Value Added Tax in the GCC. Insights by industry Volume 1 Introduction. Ninety years in the Middle East

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1 Value Added Tax in the GCC Insights by industry Volume 1 Introduction Ninety years in the Middle East

2 Deloitte Value Added Tax in the GCC Introduction Introduction 04

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4 Deloitte Value Added Tax in the GCC Introduction VAT, but why now? On June , ministers representing each of the Gulf Cooperation Council (GCC) Member States met in Jeddah, Saudi Arabia, to discuss the introduction of value added tax (VAT) in each of their nations. It was confirmed that during the meeting a multi-lateral agreement has been reached to implement the tax, but that the remaining details of the plan, or more specifically the GCC VAT Treaty, would be finalized at a meeting to be held in October this year. These developments mark the start of some of the most exciting, dramatic and far-reaching socioeconomic changes in the region since the discovery of oil reserves in commercial quantities during the 1960 s. GCC non-oil GDP share 2015/ Oil Saudi Arabia Non-oil This news on VAT is not new, however. Rumors have been circulating for many years, occasionally coming to a head but subsiding shortly thereafter, about multilateral and unilateral efforts to implement the tax. But whilst the demand for VAT was previously driven by an overarching fiscal reform agenda within which VAT would be introduced as a nice to have, the volatile hydrocarbon markets coupled with larger and relatively fixed public spending commitments have, arguably, turned domestic revenue raisers like VAT into a need to have for many United Arab Emirates Around the GCC, the dependence on oil as the principal contributor to GDP (and the public purse) differs quite substantially. The UAE, having pursued fiscal diversification policies for many years, generates around a third of its GDP via the oil economy. Kuwait on the other hand turns this ratio on its head; almost 65% of its national output is derived from the hydrocarbon industry. Whilst that is not the only measure of exposure to a challenging international oil market and the consequences for a domestic economy, the fact that hydrocarbons account for around 50% of GCC output on average provides the backdrop against which policy makers are now striving to make meaningful long-term changes Qatar Kuwait Oman Bahrain The new-normal for oil producing countries looks increasingly like US$40-60 per barrel, and as a result most countries in the GCC are now running deficits. Although these can be sustained, even in the long term in many cases (cash reserves in the GCC are estimated to exceed US$754 billion), policy- makers are faced with two options; cut spending, or raise new revenue on a sustainable basis. Cutting spending to any significant degree is unrealistic; the region is in growth mode and a range of important but costly programs of lasting significance are underway. In the alternative, imposing taxes even if only at a very low rate in a region that has historically remained a tax free outlier appears to offer the most palatable long term solution. And so to VAT VAT is a tax on consumption, not profits, and for many policy-makers it provides the preferred means of raising public revenue without sacrificing much private sector activity in the process. Essentially, introducing VAT is not a cost-less exercise economically speaking, but rather it is less costly than introducing a corporate or personal income tax. Across the OECD, VAT represents around 6.5% of GDP and approximately 34% of total taxes raised. Recent estimates have indicated that in the GCC a VAT at 5% would represent around 1.4% of GDP, a figure which reflects on the relatively large share of public participation in the 6 economies and the low rate being considered. Indeed, a rate of 5% is around a quarter of average rates in the OECD (19%). To some extent, however, the rate discussion is somewhat irrelevant. The tax plans being deployed by GCC policymakers are designed to enable long term fiscal sustainability and stability; this is not an exercise in short-termism. Creating an effective tax framework, creating new administrative capacity and deploying best-in-breed administration systems is, even at a low VAT rate, a vitally important step along the road to a taxing environment that serves the needs of a fully developed non-oil economy, in time more effectively. But why VAT? VAT can be found in more than 160 countries today. Recent introductions of the tax into major economies have taken place in Malaysia (2015) and China (2014), whilst all of the EU Member States, New Zealand and Australia have been operating the tax or its equivalent, Goods 06

5 Deloitte Value Added Tax in the GCC Introduction Fiscal break-even 2015/16 (US$ barrel) Jan Bahrain Source: IMF, OPEC Kuwait Oman Qatar Saudi Arabia and Services Tax (GST), for decades. It is relatively simple to administer due to its design around self-assessment principles, and the fairly straight-forward nature of the underlying tax code compared to other tax types. A broad-based, low-rate design also limits the extent to which investment and spending decisions are distorted. FTI cruide oil price (US$ barrel) On a more basic level, the preferred credit-invoice version of VAT works by having all VAT registered suppliers charge VAT on most if not all of their transactions, whilst allowing registered purchasers to credit for VAT that they have paid using invoices issued by suppliers as evidence for that claim (i.e. VAT should be neutral between VAT registered businesses). The VAT charged by suppliers is paid over to the tax authority, whilst VAT credits for VAT paid out by those suppliers is claimed by them, effectively being netted off against the VAT collected, at all stages of production. Indeed, the design of VAT is such that it is the final consumer of goods and services, generally in their private Jan UAE 71.8 capacity, that should bear the total cost of VAT accruing along the supply chain; VAT charged by the final supplier in that chain is paid over to the authority but cannot be recovered by the person to whom it was charged. Details, details, details! Although the basic theory behind the operation of VAT is conceptually simple, in practice the rules can often be quite complex. In some cases this complexity is required in order to limit or prevent instances of avoidance or evasion with the intent of the tax. In other cases it is associated with the existence of exceptions from the normal operation of the tax, those exceptions being deliberately designed to achieve certain social or economic ends. These exceptions are often aimed at neutralizing the potential regressive nature of the tax, and ensuring that the primary focus is on consumers discretionary spend, rather than the essentials for life. Importantly, however, self-assessment requires that businesses get it right in VAT is a tax on consumption, not profits, and for many policy makers it provides the preferred means of raising public revenue without sacrificing much private sector activity in the process. Essentially, introducing VAT is not a cost-less exercise economically speaking, but rather it is less costly than introducing a corporate or personal income tax. 07

6 Deloitte Value Added Tax in the GCC Introduction order to avoid penalties; getting it right can be more difficult for some than others. Business impacts And so with many predicting the progressive implementation of VAT throughout the GCC from January , the time does appear to be upon us all to start looking in detail at the potential impacts it will have on businesses, whether from an organizational, operational, commercial or financial perspective. VAT is often described as being cost-less for businesses. While as a general statement this may have an element of truth, in many (though not all) cases it is not cost-less from the perspective of a business preparing for change and managing their new obligations. To help businesses in the GCC understand the potential impacts of the implementation of, and operation under, VAT, Deloitte Middle East is issuing a number of short papers under a number of volumes designed to provide a greater understanding of the impacts of the tax on specific industry types. We try, where possible, to outline the scenarios which are most likely and possible responses to them in order to give a fuller flavor of the changes to be expected. This first volume provides an overview of how businesses should go about shifting from thinking to implementing, and putting themselves in a position to submit accurate, on-time VAT returns. In addition it looks at the retail, automotive, Meetings, Incentives, Conferences and Events (MICE) and financial services and insurance industries. Contacts Should you have any questions about these papers or just want to speak to us, please feel free to contact Justin Whitehouse, Middle East Indirect Tax Leader on the details listed below. If you want us to consider your particular industry as part of our series, we would be pleased to take your suggestion. Justin Whitehouse Indirect Tax Leader Tel +971 (0) jmwhitehouse@deloitte.com 08

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8 This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter. Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterrupted presence since Deloitte provides audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has also received numerous awards in the last few years which include best employer in the Middle East, best consulting firm, the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSR integrated organization Deloitte & Touche (M.E.). All rights reserved.