Value Added Tax – Middle East Lessons Learnt

The Middle Eastern countries of the Gulf Cooperation Council (GCC) have relied upon petrodollars to fund their economies for many years. Investment in mega infrastructure projects to transform their countries into economic hubs, diversifying their economies to centres of trade, commerce, hospitality and tourism have all financed heavily from oil revenues.

Cover of the report

Against the backdrop of globalization, numerous global companies added regional offices to the region. This movement of capital brought with it skilled manpower through the white collar workers steering the private sector to economic prosperity. The GCC countries were ideal hubs to trade goods and services between the east and west, offering the very best in living conditions, tax-free salaries and consumerism. This report looks at the genesis of how the GCC countries were compelled to adopt an indirect tax framework to replace decades of tax-free environments. The economies of the region were faced with the realities of global mega forces, including: (i) the consistent fall in the demand for and price of oil and (ii) the 2008 financial crisis that had a domino effect on economies exposed to global capital flows.

The laissez faire business environment that already existed in the oil rich Middle East reflected the culture of an entrepreneurial spirit that GCC countries were using to attract talent and capital. Nevertheless, long-term financial calculations indicated that if countries continued their trajectory of massive public expenditure against the backdrop of falling oil demand and prices[AB2] , they needed to plug the gap in sustainable public funds through adopting a state tax system.

In 2017, the GCC countries agreed and announced the first ever Value Added Tax framework to allow each member nation to develop legislation to start VAT at 5% in their respective countries. The economic and trade bloc of the GCC modelled their system on the tried and tested European Union jurisdiction with the aim of implementing VAT in a harmonious way across the GCC trading region. This report covers the early transition period and illustrates the stakeholder engagement that took place, as well the learning curve that businesses both large and small had to undertake to be VAT ready and compliant.

Why is this report important?

This report effectively covers the contours of the VAT landscape over the last four years starting from a market “denial mode” all the way to full compliance mode that has generating Dh27 billion (USD7.4bn) in 2018 for the UAE alone and  45.6 Riyal (USD12.6b) billion in 2018 collected in Saudi Arabia. According to the IMF, these collections are set to multiply manifold over the coming years.

The report is developed in collaboration with Al Tamimi, the region’s most respectable law firm, and it therefore offers a unique blend of commercial substance and legal form perspectives as it highlights the interconnectedness between the work of professional accountants and the legal fraternity.

Conclusions and recommendations

The report’s conclusions are drawn from an expert roundtable and emphasize the need for efficiency and accuracy in maintaining accounting records. Many supply chains are still unclear about VAT and greater engagement that will need to take place, especially between businesses with the knowledge and capabilities to bring SMEs in their supply chains into the VAT cycle.

GCC VAT timeline

Only three out of six GCC countries have implemented VAT.

The UAE and KSA implemented this on 1 January 2018, and Bahrain did too on 1 January 2019.  The UAE ratified the GCC VAT Agreement in May 2017 and became the second country to submit its ratification documents to the GCC after the KSA, bringing into force the GCC VAT Agreement.  The effective date of both the UAE VAT Law and executive regulations was 1 January 2018. The KSA VAT Law and implementing regulations came into force on 1 January 2018.

The VAT legislation in Bahrain became effective on 1 January 2019. Oman’s VAT would be effective from 16 April 2021. Kuwait had originally postponed the introduction of VAT until 2021 and this is expected to be extended further. Qatar has not announced any schedule for the implementation of VAT.