GCC Countries to Implement VAT in 2018

The six GCC countries are planning on implementing the Value-Added Tax (VAT) starting January 2018. The GCC states include the United Arab Emirates (UAE), Saudi Arabia, Bahrain, Qatar, Kuwait and Oman.

The first announcement concerning VAT proposal was made in early 2016. As it is quite complex to apply it GCC-wide, it took some time for all members to be on board. Now that there is unanimous agreement, it will become a reality in less than 10 months.

The declining prices of oil has significantly impacted the revenues of GCC countries. So in an effort to increase non-oil revenues during a time of economic slowdown, the VAT discussion came to being.

Each country in the GCC is unique and VAT laws will likely mirror local conditions. While the unified agreement aims to introduce VAT in a coordinated fashion, it doesn’t necessarily mean that the laws will be the exact same in every nation.

None of the countries have shared the official laws as of yet so there remains much ambiguity.

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What is VAT?

VAT is a consumption tax on goods and services that are sold and bought for use or consumption. Imports are subject to the tax, while exports and international services are not. There are more than 150 countries around the world using this type of tax.

How much will the VAT be?

The GCC nations are expected to introduce a 5 per cent VAT.

When will it come into effect?

The proposed starting date is January 1, 2018. However, in earlier announcements, UAE Minister of State for Financial Affairs Obaid Al Tayer stated that GCC countries will have a year until January 1, 2019 to implement the VAT. This is in line with Bahrain’s Information Affairs Minister Ali bin Mohammed Al-Romaihi’s announcement last week that they are expecting to implement it in mid-2018.

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Why is the GCC implementing a VAT?

Due to finances strained by low oil prices, GCC countries are looking for ways to increase profits through non-oil revenues. The VAT will allow the six members to maintain economic growth and will contribute to the continued provisions of public services.

According to the International Monetary Fund (IMF), the 5 per cent rate is expected to procure VAT revenues between 0.8% and 1.6% of GDP in GCC countries, which is a significant amount. For instance, the UAE expects to have $3.3 billion of revenue from this tax, which is 0.9 per cent of its 2015 GDP.

Are there any exemptions?

Bahrain’s Information Affairs Minister announced during a press conference that basic food and other necessary consumer commodities as well as medicines and medical supplies will all be exempt from the VAT. The previous announcements stated that there will be just under 100 items and services that will not be subject to this new tax.

Having exemptions is of significant importance because otherwise, lower-income individuals would be a lot more negatively affected than all others. The Bahraini minister emphasised that the VAT won’t affect low income individuals. It's not yet clear how this will translate into the laws. 

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Does this affect businesses?

Yes. If a company doesn’t apply VAT correctly, it could bare the additional costs. Non-compliance is also expected to have severe penalties. Businesses will need to review their current contracts to make sure that VAT is addressed and they may also need to update their IT systems to be able to account for VAT credits and collections.

UAE authorities indicated that they will start with registering companies with annual revenues exceeding $100,000 for the tax. It remains to be seen if this will be the same for the rest of the GCC.

How does it compare to other countries?

The Organisation for European Economic Co-operation (OECD), which has 35 member countries with 22 being European Union states, has an average VAT rate of around 19 per cent. For instance, the UK’s rate is a whopping 20 per cent. Therefore, the 5 per cent rate is quite low.