PwC: GCC companies should take action now to prepare for VAT and Excise Tax

Need to ensure right knowledge, systems and processes are in place

Dubai, UAE, 19 June, 2016:   The GCC Ministers of Finance held an extraordinary meeting on Thursday 16 June in Jeddah and approved in principle the Value Added Tax (VAT) and Excise Tax treaties. Some administrative matters still need to be resolved, notably with regards to the tax collection mechanism related to intra-GCC trade. The GCC Committee has been tasked to provide its recommendation by the end of summer in view of the formal announcement of the treaties.

The Excise Tax and VAT treaties constitute the common framework for the introduction of these taxes in the GCC which is expected to occur by 1st of January 2017 and 1st of January 2018, respectively. The treaties will form the basis for the issuance of national VAT and Excise Tax legislation by each GCC Member State. 

Commenting on this Jeanine Daou, Middle East Indirect Taxes Partner, said: “The introduction of VAT and Excise Tax constitute an important policy reform aiming to help GCC Governments achieve medium to long term social and economic policy goals, and reduce reliance on hydrocarbon revenues. Approval of the treaties is an important development as it sets out common principles that will guide the application of VAT and Excise Tax at a national level by each individual Member State. Companies should take action now, if they have not already, to prepare for the implementation of the new tax systems and be ready by go-live date.”

Upon the ratification of the treaties, each Member State will need to issue its own national VAT and Excise Tax legislation based on the agreed common principles. This will entail the issuance of national VAT and Excise Tax laws along with the implementing regulations in accordance with each Member State’s national legislative process. This should happen ahead of the expected go live date, allowing sufficient time for businesses to get ready. 

In any case businesses need to start preparing in advance to be able to comply with the new tax obligations including charging, collecting and paying VAT and Excise Tax to the Tax Authority in a timely manner. It is the right time to start creating awareness and increase knowledge throughout the organisation, as well as start assessing the potential impacts of the new taxes on the business, including impact on margins and cash flow. It is also essential to ensure the right systems and processes are in place to apply the tax correctly and generate the required reporting and documentation. 

The formal announcement of the GCC common VAT and Excise Tax treaties is expected now in the last quarter of this year and this will pave the way for the adoption of the new tax systems by GCC Member States by the expected dates. Businesses should start adopting VAT and excise tax compliant strategies now to ensure a smooth transition at a later stage.

VAT

The envisaged system is a standard fully-fledged VAT system that will apply at 5% across the GCC. The system will be based on a destination principle according to which VAT is charged at import and on local supplies of goods and services, and exports are subject to 0% (zero-rated). 

VAT is a tax on consumption. It is a transaction based tax levied at each stage in the chain of production and distribution. VAT is charged on supplies and is deducted on purchases, exception when exemptions apply. It is collected by business on behalf of the VAT authority, and businesses submit a periodic VAT return to the Tax Authority in which they calculate the net VAT amount to be paid or refunded.

VAT is a broad based tax and is charged on most supplies of goods and services. Traditionally, few sectors or supplies would be exempt, zero-rated or subject to special schemes, e.g. education, basic food, medical services, financial services, real estate sector. The VAT treaty should provide clarity around the treatment of these sectors by the GCC Member States and this will depend on several factors, including the local economic and social context and government objectives.

A registration threshold has been considered, based on which businesses exceeding a certain annual turnover threshold will be required to register for VAT purposes, whereas an option to register will allow businesses achieving a lower annual turnover to voluntary register for VAT. 

Accordingly, registered businesses will be required to charge VAT on their supplies, and will be entitled to deduct VAT incurred on their purchases, including capital assets and imports. Some countries introduced VAT Grouping provisions, allowing separate legal persons to act and be treated as a single taxable person for VAT purposes, subject to certain conditions being met. VAT Grouping may be seen beneficial for businesses (and authorities), mainly through reducing administrative burden as well as disregarding intra-group supplies for VAT purposes.

The VAT treaty will determine how and where intra-GCC transactions are taxed. In some economic unions such as the EU, a reverse charge mechanism applies whereby the intra-EU transactions are taxable in the country of the recipient, who is in charge of reporting the tax due to the authorities. This is subject to certain conditions and we would need to wait for the details of the treaty in order to better understand the exact treatment in the GCC.

VAT registered businesses will be required to comply with a number of VAT obligations, including: 

• To keep VAT books and records for a specific period of time, on paper or electronically, that must be accurate, complete and readable
• To issue VAT invoices for their supplies and keep VAT invoices obtained from their suppliers as a requirement for deducting VAT 
• To compute their VAT liability and submit a VAT return on a periodical basis (monthly or quarterly)
• To report all VAT on sales and purchases made in the period, including intra-GCC transactions, and calculate the net VAT amount to be paid or refunded 

Excise Tax

Excise Tax is a tax on consumption levied on specific goods. It is a single-phased tax, levied once at import or at production stage within the country, and is collected by businesses on behalf of the Tax Authority. Businesses submit Excise Tax returns periodically to the Tax Authority.

Standard Excise Tax systems features:  

• Different rates applicable on each category of excisable goods
• Excise Tax is levied on the excisable goods, both imported and locally manufactured
• Excise Tax is not effectively levied on exports
• Typically, certain transactions are exempt from Excise Tax, e.g. supplies to diplomatic missions
• Additionally, Excise Tax may be refunded in certain cases, e.g. exports of excisable goods 
• Excise Tax is normally suspended when excisable goods are located in tax warehouse. In such cases the Excise Tax shall be levied upon release of the excisable goods for consumption
• Tax Authorities will need to create an efficient inventory and movement control system to monitor the physical movement of excisable goods and tackle potential illicit trade. Best practices usually seek to implement electronic based systems supported by tax stamping policies to ensure compliance from the taxpayers
• Similarly to VAT, the Excise Tax treaty will determine the treatment of intra-GCC movement of excisable goods, which should be taxed in the place of consumption. There would be a need for common GCC mechanisms to collect and monitor the Excise Tax due in the appropriate jurisdiction

Businesses engaged in the import and/or local manufacture of excisable goods will be required to comply with a number of Excise Tax obligations: 

• To register with the Tax Authority. There is no threshold expected
• Keep Excise Tax records for a specific duration, on paper or electronically; records must be accurate, complete and readable
• Submit periodical tax returns, informative returns and specific Excise Tax reporting
• Comply with the inventory and movement control system, which may entail keeping and/or submitting additional documents related to the physical movement of excisable goods, particularly in the case of movements under Excise Tax suspension 
• Keep customs and transport documents as relevant to the movement of excisable goods, especially with respect to transactions subject to refunds and/or exemptions, or performed under Excise Tax suspension