The Introduction of VAT in GCC

2 The Introduction of VAT in GCC

3 OUR GUEST SPEAKER Finbarr Sexton Partner Tax Advisory Ernst & Young Qatar

Today s agenda 1 GCC Overview 2 Why VAT 3 GCC VAT and its key features Page 4

GCC Overview 1

Economic and fiscal drivers for changes in GCC Continuing low oil prices, plans to boost economic growth and international regulatory changes are driving governments to implement tax law changes and enforcement practices. 1 2 3 4 5 New income tax laws Introduction of VAT Other taxes and fiscal measures More stringent tax enforcement BEPS and FATCA Corporate tax in UAE, and Business Profits Tax (BPT) in Kuwait Higher tax rates in Oman WHT in Kuwait Broader definitions of PE in Saudi Arabia, Kuwait and Iraq GCC framework agreed and passed Confirmation of local plans by all GCC countries, for introduction from 1 January 2018 VAT implemented in Egypt in 2016 New tax on vacant urban land in Saudi Arabia New excise duties on unhealthy (alcohol and sugar-based) food products Increased desktop or field audits of source documentation during tax assessment process Deemed profit filings discontinued or discouraged Implementation of TP regulations or principles BEPS information exchange initiatives Foreign Account Tax Compliance Act (FATCA) rules and measures in most GCC countries We are likely to see considerable tax activity in GCC as governments introduce a broad range of changes to tax laws, regulations and tax practices to increase tax yields and broaden their revenue base. Page 6

KSA - Economic and fiscal landscape: Overview Non-oil government revenues: SAR1,000b (US$266.67b) by 2030 from SAR163b (US$43.47b) in 2016 Private sector contribution to gross domestic product (GDP): 65% by 2030 from 40% in 2016 Annual Umrah visitors: 30m by 2030 from 8m in 2016 Three pillars of Saudi Vision 2030 Non-oil exports as percentage of GDP: 50% by 2030 from 16% in 2016 Public Investment Fund assets: SAR7,000b (US$1,866.69b) by 2030 from SAR600b (US$160b) in 2016 Power generation capacity: 75GW by 2030 from 57GW in 2016 Saudi Arabia remains at the heart of the Arab world. Saudi Arabia can become a global investment hub. Saudi Arabia has an ideal location as a trade hub. Saudi Vision 2030: highlights Unemployment rate: 7% by 2030 down from 11.6% in 2016 Female labor force: 30% by 2030 from 22% in 2016 Page 7

Qatar - Economic and fiscal landscape: Overview Qatar s second national development strategy 2017 22 is under development, to be published by Q2 2017 Continued focused on diversification of economy US$200b infrastructure program continues advance of 2022 World Cup National Oil Company (Qatar Petroleum) continues international expansion through acquisitions, JVs, investments in liquefied natural gas (LNG) through Qatar Petroleum International (in Cyprus, Mozambique, and others) Greater focus by Qatar sovereign wealth fund on US, Asia and emerging markets as it pivots from Europe Current trade blockade and political dispute hurting the economy and a significant source of uncertainty Real estate Transport Utilities Oil and gas Industrial Petrochemicals Investment spending by sector (2015 18) (Percent shares shown) Total 45.50% 100% 29.40% 12.40% 9.20% 2.90% 0.50% Source: MEED Projects and QNB Economics analysis The Qatar National Vision aims at transforming Qatar into an advanced country by 2030, capable of sustaining its own development and providing for a high standard of living for all of its people for generations to come. Page 8

Kuwait - Economic and fiscal landscape: Overview The fiscal deficit is expected to narrow in 2017 as the price of oil gradually improves and the Government implements fiscal reforms. In line with the Vision 2035 strategic plan, capital spending on large infrastructure projects is expected to remain unaffected. However, delays are expected in the implementation of recently awarded projects, and some projects may be re-tendered. The five-year plan for 2015 20 envisages capital spending of US$112.7b on large projects. The Government s planned capital spending of KWD34b (US$111b) through 2020 includes significant private investment. The Kuwait Authority for Partnership Projects (KAPP) has awarded US$6.6b worth of PPP contracts. The Government is looking for additional sources of revenue through the introduction of new taxes, reduction of subsidies on fuel, electricity and water, as well as foreign investment. Page 9

Oman - Economic and fiscal landscape: Overview Positive message of continued spending by Government to boost economic activity Planned austerity measures to continue GDP expected to increase with 2% growth in oil and gas and 4.7% in non-oil sectors Focus on diversification of economy managed by a new Tanfeedh (performance management and delivery) unit Public-Private-Partnerships (PPPs) for execution of major projects PPP framework expected in 2017 Amendments to Oman Income Tax Law (ITL) New Foreign Capital Investment Law expected in 2017 VAT and excise tax to be introduced as part of GCC initiative Impact of declining oil prices Projected deficit of OMR3b (US$7.8b) Spending of OMR11.7b (US$30.4b) Oil price at US$45 per barrel Oil production at 990,000bpd US$ per barrel Oil price volatility of Oman crude (US$) Page 10

UAE - Economic and fiscal landscape: Overview Growth is expected to be reaching 3.6% in 2018 Oil production is expected to rise due to investments in oilfield development Non-oil growth is also projected to rebound due to; Expected improvement in oil prices and its positive effects on confidence and financial conditions dampen the effects of fiscal consolidation; Megaproject implementation ramps up ahead of Dubai s hosting of Expo 2020. UAE is expected to implement a GCC-wide value added tax (VAT) by 2018 New bankruptcy and investment laws are also being prepared with a potential positive impact on investment Page 11

Why VAT in the GCC 2

Key reasons why VAT is going to be introduced in the GCC With the drop in oil prices, GCC economic growth went down to just 2% in 2016 from a peak of 8.8% in 2011. The forecast for the next three years of the aggregate GCC economies real GDP growth is approximately 3.2%. 50 41.4 46.6 23.2 32.8 Declining oil prices have resulted in a steep fall in government revenues across GCC economies. 0 Government revenues as a percentage share of GDP Saudi Arabia GCC average (unweighted) 2013 2016 Kuwait, Qatar and Saudi Arabia have moved from budget surplus to deficits in the last four years Heavy reliance on hydrocarbon revenues means the tax burden has been very light across the GCC region, relative to other jurisdictions (2% as against the G20 average of 29.1%) Overall non-oil tax burden as percentage share of GDP Africa 22.2 GCC 2.0 MENA 6.2 Asia-Pacific (APAC) 21.1 Europe 36.2 North America 29.1 OECD 34.3 G7 average 35.5 G20 average unweighted 29.1 Page 13

With the drop in oil prices, GCC economic growth down from a peak of 8.8% in 2011 to just 2% in 2016 Aggregate GCC economies real GDP growth; year-on-year % change; including 3 year averages 12 10.1 10 9.0 8.8 Forecast 8 6 4 2 6.0 6.8 4.1 6.1 4.6 5.7 3.4 3.2 3.8 2.0 1.4 3.3 3.2 3.2 0-2 -2.1-4 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source; EY Knowledge analysis; Oxford Economics % change y/y 3 year average growth rate - to year stated Page 14

Oil price declines have led to a precipitous drop in government revenues across GCC economies General government revenues as a % share of GDP across GCC economies; 2013 compared with 2016 80 72.5 70 Largest percentage point 60 50 40 30 20 24.6 21.5 52.8 49.9 50.0 38.0 35.1 41.4 40.8 23.2 26.2 46.6 32.8 10 0 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Source; EY Knowledge analysis; IMF World Economic Outlook 2013 2016 GCC average (unweighted) Page 15

Kuwait, Qatar and Saudi Arabia have move from budget surplus to deficits in the last four years 30.0 Annual government balance as a % share of GDP across GCC countries 26.1 20.0 19.3 10.0 6.5 0.0-10.0-3.4-8.4-0.3-8.3-5.1-6.9-20.0-14.2-21.1-16.8-30.0 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates 2013 2016 Source; EY Knowledge analysis; Oxford Economics Page 16

Heavy reliance on hydrocarbon revenues means the tax burden has been very light across the GCC, relative to other jurisdictions Overall tax burden as percentage share of country GDP; for GCC only non-oil total tax burden shown, other country groups are total tax burden as % share of GDP. Illustrates considerably lower standard tax burden in GCC Africa GCC MENA Latin America and the Caribbean APAC Europe North America OECD G7 AVERAGE G20 average unweighted 2.0 6.2 21.7 21.1 22.2 29.1 29.1 34.3 36.2 35.5 0 5 10 15 20 25 30 35 40 Source; EY Knowledge analysis; OECD; IMF Article IV consultations; IMF staff paper: Diversifying Government Revenue in the GCC: Next Steps, October 2016 Page 17

Current status on GCC VAT The current challenging environment, driven by low oil prices, has resulted in major difficulties for companies and governments in the region. Governments are facing budget deficits that will need to be funded. Government revenue diversification is a top priority, and the introduction of VAT is one of the key initiatives for action. In June 2016, government officials of the GCC have formally approved the implementation of VAT in the region. They indicated that the target date for the introduction of VAT is January 2018. The principles in a GCC VAT system will follow a European Union model to reflect that the new VAT regime will follow the direction of the GCC Customs Union a single economic zone for the movement of goods and services. KS A 20 April 2017: Publication of GCC VAT Framework Agreement 30 May 2017: KSA VAT law published for comment 19 July 2017: KSA VAT Implementing Regulations was published for comments 28 July 2017: KSA VAT Law was published in the Official Gazette 23 August 2017 : UAE MoF released the VAT law GCC 1 January 2018: Target date for the introduction of VAT in KSA and Jan 2018 UAE 5% During 2018: Other Member States will introduce VAT The VAT framework has entered into force and will be imposed in the GCC as of early January Each Member State will incorporate the provisions of the VAT framework into their domestic VAT law and expand on these provisions through VAT regulations The supply of goods and services will be taxed at a 5% rate of VAT, except the following: 0% VAT rate for exports, basic and certain goods and services Exempted goods and services Page 18

GCC VAT Where are we? Domestic VAT The GCC VAT Framework Agreement will be the overarching legislation, and each GCC member state will adopt its provisions into its own domestic VAT law. Ongoing work All GCC countries are working to implement VAT by 1 January 2018, to avoid distortions arising from intra-gcc trade. Distortions may occur when one country has implemented VAT, but another country has not and, therefore, does not have mechanisms to deal with charging VAT from business to business and onward to the consumer. Compressed window Initially, GCC countries had committed to giving businesses 18 months to achieve compliance by 2018. However, this time frame has now been compressed to a far shorter duration, due to delays in ratification of national VAT laws Ratification GCC VAT Framework Agreement finalized Implementation All GCC states must implement VAT in 2018. 2016 2017 2018 Page 19

GCC VAT and its key features

Key features of GCC VAT The GCC VAT Framework Agreement 1. EU type VAT model as GCC is a common economic zone. 2. Framework agreement as overarching legislation allows for limited deviations. 3. Each GCC member state will adopt the framework provisions into its own domestic VAT law. Page 21

Key principles of GCC VAT VATable supplies of goods and services Restriction on deduction of input VAT on exempted supplies and nonbusiness expenses A single standard VAT rate of 5%, as well as 0% and exempt 0% tax on exports VAT exemption to be narrow government, health and education Financial services partly exempt Reverse charge principle to apply to intra-gcc supplies of goods and services Imports VATable at the point of entry into the GCC Mandatory US$100,000 and elective US$50,000 VAT registration thresholds What the key principles of the proposed system are likely to be Page 22

Key features of GCC VAT Intra-GCC supplies Single GCC territory concept VAT design constrained by existence of customs union Reverse charge mechanism to account for intra-gcc supply of goods and services Imports VAT due at point of entry VAT return and payment: Tax period shall not be less than one month; deadline for submission of returns subject to national law Exceptions: Free zones 0% rated national law will need to address VAT requirements for businesses operating in free zone Customs warehousing arrangements or other suspension arrangements Page 23

Salient features of GCC VAT VAT regimes: 5%, 0%, exempt VAT registration annual sales thresholds Mandatory: US$100,000 Optional: US$50,000 Expected tax period: two calendar months or quarterly, depending on GCC states (in some instances, the tax period may be for one month only) Electronic invoicing: Saudi Royal Court Decree No. 24957 mandated that private sector keep accounting records and apply electronic invoicing systems Fines and penalties include the following: Failure to register Failure to pay taxes on scheduled dates Filing false or misleading data Failure to submit VAT declaration Record-related fines Tax evasion-related fines Page 24

Salient features of GCC VAT Exports Must be transported outside the GCC 0% rate on all goods and related services Records of export Evidence of export Free zones Free zones are special areas within the customs territory of each state generally seen as foreign territories for customs duty purposes. Free zones established by national law and operating within a gated zone are likely to be treated as outside the scope of GCC VAT and are likely to be defined as designated zones. Service free zones and special economic zones (SEZs) that are likely to be within the GCC will be subject to VAT. Page 25

Transitional provisions Saudi Arabia Tax Law Grandfathering provision Any Supply of Goods or services made in respect of a contract which does not anticipate the application of VAT to the Supply may be treated as zero-rated by the Supplier until the earlier of the time the contract expires, is renewed or 31 December 2018 provided that: the contract was entered into before 30 May 2017, the Customer is entitled to deduct Input Tax in respect of the Supply of Goods or services in full or is an Eligible Person entitled to a refund of the Tax the Customer provides a written certification to the Supplier that Input Tax is able to be deducted or refunded in full on the Supply. Page 26

Transitional provisions United Arab Emirates Does not explicitly provide for grandfathering of contracts The Executive Regulations will provide special provisions where a contract has been concluded before the effective date of the Decree-Law but the supply under the contract is wholly or partly made after the effective date of this Decree-Law In the GCC VAT Framework Agreement, supplies made after the effective date will be subject to VAT Agreed price is inclusive of VAT if: Contract has been concluded before the enforcement of the VAT Decree regarding a supply to be wholly or partly made after the effective date of the VAT Decree There was no clause related to VAT on the supply VAT shall be calculated on the supply regardless of whether it has been taken into account when determining the Consideration for the supply VAT will apply if supplies are made after the effective date of the VAT regime notwithstanding if the invoice was issued or the payment was made before such effective date Page 27

Financial services overview GCC Framework Broadly two models: Narrow exemption model Asia Pacific (e.g. Australia, New Zealand, South Africa, Singapore and Malaysia) Broad exemption model UK/EU, Canada Under the GCC Framework Agreement, the GCC has left it to each of the member states to decide on their own treatment of financial services. Likely that GCC states will adopt the narrow exemption model. Implications include partial exemption calculations and single / multiple supply analysis among others. Additionally, likely two domestic VAT laws in Qatar, when VAT is introduced in this jurisdiction. Page 28

VAT treatment banking / asset management Service Core banking services Investment services and asset management activities Current view Fee-based financial services are likely to be taxable at the standard VAT rate of 5%. Margin-based financial services / products are likely to be exempt (without recovery). Advisory services likely to be taxable at the standard rate. Share trading and issue of shares, bonds and other securities are likely to be exempt. Private Equity Advisory services likely to be taxable at the standard rate. Share trading and issue of shares, bonds and other securities are likely to be exempt Islamic financing Treated similarly to conventional banks i.e. core finance transactions including a fee or profit mark-up are exempt. Transaction elements and agreements that purchase and sale of movable and immovable assets are taxable at the standard rate. Page 29

VAT treatment insurance Service Current view Life insurance Exempt (long-term test). May be issues around what constitutes life insurance. Non-Life insurance Non-life insurance is likely to be taxable at the standard rate. Islamic insurance overview Non-Life (general) Takaful services Takaful (General and Family (Life)) and ReTakaful arrangements are to be treated in the same way as conventional non-life and life insurance and reinsurance arrangements. Same liability as conventional insurance i.e. taxable at the standard rate. Page 30

Issues and impacts Islamic Finance Under Islamic banking principles, consideration for financial services may take the form of profit share, spread, dividend or other Islamic sharia compliant consideration. Commercial reality of the supply and equal tax treatment Holding Companies Possible queries from GAZT and FTA querying right to deduct VAT charged on costs Economic activity and trade licenses Review of cost structure VAT grouping unlikely for a passive holding company and excluded from voluntary registration. VAT grouping Forming a VAT group is possible subject to criteria similar to the UK. Establishment only included in VAT group Other issues Permanent establishment risks and potential force of attraction principle Single / multiple supply issues Page 31

Issues and impacts Insurance services / products Some insurance services / products can be zero rated in particular circumstances e.g. non-gcc insured Definition of life insurance Valid VAT invoices necessary, as only policy documents are presumably used instead at the moment. VAT liability of claim recoveries between insurance companies still to be determined e.g. insurance company A assumes the right of the insured person of insurance company B. Reinsurance services / products In general, supply of general reinsurance to a direct insurer belonging in UAE will be treated as taxable at the standard rate of 5%. Life re-insurance services will be exempt from VAT. Reinsurance cover is not treated as supplied directly in connection with goods or land. Input tax recovery will depend on the nature of the insured party Page 32

GCC transformation roadmap

Typical challenges and risks we identify in different business sectors 1. Working capital and cash flow 2. Penalties, cost of non-compliance and non-recoverability of VAT 3. Operational readiness of the extended organization (suppliers to customers) 4. Administrative burden 5. Scarcity of resources Page 34

Impact of VAT across the organization VAT implementation challenges Finance and administration Information technology (IT) Procurement Business Human resources Compliance Product offerings and marketing Cash flow VAT refunds Input tax recovery Tax payments and accounting periods Imported services System changes System replacement Compliance Auditability Tax engines Multiple transaction types Vendor registration Preferential treatment Business structure Efficiency Reputational risk Large number of stakeholders Fringe benefits Communication Staff education and training Policy and procedures Group registration Compliance Tax authority audits Monthly VAT declarations Pricing Contracts Competitor distortion Page 35

Impact of VAT on your IT landscape System architecture Key tax master data Tax logic Invoicing and tax reporting Is business-efficient Supports legal tax requirements Supports multiple sets of books Includes inventory locations and functionality to use Mirrors the organizational structure, including VAT registrations Customers: VAT registration numbers Tax classification Materials: VAT rate Tax classification Tax codes: Sufficient tax codes Proper setup to drive the reporting process Each transaction must receive correct tax treatment for Accounts Payable (AP), Accounts Receivable (AR), intercompany, etc. Sufficient data elements need to be incorporated in logic to support business scenarios Facilitate collection of data elements where complex group VAT registrations exist Alignment between e-invoicing, product codes, and integrated and shopping baskets Invoices template should take into account legal requirements. The compliance process should take advantage of standard enterprise resource planning (ERP) functionalities to prepare: VAT returns Listings VAT accounting (sales and purchase ledger) Transactional data sets to support VAT audits VAT sensitization of the ERP Master data Transactional data Accounting Products Sales order Billing Customers Financial postings Reporting Purchase order Invoice receipt Vendors AR and AP tax logic Page 36

Stakeholder Engagement Framework and Communication Plan to own and effectively transition to VAT The primary objectives of the Stakeholder Engagement Plan is to: Provide Stakeholders with context for the change and communicate the end-state and the road ahead Promote involvement by providing opportunities for Stakeholders to contribute feedback/input Engage Stakeholders to understand and action changes (for example to supplier contracts or Tax registration) Stakeholder Engagement Plan Communication Plan Transition Plan & Stakeholder Acceptance Familiarization Sessions Training Sessions Testing & Acceptance Operate Training & Procedures Supplier Roundtables Supplier Roundtables/ Customer Comms Contractual changes Feedback & Learn 37

How to prepare for VAT

Survey of VAT implementation preparedness of companies operating in the GCC states EY conducted a survey among companies with operations in the GCC with more than 500 respondents and asked three critical questions to determine their preparedness for GCC VAT: How prepared is your business for VAT introduction on 1 January 2018? On which area of your business are you most focused when preparing for the introduction of VAT? How connected is your headquarters ( if headquartered outside of KSA) with your Middle East entities in preparation for January 2018? The results were alarming, with 50% of businesses surveyed reporting they have not started preparations for VAT. The survey was conducted in December 2016. Page 39

VAT implementation preparedness of companies operating in the GCC How prepared is your business for VAT introduction on 1 January 2018? 11% 4% 6% 50% A B C D E A We have not started any preparations. 50% B We have studied some of the new VAT provisions. 29% C We have had a workshop with stakeholders. 6% D We have conducted an impact study. 4% E We have considered changes needed to our ERP system. 11% 29% Page 40

VAT implementation preparedness of companies operating in the GCC On which area of your business are you most focused when preparing for the introduction of VAT? 17% A Compliance 52% 10% 52% A B C D E B Procurement 8% C Education and training 13% D Customer and vendor pricing 10% E ERP system readiness 17% 13% 8% Page 41

VAT implementation preparedness of companies operating in the GCC How connected is your HQ with your Middle East entities in preparation for 15% January 2018? 29% 7% 16% A B C A No HQ visibility 29% B Partial HQ visibility 33% C Full HQ visibility; Middle East entities leading all activities 16% D Full HQ visibility and involvement for enterprise changes (e.g., ERP); Middle East entities leading all other activities E Fully connected 15% 7% 33% Page 42

How should organizations prepare? Preparation roadmap Start VAT workshop VAT impact study VAT plan developed Execution implementation and testing VAT-ready Supply chain Systems Compliance Change management Tax and finance Sourcing strategy Terms and conditions of existing contracts Negotiations Payments processing Manufacturing, sales and distribution ERP system capabilities System changes Transaction auditability Tax automation VAT registrations obtained Transitional provisions Return reporting and documentation Testing Staff training Communication Organizational structure Controls Impact analysis and tax positions Working capital management Change management Page 43

Excise tax

Excise tax What is excise tax? Excise tax is a tax on the production, sale or consumption of a commodity in a country. Excise tax will be levied at the import stage or at the production stage of the products within the country. The tax will be applied to a narrow base of goods that are primarily seen to have a level of harm associated with their consumption. These goods include tobacco and sugar-sweetened beverages. Page 45

Subject goods and applicable rates An illustration of the rates Soft drinks Energy drinks Tobacco and its derivatives 50% 100% 100% Page 46

Ad valorem tax based on retail price Ad valorem tax excise tax will be based on retail selling price of the goods and articles. Ad valorem tax = number of units or other measurements x selling price of any specific value per unit x ad valorem tax rate. How will the retail price be set? Price set by importer or producer of the relevant excise or selective goods, or set in accordance with standard prices that are agreed to by tax authorities in member states, whichever is higher In terms of concentrates, final product quantity calculated as the equivalent amount for multiplying concentrates amount by four Page 47

Persons liable to excise tax On domestic or local articles Manufacturer Producer Owner or person having possession of articles removed from the place of production without payment of the tax On imported articles Importer Owner Persons found in possession of articles that are exempt from excise taxes, other than those legally entitled to exemption Page 48

Time of payment On domestic products Before removal from the place of production On imported products Before release from the customs' custody Page 49

Designated Zones in the UAE Fenced free zones in the UAE, which meet certain conditions or areas, specified by the Federal Tax Authority which have security measures in place to restrict the entry and exit of individuals and the movement of goods to and from these areas may qualify as a Designated Zone. Goods stored, preserved or processed in such Designated Zones or transferred between the Designated Zones will not be subject to excise tax until the goods are released for consumption in the UAE. Page 50

Questions Page 51

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