States to determine the applicable conditions to pay the net output VAT. This is usually at the same day the return is filed.

 

 

 

 

 

 

 

Article 64

 

Payment of Tax on Imports

1

Tax due on imported Goods shall be paid at the First Point of Entry and deposited in a special tax account, and transferred to the final Destination State according to the Customs Duties Automated Direct Transfer Mechanism in force within the framework of the GCC Customs Union; the Ministerial Committee may propose any other mechanisms.

2

Each Member State may, in accordance with the conditions and rules determined by it, allow a Taxable Person to defer payment of Tax due on Goods imported for the purposes of the Economic Activity and to declare the same in his Tax Return. Tax due that has been deferred and declared shall be deductible according to the provisions of this Agreement.

 

The provision in paragraph 1 may surprise. It entails that VAT on imports is transferred from the first country of entry to the final destination state. The provision builds on the GCC Customs Union, which applies the same Common Customs Law and has a similar provision for customs duties.

 

Contrary to for example the customs union of the European Union, the GCC Customs Union does not necessarily allow all goods to freely circulate between the Member States of the GCC after payment of the customs duties and VAT in the first member state of importation.

 

Paragraph 1 mirrors for VAT purposes what is applied for customs duties when goods are imported into one GCC Member State and are transiting to another GCC Member State. Instead of suspending or exempting the imports into the first state of arrival, customs duties and VAT are due in the Member State of first arrival. The Member State of first arrival will then forward the customs duties and VAT to the Member State of final arrival. The importer will then claim the deduction of input VAT in the Member State of final arrival.

 

This system is obviously complex to administer and the risks of getting it wrong are high. One example is the case where the Member State of arrival zero rates a certain product, but the Member State of departure does not. The Member State of departure should not collect and forward VAT in this case, but it also requires that it keeps track of the VAT regime applicable in the other Member States. The reverse situation can also present itself. It also requires that the importer has multiple customs documents to keep and to keep track off. Only the document declared with the Member State of arrival will grant the importer input VAT deduction.

 

 

Paragraph 2 allows Member States to simplify rules for importers. It allows that a Member State can deviate from the rules that importers pay import VAT to the Customs administration and later use that the import declaration to deduct the same import VAT. That import VAT constitutes input VAT for the importer and thus should be deductible accordingly.

 

The exception foreseen in paragraph 2 allows importers not to pay import VAT to Customs, but allows them to pay this import VAT in their tax return. In other words, instead of having to pay the VAT when the import declaration is filed, this mechanism allows paying the import VAT in the VAT return. The importer therefore gains time because he does not have to pay the import VAT upon declaration. At the same time, the importer also has a right to recover input VAT. To the extent that he has the right to recover, the importer will be able to deduct the import VAT simultaneously with paying the import VAT. The UAE has made this rule compulsory, whereas KSA will put in place a license system to obtain this advantage.

 

2.11 Tax Refunds 

 

Article 65

 

Tax Refunds

 

Each Member State shall determine the conditions and rules for allowing a Taxable Person to request a refund of net deductible Tax or request to carry it forward to subsequent tax periods.

 

A taxable person filing a return may be in a refund position when he files his VAT return. That means that the sum of his deductible input VAT exceeds the sum of the output VAT for which he is liable.

 

This could happen for example to a business that only buys domestically and only exports to businesses abroad. In such a case, his output is exclusively zero rated. It will suffer input VAT since its suppliers will invoice with VAT. Every time such a taxable person files a VAT return, it will have no output VAT to pay but only input VAT to deduct.

 

In other words, this is important for sellers which find themselves in a net repayment position, which means that the tax authorities owe them money.

 

The speed with which the Member States will refund VAT is highly important since the longer this takes, the worse the situation gets in terms of the working capital of the business.

 

The Member States can determine the rules around what will happen in such a case, and determine under which circumstances VAT can be refunded to the taxable person or carried forward.

 

In KSA, in such a situation the authorities will review the request and refund within 60 days of approving the (partial) refund. In the UAE, the authorities will review a refund request within 20 business daysand, after approval, refund within 5 business days.

 

 

Chapter Eleven

 

Special Treatments of Tax Refunds

 

Article 66

 

Tax Refunds for Persons residing in the GCC Territory

Taxable Persons in any Member State may request the refund of Tax paid in another Member State in accordance with the conditions and rules determined by the Financial and Economic Cooperation Committee.

 

Similar to how the countries in the European Union refund VAT to non-established businesses according to the principles laid down in Directive 2008/9/EC Council of 12 February 2008, the Agreement foresees in a mechanism allowing non-established tax payers (but still established in the GCC) who incur VAT in one of the GCC countries to reclaim this VAT.

 

This could for example be VAT paid for the entrance to a conference or VAT paid on the purchase of a machine which is then leased back to the seller.

 

KSA has foreseen these possibilities but has to date not yet taken the practical measures to implement it. The same holds for the UAE.

 

 

 

 

 

Article 67

 

Tax Refunds for Non-Residents in the GCC Territory

Each Member State may allow Persons who are not resident in the GCC Territory to request tax refunds for Taxes paid in it if all the following requirements are met:

 

1

the Non-Resident Person does not supply Goods or Services for which it is required to pay Tax in any Member State;

2

the Non-Resident Person is registered for Tax purposes in his country of residence, if such country applies a VAT system or a similar tax system;

3

the Tax is borne by a Person who is not resident in any Member State for the purposes of his Economic Activity.

 

Similar to how the countries in the European Union refund VAT to businesses not established in the EU according to the principles of the 13th Council Directive 86/560/EEC of 17 November 1986, the Agreement foresees in a mechanism allowing tax payers not established in the GCC who incur VAT in one of the GCC countries to reclaim this VAT.

 

This could for example be VAT paid for the entrance to a conference or VAT paid on the purchase of a machine which is then leased back to the seller.

 

KSA has foreseen these possibilities but has to date not yet taken the practical measures allowing the refund (article 72 of the KSA VAT IR). The UAE has implemented the rule in article 67 of the UAE VAT ER.

 

 

Article 68

 

Tax Refunds for Tourists

1.

Each Member State may apply a Tax Refund system for tourists pursuant to the conditions and rules determined in its Local Law.

2.

For the purpose of applying this Article, a tourist shall be defined as any natural person who meets all of the following requirements:

 

a-

he is not a resident of the GCC Territory;

 

b-

he is not a crew member on the flight or aircraft leaving a Member State.

 

 

This article concerns the refund of VAT to tourists visiting a GCC country. Tourists may shop in the countries they visit. In order to give them an incentive to do so, many countries with a VAT regime allow a refund of VAT to tourists exiting the country. Provided these persons comply with certain conditions, they will get VAT back they paid themselves to the sellers. Often a third party offers such services.

 

Under the Agreement, such a system can also be put in place in the GCC. Only a natural person can benefit from the rules and this person cannot be a resident of any of the GCC countries and cannot be a crew member on flights or aircrafts leaving a Member State.

 

Article 33 of the KSA VAT law and article 73 of the KSA VAT IR foresee in such a mechanism. In KSA, the intention is to have an approved provider for such refunds, and in case the approval of such a provider is revoked, the Authority will set up its own mechanism.

 

The UAE has foreseen this possibility in article 68 of the UAE VAT ER. The application does not necessarily require to have an approved provider.

 

 

Article 69

 

Tax Refunds for Foreign Governments, International Organizations and Diplomatic Bodies and Missions

1

Each Member State shall determine the conditions and rules for granting foreign governments, international organizations and diplomatic, consular and military bodies and missions the right to reclaim Tax borne for Goods and Services in the Member State in application of international treaties or the condition of reciprocity.

2

Each Member State may apply the zero-rate to supplies of Goods and Services in favor of foreign governments, international organizations, and diplomatic, consular and military bodies and missions within the conditions and rules determined by each State.

 

This article determines that specific types of organizations can benefit from a refund. This concerns foreign governments, international organizations and diplomatic bodies and missions. The intention is to relieve these organizations from taxes. With this provision, the GCC is complying with an international custom not to tax other sovereign states or representations of foreign organizations or international organizations on its territory.

 

 

In other jurisdictions, this is usually handled by applying a zero rate or an exemption which preserves the right to recover input VAT. For the European Union for example, the Protocol (No 7) on the privileges and immunities of the European Union foresees in its article 3 that: "The governments of the Member States shall, wherever possible, take the appropriate measures to remit or refund the amount of indirect taxes or sales taxes included in the price of movable or immovable property, where the Union makes, for its official use, substantial purchases the price of which includes taxes of this kind. These provisions shall not be applied, however, so as to have the effect of distorting competition within the Union."

 

The United Nations enjoys similar tax benefits under article 2 of the Convention on the Privileges and Immunities of the United Nations, adopted by the General Assembly of the United Nations on 13 February 1946. Since VAT was nowhere applied at that point in time, no specific clause concerns the application of VAT.

 

The Ottawa Convention intends the same in its article X for the North Atlantic Treaty Organization. This article can in the EU also be found back in article 151 of the EU VAT Directive. The United States of America commonly includes a provision on taxes in its Status of Forces Agreements.

 

2.12 Exchange of information among Member States

 

 

Chapter Twelve

 

Exchange of Information among Member States

 

Article 70

 

Exchange of Information

1

The tax authorities in the Member States shall exchange information relevant to the implementation of the provisions of this Agreement, or information related to the administration or enforcement of Local Laws related to VAT.

 

2

Without prejudice to the provisions of international conventions to which the Member State is a party, the information obtained by the tax authority shall be treated as confidential information in the same manner as the information obtained under the domestic laws of that authority, and shall be disclosed only to persons or authorities (including the courts and administrative authorities) concerned with Tax assessment, collection, implementation, or bringing judicial claims or determining appeals relating thereto or supervising the above. Such persons or authorities may not use the information obtained save for those purposes, and may disclose such information in judicial proceedings in public courts or in judicial decisions. Notwithstanding the foregoing, the information obtained by the tax authority may be used for other purposes when the laws of both States permit its use for such other purposes, and the tax authority in the providing State allows such use.

3

The provisions of subsections 1 and 2 shall not in any case be interpreted in a way that obliges any Member State to do the following:

 

a-

to implement administrative procedures that breach regulations and administrative practices in that State or in another Member State.;

 

b-

to provide information which is not obtainable under the regulations or the normal administration directives of that State or in another Member State;

 

c-

to provide information which would disclose any secret relating to trade, business, or industry, or commercial or professional secrets, or commercial operations, or information the disclosure of which may be contrary to public policy (public order).

4

If a member State requests Information under this Article, the other Member State must use its own procedures to collect the required information notwithstanding that that other State may not require it for its own tax purposes. The obligation set out in the preceding sentence is subject to the restrictions provided for in subsection 3. However, under no circumstances shall these restrictions be interpreted as allowing any Member State to decline to provide information on the sole ground that it has no local interest therein.

5

Under no circumstances shall the provisions of subsection 3 be interpreted as allowing any contracting State to decline to provide information on the sole ground that such information is held by a bank or other financial institution, or by an authorized person or person acting under a power of attorney, or a person acting in a fiduciary capacity or that this information is related to ownership interests of any person.

 

 

Under the Agreement GCC states are obliged to exchange information which is relevant to ensure the correct implementation and enforcement of VAT within the GCC (including combating possible VAT fraud). Exchange of information can help the Authority in auditing companies and issuing assessments.

 

Information can be exchanged in the following situations:

 

  • upon request;
  • automatic (see below on Electronic Service System); or
  • spontaneous provision by a Member State.

 

Information requested cannot be denied for the reason that no local interests are served by the GCC country that received the request for information. This could for example be when the relevant company holds important trade secrets.

 

Additional sharing of information may be implemented based on the proposal from the Secretary General of the Gulf Cooperation Council to the Committee. In this respect, a separate agreement allowing for sharing of information and administrative cooperation within the GCC would need to be agreed with other Member States. Based on the current Agreement this could be implemented in the following areas:

 

  • sharing information needed to determine Tax accuracy based on the request of each GCC country;
  • agreeing to synchronized auditing procedures and participating in audits performed by any GCC country pursuant to the approval of the concerned country; and
  • assisting in the collection of VAT and to take the necessary measures related to VAT collection

 

This provision concerns the exchange of information between Member States related to taxes. This instrument comes on top of any international conventions concluded by the individual Member States. This concerns amongst others the double income tax treaties based on the OECD model and the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (the "MAATM Convention").

 

Since 1 April 2016 the Convention on Mutual Administrative Assistance in Tax Matters has entered into force in KSA. The UAE has only signed the amended Convention on 21 April 2017, but the convention has not entered into force yet. The use of the MAATM Convention is therefore not widespread yet in the GCC region. Although it applies to other taxes, it applies to VAT too.

 

It relates to the exchange of information, including simultaneous audits and the participation in audits abroad, the cross-border collection of documents and the notification of documents.

 

It does not constitute the sole legal basis for the GCC countries to collect information though. Through their network of double income tax treaties, on the basis of article 26 of the OECD Model Tax Convention on Income and Capital (sometimes also referred to as the "OECD Double Income Tax Treaties Model), "foreseeably relevant information" is exchanged with other States. This article is not limited by article 2 of the OECD Model ("taxes covered") and therefore applies to VAT as well. Article 27 of the OECD Model allows also mutual assistance between the contracting states. In the UN Model of Double Income Tax Treaties, the applicable articles are article 26 and 27 as well.

 

 

Article 71

 

Electronic Service Systems

1

Each Member State shall create an electronic Services system for the purposes of complying with requirements related to Tax. The GCC Secretariat General shall take the necessary measures to establish a tax information center, and to operate a central website or electronic system to follow up the information related to Internal Supplies and the exchange of this information between the concerned Tax authorities in the Member States; provided that the website or electronic system of the tax information center must include at least the following information:

 

 

a-

the TIN for both the Supplier and the Customer;

 

b-

the number and date of the Tax Invoice;

 

c-

a description of the transaction;

 

d-

the consideration for the transaction.

2

If the information recorded by each of the Supplier and the Customer corresponds, each of them shall be given a confirmation number that must be retained for Tax audits performed by the concerned Tax authority and for the purpose of ascertaining that this information corresponds with that provided in Tax returns and other relevant information provided pursuant to the provisions of this Agreement.

 

3

The system must be reliable and secure and must not allow the Supplier or the Customer access to any information other than that to which they are permitted to have access.

 

4

The concerned Tax authority in each Member State shall have a right of access to the information related to Internal Supplies between Taxable Persons registered for Tax purposes.

 

5

The System shall allow the follow-up of proof of transfer of Goods to the country of Final Destination.

 

The Member States should implement an electronic system (the Electronic Service System) under the Treaty. However, on 1 January 2018, this system will not be in place yet.

 

This system will link information registered by suppliers and customers, potentially in their respective VAT returns. A taxable person will receive a notification from the Authority verifying whether the data matches that provided by the counterparty in the other GCC State. The taxable person should keep this notification in its VAT administration records. This will facilitate efficient enforcement of VAT by the Authority.

 

The system will store at least the following information:

 

  • the TIN number of the supplier and the customer;
  • the number and date of the invoice;
  • a description of the transaction;
  • the consideration of the transaction;
  • information related to internal supplies between taxable persons; and
  • information (tracking data) and proof related to the transfer of goods to the final destination point.

 

The system will be managed by the Gulf Cooperation Council. The quality and speed of the exchange of this information will determine its efficiency in combating VAT fraud. The information in relation to internal supplies will be accessible to the respective Authorities of all GCC countries.

 

 

 

It constitutes a relatively innovative system, which could be a potential application of block chain for governmental and taxation purposes. In order for it to be efficient though, it should also include services. As we've seen in mature tax jurisdictions, VAT fraud and in particularly missing trader fraud is easily set up with services.

 

 

Article 72

 

Cooperation between Member States

1

The Member States may, upon a proposal from the Secretary General of the Gulf Cooperation Council to the Ministerial Committee, take the necessary measures related to administrative cooperation among them, especially in the following areas:

 

 

a-

exchange of information needed to determine Tax accuracy based on the request of each Member State;

 

 

b-

agreeing to synchronized auditing procedures and participating in audits performed by any Member State pursuant to the approval of the concerned States.

 

c-

assisting in the collecting of Tax and taking the necessary procedures related to collection.

2

Subject to the provisions of international agreements to which the Member State is party, each Member State shall obligate its employees not to disclose or use information they receive in the course of their work from another Member State for any other purposes not related to their functions. Each Member State may determine the penalties that apply in the event of violation.

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional sharing of information may be implemented based on the proposal from the Secretary General of the Gulf Cooperation Council to the Committee. In this respect, a separate agreement allowing for sharing of information and administrative cooperation within the GCC would need to be agreed with other Member States. Based on the current Agreement this could be implemented in the following areas:

 

  • sharing information needed to determine Tax accuracy based on the request of each GCC country;
  • agreeing to synchronized auditing procedures and participating in audits performed by any GCC country pursuant to the approval of the concerned country; and
  • assisting in the collection of VAT and to take the necessary measures related to VAT collection

 

The European Union has the most extensive legal cooperation instruments of any customs or monetary union. Although the inception of the European Union (or rather its predecessor) dates back to 1957, the exchange of information between the Member States of the EU can still much be approved, according to report from the European Court of Auditors. Its exchange of information is foreseen in Regulation n° 904/2010.

 

2.13 Transitional Provision

 

 

Chapter Thirteen

 

Transitional Provisions

 

Article 73

Each Member State must provide in its Local Law transitional provisions dealing with the following areas at least:

1

Tax is due on supplies of Goods and Services and on imports of Goods as from the date the Local Law comes into effect in the Member State.

2

Each Member State shall determine timelines for registering Taxable Persons obliged to register on the date the Local Law comes into effect.

 

3

Notwithstanding any other provision in this Agreement, should an invoice be issued or Consideration paid before the date of application of the Local Law or prior to the registration date and the Supply occurred after such date, then each Member State may ignore the date of the invoice or payment and consider the Tax due date to be the date of the Supply.

4

Notwithstanding any other provision in this Agreement, should an invoice be issued or Consideration paid before the date on which the Local Law comes into force or prior to the registration date and the Supply occurs after such date, then each Member State may ignore the date of the invoice or payment and treat the Tax due date as being the date of the Supply

The provisions of subsection 3 of this Article shall apply to Internal Supplies between a Taxable Supplier residing in a Member State and a Customer in another Member State.

 

5

With regard to continuing supplies that are partially performed before the date on which the Local Law comes into force or before the registration date and partially after such date, then Tax shall not be due on the part performed before the date of coming into force or of the registration.

Although the Member States can lay down any policies and procedures for the implementation of VAT, the Agreement obliges them to consider transitional provisions in a number of areas.

 

The Agreement provides that Member States must introduce provisions which deal with the fact that VAT is due on supplies of goods and services and on imports as of the date that the local law comes into effect. This is merely a consequence though of the introduction and does not necessarily have to do with transitional provisions.

 

The UAE applied that VAT on 1 January 2018 upon when the business opened or 7 AM, whichever was earlier.

 

The Member States should also foresee timelines for VAT registration. This provision is also unsurprising as it follows logically from the laws that if a tax payer is liable for the payment of VAT, he will have to get registered for VAT purposes.

 

KSA made use of this provision by allowing the tax payers whose turnover is below 1 million SAR do not have to register for VAT until 1 January 2019, as opposed to 1 January 2018 for the other tax payers in KSA.

 

The real transitional provisions foreseen by the Agreement relate to situations where tax payers may be tempted to advance the tax point of their supplies to a point in time prior to 1 January 2018, or any other implementation date, in order to avoid having to charge VAT on their supplies. Imports is not mentioned here. The provision foresees that that advancing of the tax point can be disregarded and that VAT is simply due on the date of supply. For continuous supplies, the situation is different when they are partially performed before the introduction of VAT. In that case, the performance is taken into account and no VAT is due on the part relating to prior to 2018.

2.14 Objections and Appeals

 

 

 

 

Chapter Fourteen

 

Objections and Appeals

 

Article 74

 

Objections and Appeals

Each Member State shall determine the conditions and rules for objecting to decisions of the concerned tax authority. This includes the right of recourse to the competent local courts in each Member State.

In line with the principle that each Member State has full fiscal autonomy, unless limited by the Agreement, the Member States can determine their own objections and appeal process. Although the Agreement refers to local courts, it does not organize a binding sanctioning mechanism on the GCC level for Member States who would infringe the provisions of the Agreement.

 

2.15 Closing provisions

 

 

Chapter Fifteen

 

Closing Provisions

 

Article 75

 

Interpretation

The Ministerial Committee shall have jurisdiction to consider matters related to the application and interpretation of this Agreement and its decisions shall be binding on the Member States.

 

In terms of the interpretation of the Agreement, the Ministerial Committee will make any decisions, which shall be binding for the Member States. It is not further specified how this procedure shall be initiated, how the Ministerial Committee shall decide or what happens if the Ministerial Committee does not take a decision. Since there is no published history of the drafting of the Agreement, it would be interesting of the decisions of the Ministerial Committee would be published.

 

 

 

 

 

Article 76

Dispute Resolution

The Member States will work to settle any dispute which may arise between them concerning this Agreement amicably, and they may, upon agreement, if such amicable settlement is not possible pursuant to the foregoing, submit the dispute to arbitration in accordance with the rules of arbitration to be agreed upon.

 

This article is the only article in the Agreement around the policing of the Treaty. It is very light in its application, as it only concerns an obligation to try to work out differences between Member States.

 

In the absence of a court that can judge on the correct interpretation of the Agreement, such as the Court of Justice of the European Union, there is no other policing mechanism or another mechanism which would allow for a test of the domestic legislation and practice against the Agreement.

 

Article 77

Amendments

This Agreement may be amended upon the approval of all the Member States and based on the proposal of any of these States. The coming into force of the amendment shall be subject to the same procedures provided for in Article 79 of this Agreement.

 

This article prescribes that in order for the Agreement to be changed, unanimity is required. This condition is relatively difficult to meet. In the European Union, the same condition applies which means that currently all 28 Member States need to unanimously agree to change the VAT directive. This article obviously does not prevent the Member States to implement VAT in their own way.

 

 

 

 

 

 

 

 

 

 

 

Article 78

Coming Into Force

This Agreement shall be approved by the Supreme Council and ratified by the Member States in accordance with their constitutional process.

1

The Agreement shall come into effect as from the lodging of the second State’s confirmation document with the Secretary General of the GCC Council.

 

2

Each Member State shall take domestic measures to issue its Local Law with the aim of implementing the Agreement. This includes laying down the required policies and procedures to implement the Tax in such manner as does not conflict with the provisions of this Agreement.

 

3

Each Member State that has not implemented its Local Law shall be treated as being outside the scope of this Agreement until such time as its Local Law comes into force.

 

This article is especially important pending the implementation in all six GCC countries. It legally requires the lodging of the signed Agreement by the GCC Member State with the Secretary General of the GCC Council in Riyadh. In absence of this, the Agreement does not enter into force.

 

The second paragraph is informative in terms of the obligation of the Member States and the manner in which they can implement VAT. It requires that each Member States develops his own VAT law.

 

In other words, to the extent that the GCC counts six members, six different VAT laws will be issued. The Member States are free however their proper policies and procedures to implement VAT. The only limitation posed is that the policies and procedures do not conflict with the provisions of the Agreement. However, the legislation, policies and procedure need to follow the principles set out by the Agreement but they can differ in their practical details. For instance, invoicing requirements, accounting requirements, statute of limitations, certain policy options, etc. can all differ.

 

 

 

 

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