VAT in the Middle East - what UK exporters to the region need to know

Fri 9 Feb 2018
Posted by: William Barns-Graham
Features

gulf vat

The imposition of Value Added Tax (VAT) since the beginning of 2018 continues to significantly impact businesses trading with the United Arabic Emirates (UAE) and the Kingdom of Saudi Arabia Saudi Arabia (KSA).  Internationally trading companies need to consider the impact of VAT on all their transactions’ total landed cost calculations leading to potential impact on prices and margins. In addition, administration costs due to registration and reporting requirements need to be factored in as well.

We spoke to our Young President Arne Mielken, who is monitoring the region on a daily basis, about how and why VAT was brought in and what exporters to the Middle East need to know.

 

IOE&IT: Why is it important that British companies know about changes like the imposition of VAT in faraway markets like the UAE and the KSA?

Arne Mielken: We are the Institute of Export & International Trade, so by default, when changes occur to business functions in a certain market, and this change has an impact on our business’ ability to get our great UK produce to that market, we are in a “need-to-know” situation.

This is even more important as we leave the European Union and wish to make ourselves even more known on a global stage.  Besides, the introduction of VAT is a major, somewhat irreversible, event. It’s something that can add many new layers of complexity, time and cost to international trading and might eat into your total landed cost profit margin.

So, as more and more sales orders come to you from the region, VAT payments are now something to be mindful of.

 

IOE&IT: But VAT is complicated and boring – I’m not an accountant! Can I just let an agent in the market deal with it?

Arne Mielken: Yes, you can, but VAT is actually quite easy to understand – at least the basic principles are.

Once you know the basics, you can then make informed decisions and manage your export process rather than being told what has to be done. I’d rather be in the know.

And about the boring bit – VAT can actually be quite exciting! Once you get your head around it and appreciate the reasons for why this region needs to do it and the enormity of the task ahead, it can become really interesting.

 

IOE&IT: What happened in the UAE and SKA on 1 January 2018 then?

Arne Mielken: On 1 January 2018 was the “go-Live” date for the UAE and KSA to begin applying their respective VAT regulations: Federal Decree Law No (8) of 2017 in the UAE and Royal Decree No. M113 & GAZT Board of Directors Resolution No.3839 d.

VAT was introduced in both countries at a standard rate of 5%, one of the lowest rates of VAT charged globally.

 

IOE&IT: Why has VAT not been introduced for the whole of the GCC region?

Arne Mielken: All six Cooperation Council (GCC) Member States, Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman have signed “The Unified Agreement for Value Added Tax (GCC VAT Agreement) of the Cooperation Council for the Arab States of the Gulf. They committed in 2017 to launch a harmonised VAT regime within two years

As a consequence of this Agreement, both the UAE and Saudi Arabia have implemented VAT laws and accompanying regulations, which entered into effect on 1 January 2018. 

However, as yet, none of the other GCC states has implemented any VAT legislation. Bahrain is expected to launch VAT in 2018. Qatar and Oman may launch in 2019. Kuwait may now consider introducing an alternative to the proposed 5% VAT regime.

 

IOE&IT: Will the VAT laws be the same across the GCC member states?

Arne Mielken: There is a level of difference in the application of the rules across the GCC member states. This is because the GCC VAT agreements set some requirements as compulsory, and others as optional and to be given consideration at a local level.

Implementation of the law will therefore take into account national and local economic and political conditions.

 

IOE&IT: What does the GCC understand by VAT?

Arne Mielken: VAT in the GCC is the same as in more than 160 countries around the world where it is implemented. It is an indirect tax, which is imposed on selected goods and services that are bought and sold by businesses.

VAT is a tax on consumption that is paid and collected at every stage of the supply chain, from when a manufacturer purchases raw materials to when a retailer sells the end product to a consumer.

 

IOE&IT: How does VAT in the GCC work?

Arne Mielken: Unlike with direct taxes, when a VAT-registered business sells to a good or service businesses operating in KSA and UAE, they will, in a standard scenario, need to:

  1. . Charge an extra 5% of VAT on top of the sales from their customers of each eligible sale (referred to as “output VAT”), and..
  2. Pay 5% VAT on top of the goods or services purchased from other taxable businesses.

The VAT that a business pays to its suppliers is called ‘Input VAT’.

The business will account for that 5% from all eligible sales separately from its revenue in order to later remit a portion of it to the KSA or UAE government. In order to calculate how much they owe, each business will note how much VAT it has collected from customers and subtract from it the total VAT it paid in the same period.

 

IOE&IT: What are the basic requirements?

Arne Mielken: Most businesses operating in both countries will need to register for VAT and comply with several VAT duties, ranging from charging VAT and issuing tax invoices, to filing periodical VAT returns and paying any VAT due to the national tax authorities. As such, business should consider that all invoices should now comply with the above-mentioned VAT regulations. While there is generally an adaptation / graze period, there is no implementation period as such and businesses must expect penalties for non-compliance for late- or non-payments or filings/submissions of returns in the near future.

 

IOE&IT: Are there any exceptions to paying VAT?

Arne Mielken: All resident businesses with taxable sales in the past twelve months, or expected taxable sales in the next twelve months, that exceed a certain threshold will be required to register for, collect, and remit VAT. Those below the threshold usually can choose to register for the VAT or not.

Furthermore, some limited goods and services (e.g. financial services or residential real estate) are exempted from VAT. There are also zero-rated goods and services that are legally taxable but are taxed at VAT rate of 0%. This regulation exists so that businesses selling zero-rated supplies can still deduct their input VAT and receive refunds. This is the key difference compared to businesses that sell exempt supplies, which cannot receive refunds.

 

IOE&IT: Are imports subject to VAT?

Arne Mielken: A VAT-registered importer of record must pay VAT on goods when brought in from outside the GCC, from non-GCC countries - or from the GCC if VAT payment cannot be proven.

A reverse-charge mechanism is available in the UAE, so the importer can ‘pay’ and ‘recover’ the import VAT at the same time, mitigating any cash flow impact.

The KSA allows payment of import VAT through the VAT return in some circumstances. The import VAT document will need to be provided to show that import VAT has been paid.

 

IOE&IT: How is the value for VAT purposes calculated?

Arne Mielken: The value of imported goods into the KSA and UAE for VAT purposes is, like in most countries, the value of the goods plus any applicable:

  • Customs duties
  • Excise duties
  • Insurance duties
  • Freight duties
  • Any other fiscal charges (except for VAT itself)
  • Any services incidental to the import of the goods (where not included in the dutiable value)

 

IOE&IT:How does VAT affect total landed costs of a product?

Arne Mielken: VAT is one of a number of variables that go into calculating total landed cost.

To really understand how a new 5% charge affects your product margins and transactions to the UAE and KSA, it is important to have a clear understanding of estimated landed cost. This is so that you can correctly set prices, make accurate sourcing decisions, and assess transportation & storage options – options that maybe involving moving goods to ‘Free zone’ warehouses, or even to a neighbouring GCC country as long as no VAT is charged there.

 

IOE&IT: Are transits subject to VAT?

Arne Mielken: If goods are imported by a taxable person into KSA and then goods are then moved to  the UAE, VAT will be payable in the KSA as an import. This VAT will be recoverable in the VAE, however. If the goods move to any of the other GCC countries, VAT can be zero-rated when the goods enter the KSA as this would count as an export (until VAT is introduced).

 

IOE&IT: Are exports subject to VAT?

Arne Mielken: VAT registered businesses exporting goods from KSA or UAE to a destination outside the GCC can zero-rate the transactions. As long as the other 4 GCC states that have not yet implemented VAT, supplies to these countries would be treated as exports of goods for VAT purposes. Consequently, no VAT will be collected but the business is still able to deduct the input VAT it paid when it purchased the raw materials to produce the goods from the manufacturer.

There is of course more than just VAT to consider when exporting! Ever since the Qatar crisis, it is more important than ever to screen potential customers against restricted party lists, identify and determine license requirements, perform export compliance checks, and generate international trade documents.

 

IOE&IT:  How should you charge VAT when moving goods between GCC states?

Arne Mielken: Currently, only the UAE and Saudi Arabia have implemented a VAT law. Moving goods between both will be subject to VAT at 5% rate. In contrast, businesses located in Bahrain, Kuwait, Oman or Qatar (where a VAT law has not yet been implemented) will not be required to pay VAT.  This is because the services will be considered as exported and, in these circumstances, the services will be zero-rated (see previous question).

 

IOE&IT: What type of goods are VAT zero-rated?

Arne Mielken: Approved medical equipment and medicines should be subject to zero rating. Food products shall be subject to the standard rate of VAT, however, each member state will have the right to zero rate on food as per a GCC-unified list of commodities (e.g. basic foods: bread, milk etc.). Oil and gas, including the oil derivatives sector, may be subject to VAT at a standard rate or zero rate, at the discretion of each GCC member state.

The transport of goods and passengers (intra-GCC and international) and associated ancillary services will be subject to VAT at a zero rate. Some other goods may also be zero rated, like certain precious metals in the KSA.

 

IOE&IT:Will temporary imports, re-exports or goods destined for free zones be VAT-able?

Arne Mielken: The supply of goods placed under suspension arrangements referred to in the GCC Common Customs Law shall be subject to a zero rate.

 

IOE&IT:The UAE has many free zones! Will VAT need to be charged?

Arne Mielken: The UAE executive regulations make clear how free zones, designated zones, and mainland areas will be treated under VAT.

The UAE’s VAT law will not cover all transactions by companies inside so-called “designated zones”, which are fenced areas with security measures and customs controls in place to monitor the entry and exit of individuals and movement of goods. Operations including importing into the zones, storing, and selling goods to countries outside the UAE are not VAT-able.

The transfer from one VAT designated zone to another might require the provision of a financial guarantee. Note that the purchase of goods by a UAE mainland company from a designated zone company will be treated as an import while sales to a designated zone company by a UAE mainland supplier will not be treated as an export and will be taxable.

Of course, it is inherently difficult to manage customs supervised inventory, especially if companies are dealing with large transaction volumes and multiple FTZs, not only in the UAE but also across the world.

 

IOE&IT: How can one stay in touch of tax developments in the GCC?

Arne Mielken: IOE members receive daily and monthly newsletters. We also have a quarterly flagship publication called “Trade Matters” which is a great read.

 

IOE&IT: How can I learn more about the functioning of VAT

Arne Mielken: IOE&IT members receive discounts on training, seminars and workshops we provide. Go to export.org.uk/training for the complete list of trainings available. Bespoke training can be made available upon request.

There is also a wide range of formal qualifications in international trade that we provide. The Diploma in World Customs & Customs Regulations covers many different aspects of VAT for international trade.  

 

IOE&IT: Where can I find out more about doing business with the GCC, the UAE or the KSA?

Arne Mielken: We offer a wide range of “Doing Business” guides, free of charge, available for download .

This includes, at present, Saudi Arabia & the UAE.

They are designed to advise and assist UK companies when looking to trade with and invest in opportunity-rich overseas markets. The guides’ contents focuses on the market in question, how to approach that market and the help and support available. They also include informative market overviews and details of business opportunities, listings with website links to British and Foreign Government support services and essential private sector service-provider profiles.