VAT in Saudi Arabia and the UAE: The Gulf States Redefine the Social Contract

On January 1, 2018, Saudi Arabia and the United Arab Emirates (UAE) will introduce a new value added tax (VAT) in accordance with the terms of the Gulf Cooperation Council (GCC) Unified VAT Agreement. Four other members of the GCC—Bahrain, Kuwait, Oman and Qatar—have pledged to do the same, though their timeline for implementation remains unclear, and Qatar may abandon the VAT altogether.

VAT reflects a dramatic change in the relationship between rulers and citizens in the region, explained Dr. Jim Krane and Daan Arends in a Bloomberg Tax Webinar on A New VAT for Saudi Arabia and the United Arab Emirates, held on December 4, 2017. 

Dr. Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute, explained that traditionally, the autocratic Gulf States financed themselves with oil revenues, and redistributed part of the proceeds to citizens—effectively, providing their citizens with social welfare benefits in lieu of a say in government. 

“In a twist on the slogan, ‘No taxation without representation,’ the rulers took the view that if they did not impose tax on their citizens, they could avoid accountability,” Krane explained.

However, various factors, including declining oil prices and citizens’ increasing concern about terrorism and instability have prompted a revised social contract. Citizens are now prepared to exchange some taxation for protection and political stability.

VAT is generally more palatable than income tax—which explains its global expansion as a means of revenue generation—and is set to be introduced in GCC Member States at the modest rate of 5%.

Although the rate is low, the complexity of the new laws can lay traps for the unwary, notes Daan Arends, an indirect tax partner with DLA Piper, Amsterdam, who has advised GCC Member States on the new legislation. He flagged the following challenges for entrepreneurs who do business in the Gulf:

  • There is no minimum registration threshold for businesses established outside of the taxing state. Therefore, registration may be triggered if a foreign business sells a single ebook or digital service to a private customer in a taxing state.
  • VAT exemptions are generally consistent under the GCC Unified VAT Agreement, but each GCC Member State implements its own special rules.  For example, the UAE applies the zero rate to crude oil and natural gas. These supplies are standard-rated in Saudi Arabia.  Financial services are generally exempt in both countries, but the UAE does not exempt financial services such as loans or currency exchange if there is an explicit fee, discount, commission or rebate. This may offer planning opportunities for suppliers who wish to make their transactions taxable, and by extension, eligible, for input VAT deductions.
  • The timeframe for processing refunds is unclear, as these systems are as yet untested. Businesses may be able to use grouping rules to offset VAT liabilities and credits internally, so as to avoid filing refund claims.

Click here to listen to a recording of the webinar.

Daan Arends has authored summaries of the New VAT regimes for the VAT Navigator, available through Bloomberg’s International Tax Library. Click here to request a free trial.


By Joanna Norland, Technical Editor, VAT Navigator, Bloomberg Tax