July 17, 2019

GCC VAT – same base, different faces

With the introduction of VAT in Bahrain from 1 January 2019, half the members of GCC have now brought VAT on stream. And already, differences have emerged in the way it is being implemented in different countries. Given that all six GCC countries have jointly decided to introduce VAT, why are there so many differences? This is a question that we get from businesses which are operating in multiple GCC countries. Here I will attempt to explain why.

At the base of GCC VAT is the GCC Framework, which is an agreement signed by all six countries. Each country has then developed its own laws and regulations and also issued guides, clarifications and so forth, all of which have to adhere to the principles set by the Framework.

The Framework uses both “shall” and “may” when it lays down its principles. In other words, the Framework mandates certain rules that all countries must follow while, for certain other matters, it gives discretion to individual countries. And in certain other areas, the Framework lays down only the broad principles. Then there are other areas where the Framework is silent.

For example, the Framework mandates the VAT rate (5%) which all countries must follow. In terms of taxable, exempt and zero-rated supplies, some are mandated in the Framework while others are left to the discretion of the countries. In general, VAT treatment of the areas which affect inter-GCC and international trade and transportation are mandated in the Framework to ensure consistency across, while that of certain other sectors that are largely localized (such as education, healthcare, food items) are left to the discretion of the individual countries. In certain matters such as the contents of a VAT return, the Framework is silent.

Now let us look at how each country will treat the areas which are left to their discretion. A number of factors such as those listed below will impact how they determine their treatment of such cases.

  • The existing tax systems and practices in the country – Saudi Arabia has had a tax department (GAZAT) in existence for a while, while the UAE had to create FTA from scratch when VAT was introduced. While having an existing tax system gives KSA a head-start from the rich experience and data it has gathered over the years, the ability to start something completely afresh gives the UAE more flexibility and freedom while developing VAT rules, systems and processes.
  • The economic status of the country and the relative importance of different industries and sectors – A country may want to encourage certain industries/sectors through provision of special VAT treatments. For example, the UAE was prompt in introducing a tourist refund scheme and special rules around refund for MICE activities precisely because these activities are very important for the UAE economy.
  • Social and political considerations – As an example, the Framework refers to a list of 100 basic food items and provides discretion to each country in determining their VAT treatment. Bahrain has decided to VAT-exempt the list of basic food items while the UAE and KSA have decided to tax them at standard rates. Such decisions may have been borne out of social and political considerations, among others.
  • People – The backgrounds and individual differences of the people who are working behind the introduction and management of VAT legislation and systems also impact how rules are interpreted, decisions are made and systems and processes are developed. The differences in interpretation can even affect areas which are mandated by the Framework because the Framework is a high-level document while the laws and regulations are much more prescriptive.

These factors help explain why the rules are not fully aligned among different countries. A complete alignment may in fact not even be in the best interests of each country as the countries will be forced to accept tax rules which are misaligned with their economic, cultural, social and political realities and objectives.

Before I conclude, let me draw your attention to a guide that we have published “At a Glance – VAT in GCC” which provides a high-level overview of the major VAT rules of each country in the GCC. It is a downloadable document and is available here.

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