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Four states of the Gulf Cooperation Council are now in the spotlight as they prepare to implement a value-added tax.
Bahrain, Kuwait, Oman, and Qatar are due to begin collection this year, according to the GCC Unified Agreement for VAT, known as the framework agreement, first ratified by Saudi Arabia in April 2017, But setting up the regime won’t be easy.
Since the countdown began in January, the four states have broadcast mixed messages. None have so far published final versions of the necessary legislation or regulations, or begun registering potential taxpayers.
“We’ve had no formal announcements of any specific dates, we’ve had no release of any laws yet,” said David Stevens, EY’s Middle East and North America VAT implementation leader. By April 2017, the UAE and Saudi Arabia had already made announcements, revealed their timelines, and engaged the business community, he said.
In February a senior International Monetary Fund official told UAE newspaper, The National that the four countries would need until mid-2019 to prepare for the VAT, while an IMF Article IV Mission report on Qatar published March 5 assumed the tax would be introduced in late 2018. The IMF didn’t respond to requests for clarification.
Each country is at a different point in the implementation process:
Despite the lack of clear announcements, practitioners are confident that the four countries can meet the Jan. 1 deadline.
“The other GCC countries can look at the experience of the UAE and Saudi Arabia and learn from their mistakes or learn how to smoothly enact this provision,” said James Mathew, group CEO for UAE and Oman at Crowe Horwath International. “Early 2019 looks realistic,” he said by email March 11.
Ideally, legislation would be introduced in July or August at the latest, if the countries are going to meet the Jan. 1 deadline, Robert Tsang, Oman and Qatar indirect tax leader at Deloitte, said in a March 12 email.
“From our discussions with business, especially in both Oman and Qatar, this is the timetable that they are expecting and are already requesting advisers like us to provide services to guide their transition into this new tax era,” he said.
Businesses could need as much as nine to 12 months “to be ready and implement VAT effectively,” Jeanine Daou, partner and indirect tax leader for PwC Middle East in Dubai, said in a March 13 email.
The widespread denial about VAT that caused many businesses in the UAE and Saudi Arabia to delay preparation is unlikely to be repeated, Stevens said.
“The idea now that VAT is not coming to the GCC has been completely debunked. It’s now only a matter of when, not if,” he said.
Even as the timetable starts to slip, businesses can still prepare because the outlines are clear, Stevens said.
“They are all going to follow the GCC framework agreement, so we tell all our clients that the bulk of the information is already there,” he said, pointing to the Saudi and UAE laws that “almost directly mimicked the framework. When you see the laws coming out in these other countries, it’s going to be very much an enactment of the agreement.”
“Because so many businesses in the region have operations in other GCC states,” many of the larger firms had to be compliant for their dealings in Saudi Arabia and the UAE, Stevens said. “It’s not like you’re starting with nothing, which is what we had last year.”
Should any of the countries not meet the January deadline, the consequences are unclear.
“There’s no agreement as to any penalty regime. It is a consensus agreement. The expectation is that once one signs up to an agreement one honors one’s undertakings,” Stevens said, adding that the GCC states could agree on other arrangements if they chose.
“The whole GCC framework agreement is premised on all members of the GCC participating,” he said. “The rules are designed for an integrated economic bloc to work smoothly within itself. If everybody doesn’t sign up and we operate as single-country regimes, the system has not been designed from the outset to be optimal under those working conditions.”
Once all countries are in the scheme, the VAT rate is unlikely to remain at its current level of 5 percent, said Michael Camburn, KSA and Bahrain indirect tax leader for Deloitte in Riyadh.
“What comes next in VAT may well depend on what happens with oil prices over the next months and years but if past experience is anything to go by, the actual rate of VAT will likely increase,” Camburn said in a March 12 email. “Average VAT rates across the EU are around 21 percent, globally they fall in the region of around 15 percent on average with an upward trend. The GCC is at the lower end of the scale at present.”
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