All you need to know about VAT implementation in the GCC

Back in 2017, the six GCC member states got together to make a huge amendment to the council’s taxation system by introducing VAT. The six states that had the reputation of being an absolutely “tax-free haven” lost that status as part of the countries’ drive to diversify their economies to non-oil sources of income.

UAE’s tax revenue, including value-added tax (VAT) made up 5.5% of the total public revenue in 2018 amounting to aed25bn, according to the Ministry of Finance (MoF). And this year, from the beginning of January until the end of August 2020, the total value-added tax (VAT) revenue amounted to AED11.6 billion ($3.15 billion). Saudi Arabia collected 45.6 billion riyals ($12.16 billion) from value-added tax in 2018.

Although the legislation was put together after the unanimous consultation of all the member states, VAT’s implementation wasn’t as unified or uncomplicated. On January 1, 2018 the UAE and KSA introduced VAT at a standard rate of 5%. On January 1, 2019, Bahrain joined the two states but decided to do a phased implementation of the tax initially, i.e only large taxpayers were required to account for VAT, and then by the end of the year there was a full implementation. On July 1st, 2020, KSA increased its standard rate from 5% to 15%. Oman has now announced that it will introduce VAT at a rate of 5% from April 2021. Qatar and Kuwait haven’t announced if and when they will be implementing VAT.

If the VAT breakdown among the different GCC states sounds complex, then the compliance regulations and the process of implementation is even more convoluted. And one sector that was (and is) deeply affected by the implementation of VAT is the retail sector.

“The retail sector has a big impact as they are directly dealing with the end consumer”, said Bastiaan Moossforff, Senior VAT Advisor at Baker McKenzie.

There are different parties to the supply chain and every link in the chain collects VAT to the value that it adds to the supply chain. It’s only at the last stage where the end consumer is charged that he/she can’t recover the VAT.

“So it’s a real cost and therefore, if you increase the price of your product by 5% it will have an impact on consumption. In combination with an excise tax that was introduced in the UAE in 2017, it had a big impact on pricing”, he said.

But it wasn’t just the increased cost that proved to be a hindrance for retailers. The lack of harmonization, the unclear legislation, and heavy penalties have made it difficult for retailers – especially the smaller ones – to do business.

Lack of harmonisation

Although the GCC VAT agreement provides a framework, the member states still have a lot of freedom in implementation. For example, there are huge differences within the zero-rate, which means the goods are still VAT -taxable but the rate of VAT you must charge your customers is 0%, between the UAE, KSA, and Bahrain.

“In Bahrain basic necessities such as food are zero-rated, but in KSA everything is subjected to the standard rate including education and healthcare, which are zero-rated in the UAE, Bahrain and Oman”, he explained.

Retail promotion ambiguity

The entire retail sector is reeling with the after-effects of a pandemic that has still not ended. From people avoiding crowded places like malls for safety reasons to being tight with their budgets because of the economic recession that has impacted every household, retailers have been resorting to every trick in their book to attract their customers and encourage them to shop.

Loyalty programmes, discount vouchers, BOGOF (buy one get one free) are some of the schemes that are effectively attracting more consumers back into the store. However, retailers need to be mindful of the intricacies of filing VAT returns while going for these promotions.

“In principle, a discount would decrease the price of your product so the VAT would be levied on the lower amount. When it’s two-for-one, the VAT impact would be the same. Some retailers announce VAT-free promotions. In this case, the retailer is still required to charge the VAT, which should be visible for the customers as well. So here, the overall price of the product is just reduced (by the retailer)”, he explained.

Where it gets tricky is when a retailer offers certain goods or services free with the product being sold. If the additional good/service is one that needs to be accounted for as per VAT regulations and is just given away without any documentation while filing for returns, then the retailer might be charged a heavy penalty.

“When you start offering additional goods or services for free, you need to be very careful about how that’s treated. There might be a case, where a free product or a free service should be taxed, even though no consideration is paid for it. So that can be tricky as if you miss one of those “deemed supplies” for which VAT should have been accounted for, a penalty might be levied on for the VAT amount that hasn’t been declared in the VAT return”, he said.

Penalties

Recently, the UAE Federal Supreme Court passed its judgment on an appeal filed by the Federal Tax Authority (FTA) about the Court of Appeal’s judgment concerning the imposition of penalties resulting from a voluntary disclosure. According to the ruling, taxpayers submitting voluntary disclosures could be subject to penalties of up to 356% of the tax due.

“So if you have made a VAT return in Q1 of 2018 and now realized that you made a mistake and submit a voluntary disclosure, the automatic late payment penalty on that will amount up to the maximum penalty of 356% of the unpaid amount. Plus you also get a 5% penalty for making a voluntary disclosure”, he explained.

“The late payment penalty makes it really difficult as the legislation and regulations were published quite late. So it’s very difficult for the retailer to get things right from the start”, he added.

According to Moossforff, there should be a mechanism in place to correct mistakes if you find one without being penalized. Unfortunately, that’s not the case. So it is very difficult to do business, especially when you’re a retailer dealing with complex transactions like vouchers, loyalty schemes etc.

“If you get penalized for such a huge amount at a later stage then your business might not be able to survive”, he concluded.