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Differing VAT rates complicate intra-GCC trade

GCC VAT Reuters/Saudi Royal Court
GCC summit held in Saudi Arabia: The six-member bloc in 2016 signed an agreement to levy 5% VAT on sales within their respective countries
  • Saudi has trebled VAT rate to 15%, Bahrain has doubled to 10%
  • No GCC entity that polices enforcement and compliance
  • Qatar likely to introduce VAT by end of 2023

Differing rates of VAT across the GCC are complicating intra-regional trade and adding costs to exporters and importers, according to experts.

The six-member bloc in 2016 signed an agreement to levy 5 percent VAT on the sale of goods and services within their respective countries.

Saudi Arabia and the UAE were the first to implement VAT, in January 2018, while Bahrain and Oman followed suit in 2019 and 2021 respectively. Qatar and Kuwait have yet to do so.

In July 2020 Saudi trebled its VAT rate to 15 percent, while Bahrain doubled its levy to 10 percent in January 2022.

“Instead of a convergence, there was a divergence in VAT,” said Thomas Vanhee, a partner at Aurifer tax consultancy in Dubai.

“It’s complicated because there is no entity at a GCC level that polices enforcement and compliance.

“Ideally, there would be a court of justice or equivalent tribunal that would rule on interpretations of the provisions within the varying VAT rules and that would then apply across all GCC countries.”

Qatar is likely to introduce VAT by the end of 2023, said Vanhee, although the country is under no financial pressure to do so from a state revenue perspective.

According to data from the Observatory of Economic Complexity and Bahrain’s government, intra-GCC exports totalled at least $85.3 billion in 2021.

This excludes Bahraini exports to Kuwait, Qatar and Oman, and Qatari exports to Bahrain due to the unavailability of data.

Thomas Vanhee, a partner at Aurifer tax consultancy, said a court of justice could help apply VAT rules across GCC countriesSupplied
Thomas Vanhee, a partner at Aurifer tax consultancy, said a court of justice could help apply VAT rules across GCC countries
VAT explained

Suppliers of goods and services are generally responsible for collecting VAT from customers.

This is straightforward when suppliers sell directly to consumers, but the situation is more complicated when multiple entities from different tax jurisdictions are involved in a transaction, a PwC report warns.

This is becoming increasingly common in the Gulf as ecommerce grows. Sector annual revenue will near $50 billion by 2027 from an estimated $28.5 billion in 2022, Statista forecasts.

A sale from one GCC country to another would be zero-rated in terms of VAT in the origin country, with the buyer paying the applicable VAT rate in the country of destination.

These differences can also affect demand for goods and services from different countries and boost exports for those with lower VAT rates, “as consumers seek to take advantage of lower prices”, said Maher El Aawar, a tax partner at PwC in Dubai.

For example, a Saudi resident could go to the UAE to buy a particular product at 5 percent VAT versus 15 percent at home.

Likewise, UAE or Saudi residents could visit Kuwait or Qatar to buy goods that are VAT-free.

However, typically any goods worth more than around $2,700 must be declared upon entry to the country of residence and the local VAT rate will be levied.

“Ecommerce is challenging from a customs and a VAT viewpoint,” said Vanhee.

“A UAE-based seller may wrongly only levy 5 percent VAT on a sale to a buyer based in Saudi Arabia and the buyer then doesn’t report the purchase.”

PwC’s El Aawar said: “Differing VAT rates can potentially impact the competitiveness of businesses operating in the region.”

Companies “may need to invest in additional resources to manage the complexity of complying with different VAT regulations, which can increase administrative costs”, he added.

As well as varying VAT rates, GCC countries also apply the tax to different products and services.

For example, healthcare is VAT-exempt in the UAE but is applicable in Saudi Arabia for medical services to non-Saudis.

Meanwhile, basic food items are VAT-free in Bahrain and Oman but subject to the tax in the UAE.

Cashflow

Differing VAT rates can hurt companies exporting within the GCC from a cashflow perspective, said Andrew Bohnet, founder of Britain’s Innovate Tax consultancy, which has implemented VAT reporting systems for various Gulf corporations including Saudi Telecom Co, Emirates Group and Dubai’s Sukoon Insurance.

Unlike in many European Union countries where companies can immediately recover VAT for business-to-business sales, in the Middle East so-called recoverability of a positive VAT return can take significantly longer, for example.

That means companies can have a sizeable chunk of their cash tied up in pending reimbursements from the tax authorities, which take even longer when goods go cross-border.

Saudi Arabia is the strictest in terms of enforcing VAT, with the UAE second, while Oman and Bahrain are the least stringent, said Vanhee and Bohnet.

Raising VAT further would be unpopular, so Saudi Arabia has focused on maximising compliance.

“In Saudi, VAT auditing is extensive and there have been a lot of fines, which have increased tax revenues significantly without having to further increase the rate of VAT,” Bohnet added.

“A further advantage to fining companies is that you are fining the company for their mistakes and not the person who buys the final product, which has a lot less public discord.”

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