Five of the six GCC nations have approved the Unified Agreement for Value Added Tax and while the UAE has taken a leading role through the process, the administrative and legislative work still needs to be done across the region.
All in the details for value added tax in the GCC
Value-added tax is taking shape across the GCC.
On Monday last week, it was announced that the Saudi cabinet had approved the Unified Agreement for Value Added Tax. The Unified Agreement, previously referred to by the working title of a framework agreement, is an overarching agreement that will be concluded by all six GCC nations. The best acronym, albeit long, is “GCC UAVAT”.
The unity referred to in the GCC UAVAT is a unity of purpose. The GCC UAVAT is intended to make sure that VAT is introduced in the GCC in a coordinated fashion. It does not necessarily mean that each national VAT law will be identical, nor that those national laws will all become effective on exactly the same date.
The rate of VAT has been confirmed at 5 per cent, a figure that was agreed at GCC level in mid-2016.
On Wednesday, further information was provided by the Bahraini information affairs minister, who held a press conference attended by the under-secretary for finance in Bahrain.
The Bahraini minister confirmed that basic food and other consumer commodities, medicines and medical supplies will be exempt from VAT. This, again, is in line with previous announcements, which have indicated that a list of just under 100 items or categories of goods and services will not be subject to tax.
The list of exemptions signals a clear intention on the part of the GCC authorities to temper the mildly regressive nature of VAT. If such steps were not taken, the tax would affect the poorer segments of society more adversely than on the better-off, on any proportional – if not absolute – measure. It is reassuring that societal welfare has been taken into account at the highest level. The Bahraini finance undersecretary was at pains to point out that “the tax will not affect persons with low or middle incomes”.
The Bahrain press conference was notable for some other pieces of information.
First, the finance undersecretary confirmed that “five GCC countries, including Bahrain, have signed the [GCC UAVAT]”. Simple arithmetic would indicate, therefore, that one signatory is still awaited. It is not known which GCC nation has yet to sign. Given the prominent role that the UAE has taken throughout the discussions, it is very unlikely to be the UAE.
Secondly, it was said that “administrative and legislative work will start soon”. That laconic comment covers a lot of ground. Administratively, the introduction of a new tax is complex, even in jurisdictions where a broad tax regime already exists. Where that is not the case, there is an obvious need to set up (or at least expand substantially) a national tax authority and to train the personnel within that authority. For VAT, the necessary administrative measures go further. VAT is said to be a “self-policing” tax because of the netting-off of input tax from output tax at each successive stage of the production and distribution cycles. Thus, administration is not confined to the national tax authority. As taxable entities, VAT-registered businesses also have administrative responsibilities. Work must be undertaken in that important regard.
The expression “the devil is in the detail” is nowhere more applicable than tax law.
It is assumed that the GCC UAVAT will provide a common sense of purpose and direction, but will not condescend to particulars. National laws will paint in the detail but, if the UK and EU VAT regimes are anything to go by, the complete legislative picture will comprise a number of layers. Thus the UK VAT Act still paints with broad brush-strokes; other legislative materials – notably the Schedules to the VAT Act, Statutory Instruments (subordinate legislation), VAT Notices and extra-statutory circulars – are more pointillist. The legislative work in each of the GCC countries will need to cover the full canvas appropriately. That is no small task. All the indications are, however, that the component parts of the GCC are well aware of the scale of the project and work on national legislation is firmly in hand.
Thirdly, it was announced that “awareness programmes will be held to inform the public”. Express confirmation of that vital ingredient is welcome. VAT is a tax on consumption. It is ultimately paid by the consumer, in other words “the public” in some shape or form. The public does, therefore, need to be made aware.
“Awareness”, though, can be elastic. A simple announcement using print and, nowadays, social media that VAT will be levied from 2018 would tick that box. But would it be preferable to go further? The imposition of any tax does not have instant consumer appeal – nobody likes paying it. Tax, however, funds government spending – on education, on infrastructure, on supporting business start-ups and encouraging entrepreneurship, on diversifying the economy from oil and hydrocarbon dependence.
The money for such expenditure cannot be magic-ed from thin air and each element just identified, and there are more, is an investment in the future. The realisation that tax can create intergenerational equity can make the bitterness of the tax pill (and tax bill) a little more palatable.
Finally, it was noted that, so far as Bahrain is concerned, “VAT tax is expected to be in force in mid-2018”.
The UAE Ministry of Finance said in February last year that VAT would be implemented in the UAE from January 1, 2018. At the time, Obaid Al Tayer, the Minister of State for Financial Affairs, went on to say that “Once the framework agreement on implementation of VAT is reached, GCC countries have time from January 1, 2018, to January 1, 2019, to implement VAT”.
Thus, as long as a year ago, the UAE Ministry of Finance sensibly recognised that implementation of VAT across the GCC would be a process extending over a full 12 months.
The approval of the GCC UAVAT is a significant step in its own right. It also maps out the next steps. With the flexibility already built into the broad timetable for the adoption of VAT by all six member states, the introduction of VAT in the GCC seems to be in train, and on track.
Michael Patchett-Joyce is a commercial lawyer and arbitrator based in London and the UAE.
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