Categories
GCC Tax

A state of play on tax litigation in KSA

A state of play on tax litigation in KSA

  1. Introduction to Tax Litigation in KSA

In recent years, the Kingdom of Saudi Arabia (KSA) has gone through tremendous reforms, and tax and the Customs authorities were part of this. Going from Department of Zakat and Income Tax (DZIT) to the General Authority of Zakat and Tax (GAZT) to the Zakat, Tax and Customs Authority (ZATCA). The tax administration went from a Department to an Authority (important semantic difference), and merged with the Customs authority.

A host of tax reforms were pushed through, with the introduction of Excise Tax and VAT, the introduction of extensive Transfer Pricing rules and compliance requirements, to an increase in the VAT rate, the introduction of a Real Estate Transfer Tax and the introduction of mandatory E-invoicing.

We are even leaving out smaller reforms here, such as the increase of the Zakat rate for financial institutions, and the implementation of a look through principle for Saudi businesses to determine whether they are subject to Zakat or Corporate Income Tax.

In the years to come, we still expect a reform of the Zakat system in favor of a generalized broad-based Corporate Income Tax system, a decrease in the standard VAT rate, an upskilling of the authority to catch fraudsters more effectively, and very likely, the implementation of Pillar I and II in KSA.

The reforms and the importance tax has taken in the Kingdom, has lead to boardroom unrest. This is perfectly illustrated by the publicised tax assessments of Careem and Fetchr. The assessments are seen as at odds with the favourable business climate Saudi wishes to create. Fetchr is likely to be liquidated, and Careem is facing a tax bill exceeding $100 Million.

KSA is an interesting country for Foreign Direct Investment, but the authority may run the risk of being perceived as lacking in providing the legal certainty which taxpayers yearn for. Taxpayers sometimes remind the authority that tax does not drive the business. Business drives the business. This has led to an exponential increase in litigation with the authority. With the merging of the authorities, we expect Customs litigation to be following the same pattern going forward, similar to litigation on VAT, Corporate Income Tax and Zakat.

In this article, we have a closer look at these disputes.

  1. Parties and departments involved

In Saudi Arabia, the players involved in the disputes process are the taxpayers, the Authority (ZATCA) and what are effectively the specialized tax courts. These were previously managed under the General Secretariat of Tax Committees (GSTC), which now is called the General Secretariat of Zakat, Tax and Customs Committees (GSZTCC), after the merger of the Tax and Zakat committees with the Customs committees. For each type of tax, the GSZTCC has a specialized committee comprised of 3 members and a chairman. There is one of each specialized committee in Jeddah, Riyadh and Damam. Each specialized committee is further comprised of 2 levels, the preliminary level and the appellant level.

Within ZATCA, there are 3 separate departments that are potentially involved with any tax dispute.

  • The Assessments and Examinations department: branch of ZATCA which initially issues the assessment or penalty and undertakes the audit.
  • The Review and Objections Department: Considered the first stage of the tax dispute journey, where the taxpayer submits an objection/review request against the assessment issued by the authority.
  • Internal Dispute Settlement Committee (“IDSC”): Committee responsible for dispute resolution between the Authority and the Taxable Person. Typically, but not necessarily, this department will rule on the relevant dispute following the objection department’s decision.
  1. Matters of dispute

Any matters concerning disputes between taxpayers and the Authority can be litigated with ZATCA, and can be ultimately ruled over by the GSZTCC. In other words, the disputes can concern VAT, RETT, Excise Tax, Zakat, Corporate Income tax, Withholding Tax, and penalties imposed by the ZATCA.

When looking at the statistics, as of September 2021, the grand majority of the cases brought before the committees concerned Zakat and VAT. Together, they make up approximately 87% of all cases.

In decreasing order of importance, the disputes brought before the GSZTCC concern Zakat, VAT, Mixed taxpayers, CIT, WHT, Excise Tax and the Real Estate Transfer Tax.

Typically, under all stages of the litigation, the plaintiff (taxpayer) will assert that ZATCA’s assessment, penalty or rejection of the objection is unwarranted.. In all stages, the burden of proof lies on the taxpayer in his capacity as the plaintiff/appellant. A different scenario occurs when ZATCA successfully appeals the decision of the preliminary committee as the GSZTCC, where it assumes the burden in proving that the first instance committee members inadequately applied the law.

  1. Taxpayer Rights and general principles

A taxpayer always has the right to dispute a matter upon disagreement with ZATCA. There is no set of legally defined generally applicable principles for the taxpayer and the tax authority in the Saudi legal framework.

Therefore, the general principles would apply, such a nemo censetur legem, no taxation without representation, in dubio contra fiscum …

The process is somewhat shaped by Sharia law principles which would require justice and fair treatment for all. Other Sharia principles refer to applicably of punitive actions in absence of fault and the extent of taxpayers’ obligations in contrast with the possibility to effectuate such obligations.

In practice, the tax authority adopts an assertive approach, issuing assessments sometimes contrary to its own legislation and guidance, and suggests a taxpayer follows his course with the designated litigation procedure.

There is no official procedure for settlements with ZATCA. There is the Internal Disputes Settlement Committee, which has no apparent independence from the tax authority, and may therefore not necessarily adopt an objective view despite its presumed individuality from the assessment and objection teams. A significant compromise by the taxpayer is also expected to be presented to the IDSC to accept the settlement request and proceed with negotiations.

  1. Statute of Limitations

Different limitations apply for the assessment of taxes to be statute barred. The general principle in KSA is 5 years, but this can be extended to 10 years. For VAT purposes, the same statute of limitations applies, but the audit period can be extended up to 20 years.

The extensions generally apply when a taxpayer does not submit a return, or submits an incomplete return with the intention to evade taxes. Tax evasion in this context is often interpreted broadly by ZATCA.

  1. Stages of Tax Litigation

ZATCA will usually issue a preliminary assessment, leaving some room for discussions with the taxpayer, before it issues a final assessment. Some informal communications via email will take place, where the Authority will often collect numerous documents. As granted by the law, the Authority retains the power to demand any documents it deemes necessary. Some in-person meetings may also be held with larger taxpayers prior to finalizing the assessment.

After the issuance of the final assessment, the taxpayer has 60 days to object against the assessment. ZATCA has recently also started to exercise its discretionary power granted by the law which allows it to mandate the payment in full of the disputed tax and penalties, or the provision of a bank guarantee, before the taxpayer can proceed.

Alternatively, if the taxpayer is unsuccessful in his objection, he has the option to request for a settlement or submit his case to the GSZTCC. He needs to do both within 30 days of the issuance of the decision by the Objections department. However, both avenues cannot be perused simultaneously and hence, while the settlement is running with the Internal Settlement Dispute Committee, the case with the GSTZCC is put on hold.

While resorting to the IDSC is theoretically a good approach, given that the settlement is ruled over and presided by ZATCA, the chances that the taxpayer will have a favorable outcome are on average limited. The GSTZCC case becomes active again, after the ISDC rules on the case, and the taxpayer is unhappy with the results.

The GSTZCC is really the first instance of an independent review of the case, by expert judges. Often an expert is additionally appointed in the proceedings to deliver a report. Several exchanges of memorandum are made until the committee is satisfied with the amount of information and can rule on the case. Subsequently, hearings are conducted virtually or in person. Finally, a decision is made which can be appealed against by any party within 30 days. The decision of the appellant committee is construed to be final and non-contestable by any other judicial authority.

At the primary level of the GSTZCC, only 11% of taxpayer grievances are accepted. In two thirds of the cases, the grievance of the taxpayer is refused on procedural or substantive grounds. When the case goes to the appellate level, in 50% of the cases, the appeal is not granted on substantive grounds. These statistics, coupled with the associated financial costs and time expenditure, shape a taxpayer’s options and therefore his strategy.

  1. Transparency

Contrary to the other GCC States, where the publication of case law is spotty, the GSTZCC publishes some of the cases on a relatively regular basis. Compared to the UAE, where the TDRC cases are not published, this is a stark difference.

While they do not have precedent value, it is interesting to examine a number of these, and interestingly enough, they do side with the taxpayer on a number of occasions, underscoring their independence. The ratios of these cases can however be persuasive for subsequent litigants as the authority themselves sometime refer to previous GSTZCC principles in the pleadings.

  1. Conclusion

Considering the recent growth in the volume of ZATCA’s audits, the number of disputes is bound to increase substantially. This heavily neglected aspect is now on the verge of being one of the most vital areas of the Saudi Tax and Legal framework.

There are ways to avoid conflict, such as the use of advanced tax rulings, which is unfortunately not used sufficiently. Informal agreements with ZATCA have unfortunately also not resisted the test of time.

The taxpayer can seek consolation in the fact that the GSTZCC is relatively independent, and therefore, unfortunately after spending an vast amount of resources, may actually prevail. However, as numbers show, in practice, the tax authority still wins more often.

Thomas Vanhee, Mohamed AlAradi

Categories
GCC Tax

Tax in the GCC – An accounting or a legal matter?

Tax in the GCC – An accounting or a legal matter?

This is a write up in respect of an event held by Aurifer and its partners earlier this year. We polled 25 tax directions in regards to the tax function in the GCC, its current status and perceptions.

Introduction

Ever since being part of the team that prepared the introduction of VAT in KSA in 2017, participating in the drafting process, I have been amazed at how things have developed since then. Before 2017, the Gulf Cooperation Council States barely had tax practitioners, when compared with mature jurisdictions.

While matters have changed much, the GCC has not evolved yet into a mature tax market. This shows for example, in my view, in the disparity in salaries offered, in how there is no relation between the size and complexity of the business, and the number of tax people employed by the business.

A fragmented market

Upon the introduction of VAT, the large demand drew many interested people. Many firms started dedicating themselves to VAT. There were the usual suspects, i.e. the big4 companies. There were a few law firms which dipped their toes in the water, a few challengers and a whole range of businesses trying to cater the market, usually small .

Conspicuously, there are massive differences in the market, from a big4 partner charging USD 1,000 an hour to price challengers trying to access the biggest names in the market for hourly partner rates as low as USD 150. One can attribute that to immaturity in the market, but I expect this to continue, as there is a regional cost sensitivity, and the offer from the subcontinent to take on outsourced services is ever present.

This fragmentation shows in the hiring market as well. There are extreme differences in what is offered to tax people. According to Indeed, the average base salary for a tax director is AED approximately AED 31,000 (https://www.salaryexpert.com/salary/job/tax-director/united-arab-emirates/dubai). According to Payscale, for the same position, the average yearly salary is AED 590,000 (approx. AED 49,166 per month).

At the lower levels, we see the same disparity. One ad offers AED 6,000-8,000 per month for a “VAT auditor” with at least one year of experience. The same outfit offers AED 3,500 for an “Excise Tax Auditor”. Another one is for an “Accounts Executive” and offers AED 2,400-2,800 per month, and asks that the applicant is “updated with FTA rules and regulations”.

At present though, a sufficient level of maturity does not seem to have reached. Important GCC businesses where one would expect multiple people in the tax department sometimes have no tax department. Smaller tax departments are sometimes found in mid size companies. From discussing with these businesses, the fact that there is no tax department in some of the big companies is not explained by the fact that the function is outsourced, as the work is done by accountants in the Finance department.

The tax function

Businesses have struggled identifying the right place for the tax function, the right role and responsibilities, and also the right remuneration.

One of the questions is for example whether the tax function should sit with the Finance Department, or with the Legal Department. The tax function is naturally at the intersection of a number of functions, as it needs to deal as well with the Logistics department and IT.

How much Legal work does the tax function do?

The Tax function should engage with the legal department on what positions to take in key contracts. It should engage with the CFO to understand tax provisions taken. It should discuss with the tax authorities key positions taken, or strategise these positions to understand and assess the risks.

How much Accounting work does the tax function do?

The Tax function should guide the internal accountants in respect of the preparation and filing of tax filings, whether it is VAT returns, Economic Substance Returns, Corporate Income Tax returns, Country by Country reports, etc.

In many organizations, even if there is a Head of Tax, the returns are still filed by the Finance Department. The Head of Tax is probably happy not to bear the responsibility but is it not giving away too much responsibility? It begs the question of centralized compliance versus decentralized compliance.

Organising the tax function

What do you need to start the tax function? Do you require an expert in CIT, VAT, or Transfer Pricing? Do you need an all around person? Do yo need an accountant, a lawyer or otherwise? Accountants can’t read and lawyers can’t count, right? The balance is sometimes delicate, but getting it right means getting your tax function right, which is important.

Results of our survey with in house tax directors

Who better to ask these questions, than the tax directors themselves? We asked 11 polling questions to 25 in house tax persons. Some of the results, may surprise you, others may not.

Question 1 The importance of the Tax Function in the GCC is underestimated

All attendees agreed and one had no opinion. Perhaps this shows a certain level of immaturity in the market, or just basic human need for recognition.

Question 2 The Tax Function in the GCC is undervalued in terms of its remuneration.

88% agreed with this statement. Surprisingly enough, one person disagreed. How much of this is attributable to a wish to make more, versus the undervaluation inside a company of the function, is hard to say.

Question 3 The Tax Function should be handled by who?

60% of respondents indicated that the Tax Function should be handled by a combination of Accountants, Lawyers and Economists. 32% said the Tax Function should be handled by an accountant. When the EU VAT system gained in considerable complexity in 1993, a similar way of thinking was present in the minds of companies. Tax was an accounting matter. With time, the tax departments started to develop independently.

Question 4 The tax function should report to who?

88% stated the tax function should report to the CFO. 8% said to the CEO and 4% to the Chief Legal Officer. This seems to be aligned to the current structures in many companies.

Question 5 The bigger the company, the more people the tax team should have

60% said they agreed. 28% disagreed.

Question 6 The key driver of a Tax Function should be

88% responded the driver is to support the business in the most efficient way. 12% answered it was to minimize disputes. No respondent answered that it was to maximize tax savings. That is perhaps indicative of a low amount of tax planning being conducted.

Question 7 Filing VAT returns should be handled by

16% answered they should be handled by the Finance department, while 84% replied they should be handled by the Tax Department. The respondents were therefore considerably in favor of centralized compliance.

Question 8 Why do I outsource work ?

The grand majority (72%) replied they wanted a second pair of eyes. 20% said they lacked the internal resources. 4% said they lacked the technology.

Question 9 Consultants are worth their money

60% agreed here, while 20% disagreed, and the rest had no opinion. The question obviously does not allow for great subtlety or explanation, but it is nonetheless interesting to note the outcome.

Question 10 When I select a consultant, my criterion is

32% answered previous experience, the same amount replied trust, and 28% replied that the main criterion is value for money.

Question 11 The differences in salaries and structures of tax departments are due to the immaturity in the market

88% of respondents expects the differences to level out in the long run. 12% expects that the GCC will always remain a jurisdiction of stark differences.

What did we get out of the poll?

Consultants are worth their money and are selected on previous experience, trust or value for money. Consultants are mostly appointed to have a second pair of eyes. The respondents mostly expect salary differences to level out in the long run. They like to handle VAT filing in the tax department, and consider that the role of that tax department is to support the business in the most efficient way. The bigger the company, the more tax people, and they want to be accountable mainly to the CFO. Tax directors feel undervalued in terms of their remuneration and underestimated.

Categories
GCC Tax

Special Tax Payers in the GCC: Exempt taxable persons

Special Tax Payers in the GCC: Exempt taxable persons

The four GCC countries which have introduced VAT so far, UAE, KSA and Bahrain, have based themselves on the GCC VAT Treaty to draft their laws.

There is a special group of VAT payers, which have a special capacity as stakeholders in the VAT system. They sit on the fringes of the VAT system, not being a full on taxable person, and neither simply a payer, like private persons would be.

In the EU, this special group is sometimes called the “group of four”, or the “persons benefiting from an exception regime”. Together with the capital assets scheme, it is one of the more technical matters in VAT, and its status under GCC VAT is at a minimum lacking in clarification.

In a previous article, we explored the status of the non taxable legal persons (https://www.aurifer.tax/news/non-taxable-legal-persons-in-the-gcc-may-need-to-register/?lid=482). In this article, we cover the exempt table persons. In the upcoming articles, we will be covering also the other special categories of taxable persons. Going forward we will refer to them as “special tax payers”.

GCC VAT and its origins

While not stated, the origin of the GCC VAT Framework (or “Common VAT Agreement of the States of the Gulf Cooperation Council” in full) lies in the EU VAT directive 2006/112/EC. More specifically it corresponds to the version applicable after 2011 and before 2013. The reasons for drawing inspiration from the EU VAT directive are obvious. The GCC had ambitions to copy the EU model.

For example, the Economic Agreements between the GCC States of 1981 and 2001 read like the Treaty of Rome, which established the European Union.

The GCC had ambitions to form a similar trade bloc like the EU. While it indeed negotiates free trade agreements together, internally it works in a different way. It tried to establish a currency union as well, but was unsuccessful, although given that the countries have pegged their currency (relatively closely to) the US dollar, in practice they may have implemented certain elements of the monetary union. One of the more eye catching provisions of the Economic Agreements is that GCC citizens are allowed free circulation within the GCC. Such free circulation is again exactly the same principle which applies to EU citizens.

In addition to wanting to follow in the footsteps of the EU politically, there is another good reason to incorporate EU VAT provisions. The EU has the oldest VAT systems, and has the oldest VAT systems integrated in a customs union (see https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=15 for a discussion on the genesis of the laws).

The copy is never better than the original

Like VHS tapes, the copy is never better than the original. This holds even more true when the copy is made from an old original. The GCC VAT Treaty does not incorporate the important changes to the EU VAT directive entered into force in 2013, 2015 and now in 2021.

At the same time, that does not necessarily need to mean that adverse consequences are triggered for the GCC States. The UAE has for example integrated the 2015 changes in its guidance and de facto applies them (https://www.aurifer.tax/news/e-commerce-vat-rules-in-the-gcc-a-missed-opportunity-at-perfect-harmonization-with-the-eu/?lid=482). Bahrain has done the same in its guidance for the place of supply rules applicable to telecoms services.

A special group of tax payers

Like EU VAT, GCC VAT has two important main groups of stakeholders. They are the taxable persons on the hand and the private individuals on the other. The taxable persons are the businesses complying with VAT. That means they charge it, collect it and pay it to the tax authority. The private individuals are the consumers who carry the economic burden of the VAT and pay it to the businesses. They are the ones hit with the rise in cost.

Let’s say that the taxable persons are “all in” and the private individuals “all out”. The private individuals have no obligation whatsoever. Although it may surprise, they have no legal obligations, except for their contractual obligations towards their contracting parties (and for imports made by private individuals).

There’s another special group though. They often go by a special name even. In France for example they call them the persons benefiting from an exceptional regime (“personnes beneficiant d’un regime derogatoire”). Elsewhere they may call them the “group of four”. In this article, we refer to them as the “special tax payers”.

Contrary to the taxable persons and the private individuals, the special tax payers are neither all in, nor all out. Whether they have VAT obligations or not, depends on their activity.

The special tax payers in the EU are:

  • Exempt tax payers
  • Non taxable legal persons
  • Small businesses
  • Farmers

Out of these four categories, the first three do not have any VAT obligations. The farmers are subject to special rules, but can generally opt out and follow the general rules.

An important feature of this group is that when it receives a service from abroad, it is obliged to apply the reverse charge mechanism. Indeed, for VAT purposes, it is considered as a taxable person. Equally so, when it receives goods from inside the EU, and the value exceeds a certain limit, they are liable for VAT on the intra-community acquisition (the EU internal equivalent of the import). Below, and in our next articles, we will analyze who the special tax payers are in GCC VAT. First however, we need to revisit the concept of taxable person.

The taxable person concept in the GCC

The concept of taxable person in the GCC is where the GCC deviates from more mature VAT systems. In the EU, a taxable person is “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.” (article 9, 1 EU VAT directive 2006/112/EC). Economic activity is then “Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions…”.(ibidem).

Although at first sight only subtly different, a taxable person in the GCC is “A Person conducting an Economic Activity independently for the purpose of generating income, who is registered or obligated to registered”. The last bit of the phrase is crucial.

In the EU, the registration is a consequence of the fact that an economic activity is conducted, it is not a defining element of it. Note also that it is a global concept in the EU, i.e. anyone in the world can be a taxable person. This last element is in stark contrast with KSA, which, strangely enough, does not acknowledge the fact that a foreign company could be a taxable person (but does require non residents in certain cases to register).

As a comparison, the GCC inspired itself on the UK definition of a taxable person, which is “A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.”

Does the detail matter? In the majority of the cases it does not, but as we will demonstrate in the next section, it does sometimes. First however, we need to remind ourselves of when a business is required to register for VAT purposes.

VAT registration requirements

A Person is required to register for VAT purposes when resident in a Member State and making annual supplies in that State above the Mandatory registration threshold of SAR 375,000 (USD 100,000 or its equivalent in local currency). Non resident businesses making taxable supplies in a Member State need to be registered as from the first cents made.

A person can voluntarily register when resident in a Member State and making annual supplies in that State above the Voluntary registration threshold of SAR 187,500 (USD 50,000 or its equivalent in local currency).

The GCC Member States have not deviated from this principle yet, although the UAE has set the forward looking threshold for the next 30 days instead of the next year (mimicking the UK).

Calculating the thresholds

According to the GCC VAT Treaty, in order to calculate the threshold, the following elements need to be included:

  • The value of taxable supplies, except for capital assets
  • Value of goods and services supplied to the Taxable Person who is obliged to pay Tax
  • The value of intra-GCC supplies which have a place of supply in another State but would have been taxable had they taken place in the State of residence

The third element is not applicable right now, as none of the GCC Member States recognize each other as Implementing States.

The first element is straightforward, the second is much less so. The second one suggests that imported goods and services received from abroad need to be counted towards the registration threshold. It mentions a Taxable Person. It may be Circular, since a business may not be a Taxable Person, but as a result of purchasing from abroad may become a Taxable Person and therefore may be required to register.

The Second group of Special Tax Payers – The Exempt tax payers

In our previous article, we discussed the non taxable legal persons. In this article, we will discuss the exempt tax payers. All GCC countries so far have established a number of supplies which are exempt.

As a legislator, one exempts supplies, not tax payers. Tax payers become exempt though because they make exempt supplies. That is why we do not have exempt sectors, only exempt supplies.

From a tax policy point of view, when applying an exemption, you remove VAT from the supplies made, however you increase the costs for businesses making exempt supplies. Those businesses cannot recover input VAT. Until recently, the GCC countries which have implemented VAT have been very conservative in applying exemptions (see https://www.aurifer.tax/news/uae-publishes-its-vat-law/?lid=482&p=16,. Oman seems to be gearing much more towards a European model, applying wide exemptions for education and healthcare (https://www.aurifer.tax/news/oman-publishes-vat-law/ ).

Below we are listing the applicable exemptions (excluding the import exemptions) in the GCC countries so far.

UAE Residential rent; Bare land; Margin based financial services; Local passenger transport

Bahrain Residential rent; Sale or lease of Bare land and buildings; Margin based financial services

KSA Residential rent; Sale building; Margin based financial services

Oman Residential rent; Sale bare land and resale residential property; Financial services; Local passenger transport; Health care; Education

The descriptions in the above table are limited, and they are much more complex in practice, especially when it comes to applying the VAT exemption for financial services. This holds even more true when it comes to the application of VAT on Shariah compliant financial products.

Due to the fact that Oman has more exemptions, the status of the exempt businesses will become more important.

In the EU we refer to them as “exempt taxable persons”, suggesting that they are taxable persons, because they conduct an economic activity, but they are part of the VAT system.

In the GCC, a business making exclusively exempt supplies is not required to register for VAT purposes, and therefore it is not a taxable person. As shown above, the exempt supplies also do not count towards the VAT registration threshold.

What is its status then? Is it similar to the EU in the sense that it may have certain obligations? When examining their status, they in principle have no registration obligation, no obligation to charge VAT on their supplies, no bookkeeping or record keeping obligations, but also importantly, no right to recover input VAT.

However, similar to the non taxable legal persons, when the exempt tax payers start “importing” services or goods, and the exceed the registration threshold, they are required to register for VAT purposes.

Application of the exemptions

As stated above, the descriptions in the above table are limited, and they are much more complex in practice, especially when it comes to applying the VAT exemption for financial services.

In the EU, exemptions need to be interpreted in a strict way, as an exception to the broad base of VAT needs to be interpreted in a limited way (cf. EU case law citation).

In the GCC, we do not have such an established principle. The FTA has stated though that it considers that the VAT legislation in the UAE prescribes a “narrow approach to the VAT exemption”.

Complex mixed status for exempt and taxable tax payers

For many exempt tax payers, the complexities arise when these tax payers are also making taxable supplies, i.e. supplies subject to 5% (15% in KSA) or 0% VAT in the GCC. This triggers a mixed situation, where they are partly entitled to input VAT recovery and partly not.

Organising that input VAT recovery for what is referred to in the EU as “mixed taxable persons”, or in the UK as a tax payer subject to the “partial exemption method” is where complexities arise.

The default method in the EU is the application of the so-called “pro rata” on the basis of the turnover. The second most prescribed method is the “direct allocation”. There are a number of other methods possible as well (e.g. floorspace, transaction count, …).

When comparing the methods in the GCC States so far, different methods have been proposed. Especially the UAE stands out with its default direct attribution method followed by a very specific type of method, an input tax based apportionment method for residual tax. For residual tax, alternative methods can be used as well, but these do not replace the initial direct attribution method, unfortunately.

KSA prescribes a direct attribution method, followed by an apportionment method based on turnover. Although Bahrain initially seemed to have followed the EU in prescribing a default turnover method leading to the calculation of a pro rata in its VAT Law (article 45), in its Executive Regulations (article 59), it reverts back to the KSA approach: a direct attribution method, followed by an apportionment method based on turnover. The same goes for Oman (article 58 of its Executive Regulations).

The available alternative methods are:

  • For UAE: turnover, floorspace, transaction count, sectoral
  • For KSA: input tax based apportionment, floorspace, transaction count, sectoral, number of employees
  • For Bahrain: turnover, headcount, number of transactions
  • For Oman: none – it is left up to the tax payer to determine an acceptable apportionment based on actual use of the goods and services and which includes an annual adjustment.

Compliance obligations and conclusion

Barring the situation where an exempt tax payer makes imports, it does not have to be registered for VAT purposes. Where the tax payer is mixed, because he makes taxable supplies, he obviously needs to register for VAT purposes when meeting the registration threshold, or can choose to do so when meeting the voluntary registration threshold. Upon registration, periodic VAT returns need to be filed, and VAT invoices issued for taxable supplies. Obviously the associated record keeping obligations need to be met as well.

The main challenge with these types of tax payers is with the calculation of their input VAT deduction, less with the registration. The applicable regime is different in the different GCC States, with especially the UAE imposing quite extensive administrative obligations.

Categories
GCC Tax

Pillar Two and the GCC – Important consequences for tax havens and exemptions for nationals

Pillar Two and the GCC – Important consequences for tax havens and exemptions for nationals

The same thing is happening with Pillar One and Pillar Two as with BEPS. Initially, it seemed to be a topic for insiders, tax administration officials and a handful of academics, but eventually it became a topic for everyone.

Discussions around Pillar One and Pillar Two have picked up very considerable speed since the endorsement by the G7 on 5 June 2021, and the endorsement by most of the Inclusive Framework members on 1 July 2021.

With laws being drawn up in 2022, and an implementation in 2023, Pillar Two is right around the corner. In this article we analyse Pillar Two. We will leave an analysis of Pillar One for next month’s article.

What is Pillar Two?

Simply said, Pillar Two establishes a Minimum Global Tax of 15% for businesses operating in multiple jurisdictions. Those businesses need to have a consolidated turnover in excess of 750M EUR though in order to be caught be the Global anti-Base Erosion Rules (GloBE).

The minimum tax is achieved through the inclusion on the parent level of untaxed income of the subsidiary (the Income Inclusion Rule), or, as a backstop, via a rejection of the deduction of undertaxed payments (the Undertaxed Payment Rule).

In addition, a subject to tax rule applies, allowing source jurisdictions to impose a limited source taxation on certain related party payments, which will be taxed below the 15% minimum rate.

The rules are designed to create a level playing field, canceling out income declared and taxed below the minimum rate of 15%, or not at all, by having to “top up” the tax. This is done a jurisdiction basis (no consolidation between jurisdictions).

There’s an additional so-called “substance carve-out” for businesses, in jurisdictions where staff and tangible assets are used.

There are limited exemptions to be foreseen, which will be reserved for Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds.

Do all countries have to apply it?

Technically no, but let’s call it fiscal peer pressure. Most of the Inclusive Framework members have endorsed the principles of Pillar Two. Amongst those are all GCC Member States, except Kuwait. The overwhelming majority of the important economies stand behind it, which means that the rest of the world is bound to follow.

What choices do countries have in terms of the implementation?

Countries with a corporate tax system leading to an effective taxation in excess of 15% may simply implement Pillar Two in their domestic tax legislation, with the abovementioned principles to be adopted. This means they will mainly target jurisdictions with a lower Corporate Income Tax rate, and include the top up tax in the most simple cases.

If a country however has a Corporate Income Tax below 15%, if may consider the following reforms:

  • Adopt a higher rate compliant with Pillar 2 provisions. It will therefore collect more revenue.
  • Adopt a higher rate compliant with Pillar 2 provisions, on a limited scale, i.e. only for businesses with a consolidated turnover in excess of 750 M EUR.
  • Do nothing – this will entail that other countries will tax the revenue of the source jurisdiction.

A country with no corporate income tax, may consider implementing corporate income tax, on a limited scale, or full scale.

What will the GCC countries do?

While arguably the UAE and Bahrain face the most important choices, with a potential (limited) implementation of corporate income tax on a national level on the cards, Saudi Arabia, Qatar and Kuwait will also need to reform their laws. Potentially, Oman will not need to amend its legislation.

On an international level, if UAE and Bahrain start taxing income recorded in those jurisdictions at 15%, as long as the corporate income tax rate in the parent jurisdiction is higher, the ETR may overall be equal or lower, than in the case where the parent includes the income of the UAE/Bahraini subsidiary and taxes the income at the CIT rate of the parent, under the current circumstances. The UAE faces a double conundrum as well, in regards to the free zones and its federal structure.

Was doing nothing an option?

While the UAE and Bahrain are often heralded because of the absence of the application of corporate income tax, and their large double tax treaty network, because they were often considered a tax haven, they were subject to measures taken by other countries, therefore reducing their attractivity.

The measures taken by other jurisdictions could be:

  • Monitoring payments with tax havens
  • Denying participation exemption for dividends received from tax havens
  • Controlled Foreign Corporations rules which include revenue recorded in tax havens in the country of the parent
  • Rejection payments as deductible expenses in jurisdiction of the parent
  • Imposing substance requirements on tax havens (such as those imposed under the Economic Substance Regulations)

This means that in effect today already transactions with tax havens are being targeted by other jurisdictions.

While Oman has been labeled a tax haven in the past for insufficiently exchanging information, and Saudi Arabia at some point as well for solely taxing non GCC shareholders, they undergo much less the same types of measures.

Next steps

The OECD and the IF Members will further develop a more granular set of rules for Pillar Two. In the meantime, governments will start exploring policy options, and implement them over the course of 2022 and 2023.

The OECD will likely develop a new multilateral treaty to implement Pillar Two. There’s bound to be some transitional rules as well.

Conclusion

The adoption of Pillar One, not discussed here, and Pillar Two, are undoubtedly going to have a profound impact on the international tax landscape. Simultaneously, it will put a number of governments as well before some policy choices, which will have an important impact on a domestic level.

Businesses can already analysis what the impact will be, at a high level, or on a more detailed level, by following the detailed guidelines given by the OECD in regards to the implementation. If prior implementation of transfer pricing or substance rules provides any lessons, it is that jurisdictions often implement them wholesale in their domestic jurisdictions. Businesses can therefore anticipate now already what the impact will be. The overall design is not expected to be changed much, and therefore analysis and planning can already be conducted now.

What concrete steps could be taken are:

  • Mapping the jurisdictions and the ETR under the Country by Country report which is already required to be filed by the same businesses.
  • Analyse what potential policy choices the jurisdictions with a nil to low ETR may take.
  • Analyse what measures are currently taken by other jurisdictions in respect of tax havens, and what impact Pillar Two might have on these transactions (i.e. identify “high risk jurisdictions”).
  • Calculate the financial impact of the imposition of the Global Minimum Tax on profits in terms of the net profit after tax.
Categories
GCC Tax VAT

30 June 2021 – End of transitional period to apply 5% VAT in KSA

30 June 2021 – End of transitional period to apply 5% VAT in KSA

Background 

In May 2020, the KSA announced an increase in the standard VAT rate from 5% to 15% effective from 1 July 2020. Transitional rules for supplies spanning the date of the VAT rate change (1 July 2020) were introduced. In brief, these transitional rules state that if you entered into a contract prior to 11 May 2020 for supplies to be made after 1 July 2020, the 5% rate would still apply until the end of the contract, the contract renewal date or 30 June 2021 (whichever occurs first), if the customer is entitled to recover the VAT charged by the supplier in full, or if the customer was a government entity.

These transitional rules were optional, and even if the conditions were met, you could choose to apply VAT at 15% from 1 July 2020. B2C supplies were simply immediately subject to 15% VAT, as were imports of goods.

Meanwhile, the other GCC countries which implemented VAT, i.e. the UAE, Bahrain and Oman continue to apply 5% and have no plans currently to increase the VAT rate. The average VAT rate applied in the EU is approximately 21%. KSA therefore still has a relatively reasonable rate.

End of transitional period

Businesses currently applying the transitional regime, will no longer be able to avail it, and need to be mindful to apply 15% VAT for supplies rendered as from 1 July 2021.

You may still be making supplies under a contract entered into prior to 11 May 2020, where this contract has continued and was not subject to renewal, i.e. there was no cessation or renewal of the contract to trigger the end of the application of the 5% rate. In this case, where you are still charging VAT at 5%, this must end on 30 June 2021. For goods or services supplied before 30 June 2021 the 5% rate can still apply, however for all supplies made from 1 July 2021 the VAT rate of 15% must apply. 

Action to be taken

Where business are currently still applying 5%, this will need to be increased as of 1 July 2021. The boxes in the VAT return where 5% output or input needs to be reported, may remain for some time. Tax payers may need to issue credit notes for initial supplies subject to 5%, and the recovery of input VAT can be done during a period of 5 years.

For businesses that had been availing the transitional regime, the cash flow impact will be significant. Caution needs to be taken as well as to expense invoices, as invoices with the wrong VAT rate will not be claimable.

Where do we go next

The Crown Prince of KSA, H.E. Mohammed Bin Salman (“MBS”), announced recently that the 15% VAT rate is a temporary measure that may last only for the coming 5 years. Increasing the VAT rate was necessary to help the ambitious government toward realizing its KSA 2030 vision.

MBS stated that the rate will reduce to a rate of 10% or even 5%. Undoubtedly, there will be new transitional provisions then.

Categories
GCC Tax UAE Tax

Q1 and Q2 2021 Tax Update Webinar

Q1 and Q2 2021 Tax Update Webinar

Do not miss our webinar covering the first two quarters of 2021 from a GCC tax perspective.

Attend our webinar on 24 May and make sure you are up to date with every single tax development in the GCC.

Are you afraid you missed KSA’s First Free Zone? Not sure what to do with round 2 of ESR?  That you missed the Clarifications in the UAE? Did you miss the Qatari TP updates? 

We will cover all important 2021 updates across the GCC and across all taxes. 

The webinar is a must attend for any in-house tax person.

Registration via the following link: https://us02web.zoom.us/webinar/register/WN_kcOGTdr0Sb-vLRxNKqhjSA

Seats are limited!

Categories
GCC Tax VAT

Oman publishes VAT Law and Executive Regulations

Oman publishes VAT Law and Executive Regulations

On 18 October 2020, the Sultanate of Oman published Oman Sultani Decree No. 121/2020 Promulgating the Value Added Tax Law. The entry into force of VAT in Oman is 180 days as of the publication of the Decree and therefore 16 April 2021. The staggered VAT registration has started on 1 February 2021 for the first batch of taxpayers in the same way it was implemented in the KSA and Bahrain. Oman will be the fourth GCC state to introduce VAT, after the UAE and the KSA on 1 January 2018, and Bahrain on 1 January 2019. Qatar is expected to be next, and Kuwait the last (if ever). Oman issued its Executive Regulations (ER) on 10 March 2021. 

Oman’s VAT regime is not an original one, and it did not set out to be. It stays close to the GCC VAT Treaty and to the UAE VAT laws, but it has a few deviations. From the trained perspective of the European VAT expert, or now also to a certain extent the GCC VAT expert, there are not a lot of surprises in Oman Sultani Decree No. 121/2020 and Tax Authority Decision No. 53/2021. We have set out below nonetheless the main characteristics of the Omani VAT legislation in a nutshell, drawing a few comparisons with the other GCC States. You can review our webinar on the topic here.

Background

Having experienced a major economic downturn with the decline of oil prices, the GCC countries have set out to introduce VAT by signing the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) back in 2016.

Although the Sultanate, alongside Qatar and Kuwait, was procrastinating the implementation of the tax, it finally caved as a result of financial implications of the COVID-19 pandemic. The immense financial expenditure resulting from the pandemic combined with the major decline in oil prices over the past years, have burdened the Sultanate with an increased fiscal deficit of 17.3% of GDP and a central governmental debt of 81% of GDP (Source: IMF Mission Concluding Statement February 2021). The Sultanate has thereby chosen to undergo major public policy reforms in an effort to reinforce fiscal sustainability, starting with the implementation of VAT in April 2021 previously having expanded the scope of excise tax, and extending to the reduction of public expenditure in the long term.

If the said transformation is executed efficiently, the Sultanate will be the first GCC country to operate a comprehensive tax framework comprising of VAT, excise tax, corporate and personal income tax. However, similar to any major tax reform, some aspects are rather ambitious, and the materialization of these plans is highly dependent on a wide range of socio-political factors.

Overall design of the VAT laws

The overall design is really derived from the GCC VAT Treaty. The GCC VAT Treaty is a close carbon copy of the EU VAT directive after 2010 and before 2011. The main difference with the EU is obviously that we do not have any intra-GCC supplies. The interplay with the GCC Common Customs Law will therefore be equally complicated as it has been so far between the three GCC States which have introduced VAT.

Simply put, in Oman, VAT registered persons will charge VAT on supplies of goods and services and imports are taxed, and so are deemed supplies. Exceptions apply. Nothing new under the sun there. The Omani VAT is a European style VAT, and seems to be closer even to Europe than the other three countries so far (e.g., a VAT exemption for schools and healthcare is mandated by the EU VAT directive).

How much of the GCC VAT Treaty still carries any force is questionable, since the KSA has already deviated from it with its 15% VAT rate, none of the GCC states consider each other as Implementing States, and the UAE applies a different forward looking test (30 days instead of 12 months).

There are a great deal of other differences between the states (e.g., the UAE adding a place of supply rule for supplies of services related to goods, which is absent in the GCC Treaty), and those will remain since there is no strong policing mechanism for the Treaty, and neither is there far reaching co-operation between the states. In other words, the divergent practices we have seen in the three GCC States so far, will continue to exist and further diverge, and there is no incentive for convergence. That is regretful for businesses, but it is simply a consequence of the political design of the Gulf Cooperation Council.

Implications on economy and consumption

The underlying principle of VAT is that it should not affect business decisions. While that is true to a certain extent, it does affect consumption. We expect, as we have seen in the three GCC states so far, a spike in consumption right before the introduction of VAT, and a drop right after, with a marked increase in inflation. Over time, the introduction of VAT will be absorbed into the prices. Residents tend to resort to the purchase of a few luxury items before the introduction of VAT, such as cars and jewellery.

The revenues from VAT are estimated at OMR 300m (roughly USD 780m – see https://www.arabianbusiness.com/politics-economics/450045-introduction-of-vat-to-give-omans-economy-780m-boost). The oil price for Brent Crude is 43 USD per barrel at the writing of this text. In order to balance its books, Oman budgeted in 2020 an oil price of 58 USD per barrel. It needs the oil price to be at exceed 80 USD per barrel to balance its budget (Source: IMF Middle East and Central Asia Regional Economic Outlook April 2020).

While VAT is a drop in the bucket for Oman, excise tax had also contributed to improving Oman’s fiscal balance. In 2019, tax revenues were up 8% compared to the previous year, amongst others due to the introduction of excise tax. For the 2021 budget, Oman will be able to count on additional fiscal revenues from VAT.

Main provisions of the Omani VAT Law

VAT registration

In terms of the mandatory registration threshold, like in the KSA and Bahrain, and how it is foreseen in the GCC VAT Treaty, there is a forward looking test of 12 months and a backward looking one for the same period, as per Article 55 of the Omani VAT Law. Oman has therefore not chosen to follow the UAE.

The mandatory registration threshold is OMR 38,500. If a business makes sales exceeding that threshold for the last 12 months or it foresees it will in the next, it needs to register for VAT purposes.

In terms of calculating the threshold in relation to the implementation of VAT, a tax payer should calculate the backward looking test by end of October 2020. If the tax payer is above the threshold, they need to register. They need to conduct also the forward looking test. If any of the two tests pushes them over the registration threshold, they need to register.

Non-residents making taxable supplies in Oman for which the reverse charge mechanism does not apply, need to register as of the first Omani riyal of turnover in Oman. They can do so directly, or via a fiscal representative. Hopefully both regimes will be business friendly and Oman will not resort to requesting bank guarantees and the like from foreign tax payers. The OECD has recommended a simplified registration mechanism for non-residents, as putting up too many barriers for non-residents, eventually just leads to non-compliance, given that international cooperation around these issues is still very complex. Article 112, par. 1, 4 allows the OTA to determine other conditions for the fiscal representative.

VAT grouping will also be possible, with supplies between the members of the VAT group remaining outside of the scope of VAT, and its members being jointly liable for the payment of VAT. Interestingly, entities established in Oman’s Special Zones are not allowed to join a VAT group and have to register individually (article 125, par. 1, 6 ER). The policy rationale behind this exclusion remains unknown, but likely has to do with the registration process in the Special Zones.

Oman recently obliged businesses to request for a tax card with the Authority, a document similar to a VAT registration certificate, and which is in use amongst others in Qatar. Given the fact that Oman has the details of tax payers already on file, they will hopefully be able to combine these in order to make the VAT registration easier for resident companies, just like in KSA.

In accordance with the guidelines published by the Omani Tax Authority, companies with a commercial registration number are required to register through the online portal. However, the residents with no CRN or non-residents are required to submit the VAT registration application in an excel sheet along with supporting documents through the email address VAT@taxoman.gov.om.

Furthermore, Oman has implemented a staggered registration similar to when VAT was introduced in KSA and Bahrain. Early registration will begin from 1 February to 15 March 2021 for taxpayers whose annual supplies exceed OMR 1 million. This decision was also followed by the publication of a VAT Transitional registration guide which assists taxpayers to calculate annual taxable supplies, help with registration via the online portal and so on. Registered taxable persons will receive a VAT Identification Number of 12 characters (OMXXXXXXXXXX).

Transactions in scope

Transactions in scope of Oman Sultani Decree No. 121/2020 and their corresponding rules stem from the GCC VAT framework. The GCC framework sets the scope of the tax, place and date of supply rules, exemptions and zero rates. The Sultanate did not deviate from its neighbours with regards to the scope of the tax and includes deemed supplies, VAT due on import and instances where the reverse charge mechanism applies.

The place of supply rules also stem from the GCC treaty and are nearly identical to those of the other GCC countries. The place of supply of goods will be the place where the ownership of the goods is transferred. While the place of supply of services will be determined in accordance with actual consumption, with the general rule as per the treaty being the place of residence of the supplier.

A comprehensive representation of the place of supply rules is provided in Articles 20-30 of the Executive Regulations. The Regulations specifically address supply of goods with/without transportation, transportation services, real estate related services, telecommunication services and electronic services.

As aforementioned, minimal differences exist in these rules relative to the GCC treaty and the Implementing Regulations published by the other GCC states. However, further deviation from the treaty is likely to result from the tax Authorities’ interpretation and subsequent guidance as witnessed in the other states. If the nature of such guidance is similar to that of other tax Authorities, we can expect the application of these standard rules to be more complex and extensive.

Exemptions and zero rates

The distinction between exemptions and zero rates is paramount. Arabic speakers sometimes have difficulties distinguishing both, since there is no good Arabic equivalent for the terms. When a supply is exempt, no VAT applies on it, but the taxable person making the supply cannot deduct the input VAT. When a supply is zero rated, no VAT applies, but the taxable person making the supply can deduct the input VAT.

The GCC VAT Treaty requires that member states subject to the zero rate:

  • medicine and medical equipment;
  • cross-border transportation of goods and persons;
  • export of goods to a destination outside the GCC;
  • supply of goods to a customs duty suspension situation as provided for in the Common Customs Law and the supply of goods within customs duty suspension situations;
  • the re-export of moveable goods that have been temporarily imported in the GCC for repairs, refurbishment, conversion or processing, as well as the services added to these goods
  • supplies of services by a taxable supplier residing in a member state for a customer who does not reside in the GCC territory who benefits from the service outside the GCC territory, except where one of the special place of supply rules applies; and
  • the supply of investment gold, silver and platinum, and the first supply after extraction of the same metals.

Oman implemented all of the above in Chapter 6 of the Omani VAT Law, in the process also zero rating foodstuffs via a Chairman’s Decision (this is a “may” provision in the Treaty), zero rating means of transport used for commercial transport (also a may provision in the Treaty), rescue airplanes, boats and aid by land.

In addition, it also zero rated the supply of crude oil and its oil derivatives, and natural gas (the Treaty allows for oil and gas to be either standard rated or zero rated). It is important though that both the supplier and customer are taxable, and both must be registered and licensed by the Ministry of Energy and Minerals (article 93 ER). These conditions will impact especially foreign businesses trading in these goods in Oman.

Oman also zero rates supplies of goods or services in Special Zones and subjects them to the same treatment as such treatment applicable for customs duties suspension. Oman’s VAT regime for the Special Zones is stricter than the UAE’s regime for the Designated Zones though, as it requires that the buyer is licensed by the Special Zone Authority.

The GCC VAT Treaty requires that the following supplies are subject to a VAT exemption:

  • financial services;
  • imports of goods if the supply of these goods is subject to a zero rate or exemption;
  • import of goods exempt from customs duties;
  • personal luggage and gifts brought by travellers; and
  • special needs goods.

Oman Sultani Decree No. 121/2020 implemented all of those exemptions.

The individual member state can deviate from the regime applicable to financial services provided for in the GCC VAT Treaty, foreseeing a fixed refund rate for financial institutions or apply “any other tax treatment”. Oman has adopted a regime similar to the other GCC states which taxes fee based income and exempts income based on a spread (article 79 ER). Such regime is not based on any EU regime.

It gets interesting in the sectors where member states can choose whether to subject supplies to a standard rate, zero rate or exemptions. Member states can do so in the following areas:

  • education;
  • real estate
  • local transport; and
  • healthcare.

Oman has chosen the following options, according to Article 47 of the Omani VAT Law:

  • exempt health care;
  • exempt education;
  • exempt bare land;
  • exempt the resale of residential properties;
  • exempt residential lease; and
  • exempt local passenger transport.

In terms of the applicable zero rates, as indicated above, Oman has opted to apply the zero rate where possible (foodstuffs, means of transport and oil and gas supplies).

Subjecting health care and education to an exemption is a first in the GCC. European VAT experts are used to this situation, since the EU VAT directive mandatorily subjects such supplies to an exemption. It will however mean that many more businesses will be a “mixed tax payer”, making both taxable and exempt supplies. The UK term for this situation is “partial exemption”, and has been in use in the region.

Oman prescribes a direct allocation, followed by a pro rata for mixed expenses (articles 58 and 59 ER).

The application of the exemption is probably the only situation in which Oman substantially differs from the other GCC states, although the KSA has made public education out of scope of VAT (with no grounds in the domestic legislation, and in violation of the neutrality principle). Arguably, this extension seems to be an effort to allow the tax to be more socially accepted and to alleviate the already onerous financial burden on Omani residents.

However, the extension also simultaneously alleviates a major problem with the interrelation of the definition of a taxable person as per the GCC Treaty with businesses providing exempt supplies. Businesses only providing exempt supplies are not required to register for VAT and hence do not fall within the definition of a taxable person. VAT incurred by these businesses is therefore non-recoverable in the GCC countries, creating an incentive to purchase services from suppliers abroad up to USD 100,000 as VAT would not be applicable in those circumstances. As the scope of the exemption is wider in the Sultanate, it provides this incentive for a wider category of businesses and thereby having a greater impact on the economy.

Interesting is also that sale of new residential property will be subject to a 5% VAT rate. As we have seen recently in the KSA, where these are now subject to a real estate transfer tax and are VAT exempt, the VAT regimes applicable to the real estate sector tend to differ from country to country.

Transactions with other GCC states

As mentioned above, the GCC States are in a VAT limbo, where they do not consider each other as implementing states and therefore consider each other as non GCC states. That means that a substantial part of the GCC VAT Treaty does not apply. Oman has not even bothered to implement the special place of supply provisions which apply between GCC member states for intra-GCC supplies.

In terms of the intra-GCC supplies, these will be subject to the same VAT regime as supplies made with third countries.

This means amongst others that supplies of goods made from Oman to another country will be subject to a zero rate, provided the conditions are met. The same thing holds for supplies of services made from Oman to a non-established customer when the service does not fall under one of the special place of supply rules. Hopefully Oman will not adopt the same very conservative position for such services as the other GCC states, and simply allow for a supply of services from Oman to a foreign customer to be zero rated, without further conditions. At this point, we only have a vague definition in article 52, 4 of the Law on exports of services, and no confirmation of the zero rate or further conditions in the ER.

Transitional provisions

As seems to have become customary upon the implementation of VAT, Oman Sultani Decree No. 121/2020 considers for contracts which remain silent on VAT, that the price is VAT inclusive. This flags to businesses that they should amend their contracts. An amendment to a contract is not always possible and especially with clients which do not have a full right to recover input VAT (e.g., governments or financial institutions), such negotiation may prove difficult.

Trained VAT eyes would not limit the amendments in a contract to simply stating that the price is VAT exclusive, but would suggest a host of amendments meant to protect the tax payer.

For continuous supplies, Oman Sultani Decree No. 121/2020 also states the obvious, which is that supplies which take place after the entry into force of VAT in Oman, are subject to VAT.

For supplies for which an invoice is issued or payment is received before the implementation of VAT, or before registration, and for which the supply is made after, VAT is due on the implementation or registration date.

Procedural process

The GCC VAT Treaty does not have any procedural provisions for each member state. They can therefore develop their own. Often jurisdictions then resort to what they already have, and then just apply that for VAT purposes. In the UAE and Bahrain, the legislators could not fall back on existing procedural provisions. In the KSA, the legislator could, but the procedural provisions were in dire need of reform. Those States therefore developed their own.

Oman has borrowed provisions from Oman Sultani Decree No. 23/2019 on the Promulgation of the Excise Tax, which entered into force previously. It has foreseen a strict regime, mirroring its other GCC member states. The tendency can be seen across government entities, which act in a very punitive way.

A business which deliberately does not register for VAT purposes, is punishable with one to three years imprisonment or with a fine of OMR 5,000 (approx. USD 13,000) to OMR 20,000 (approx. USD 52,000), as per Article 101 of the Omani VAT Law. The same penalties apply, amongst others, when a business deliberately refrains from reporting correct data in its tax return, or when it is found to be evading tax.

Such a very strict regime can be seen in the regime applicable to the responsible person. The person responsible for the business, is also responsible for the tax obligations. In addition, the responsible person is not allowed to leave Oman for more than 90 days a year, unless they have permission from the tax authority and appoint a replacement.

A range of penalties from OMR 1,000 (approx. USD 2,600) to OMR 10,000 (approx. USD 26,000) apply to violations such as failing to appoint the responsible person, failing to submit a tax return, issuing non-compliant invoices, and not keeping regular records, as stipulated under Article 100 of the Omani VAT Law. These penalties can be doubled for repeat offenders.

Interestingly, and perhaps a witness to the Omani accommodating nature, businesses can reach a settlement with the Omani Tax Authority. Reaching such a settlement cancels the assessment and the associated punishment.

The Omani Tax Authority also does not use the “pay first, then claim” principle the UAE uses. This means that, under the current legislation, we can expect that a relatively substantial amount of cases will be brought before the Committees.

VAT returns and invoices

Oman Sultani Decree No. 121/2020 does not prescribe the minimum information for invoices. It defers this to the Executive Regulations in article 144. Oman will have tax invoices and simplified tax invoices, the latter being the equivalents of receipts in continental Europe. According to the FAQ’s already issued by the Omani Tax Authority, a tax invoice needs to contain:

  • the word “tax invoice”;
  • date of issuance of the invoice;
  • date of supply;
  • a sequential number for the tax invoice;
  • supplier name, address and VAT number;
  • customer name and address, and TIN if applicable ;
  • description of the goods or services;
  • quantity of goods
  • payment date of advance payment, if any
  • total consideration, excluding tax
  • applied tax rate
  • price discounts, reductions and subsidies offered to customer
  • taxable value, and;
  • Value of the VAT due in OMR

Tax invoices in English are acceptable. However, as in UAE, the Regulations further specify that an Arabic translation may be requested by the Authority. Tax invoices and other records need to be kept for 10 years, according to Article 70 of the Omani VAT Law.

Tax invoices can be issued in a different currency, but need to be converted according to Central Bank rates. It is regretful that Oman also has not allowed for a contractual or systems override of these rates, as this puts a substantial burden on businesses.

The format of the VAT return is not known yet. Hopefully the format of the VAT return will be closer to the UAE and not the KSA and Bahrain, where the latter countries have adopted a VAT return where the VAT which is reverse charged, does not have to be reported, if the business has a full right to recover input VAT (probably a first globally!).

We do not foresee any additional reporting associated with VAT, at this point.

Way to move forward

Oman has been a sleepy tax jurisdiction up until recent years, with little reforms. Over the last few years though, we have seen the implementation of excise tax, common reporting standards, the introduction of country by country reporting and the implementation of the tax card. Before that we had the signature of the MLI as well, impacting the double tax treaties negotiated by Oman.

Although Oman already has a direct tax framework in place, applying corporate income tax at a rate of 15% and, mirroring the KSA, a set of withholding taxes, we expect the legislative framework to be subject to further reform. Additionally, the implementation of VAT alongside the expected introduction of a personal income tax in 2022 also formulates the notion that the Sultanate is on the right path to diversify its revenue stream via extensive tax reforms.

Finally, Oman is a friendly, slow paced country. The punitive provisions in Oman Sultani Decree No. 121/2020 bring a different tone though. The consultant written provisions will unfortunately create a fear with tax payers. Tax payers from more mature jurisdictions especially are more used to a cooperative tax administration, which allows for easy corrections of mistakes and which favours correcting mistakes through voluntary disclosures. The transformation from the Secretariat General for Taxation, the old Omani tax authority, into the Oman Tax Authority, signals a major change in behaviour and approach, especially where amendments can be made by the Tax Authority itself, just as in the KSA, and do not need to pass by the cabinet (like in the UAE, for example). Changes can therefore be effected much faster and easier. The KSA for example has amended its VAT law already at four occasions in the last 2.5 years.

The next step will be the further publication of the Tax Authorities’ guidance which will display it’s interpretation of the rules and likely approach, allowing for additional comparison to be made between Oman and its neighbouring states.

Conclusion

As aforementioned, the financial constraints resulting from the pandemic has opened the eyes of the GCC countries and drove them to undergo much-needed reforms. Although the VAT initiative was identified in 2016, the unfortunate events of 2020 has pushed Oman to finally join the KSA, Bahrain and the UAE.

Despite the inevitable similarity to the GCC Treaty, Oman Sultani Decree No. 121/2020 retains some degree of autonomy and uniqueness relative to the other states. As expected, this divergence expanded following the publication of the Executive Regulations as it was the case with the other states.

With the publication of the Law and Executive Regulations, it is imperative that the Omani Tax Authority provides comprehensive and clear guidance to taxable persons in order to avoid future complications, and that these taxable persons now finalise preparations for the introduction of VAT in Oman.

Categories
Free Zones GCC Tax

KSA’s First Free Zone

Categories
GCC Tax

Non taxable legal persons in the GCC may need to register

Non taxable legal persons in the GCC may need to register

The three GCC countries which have introduced VAT so far, UAE, KSA and Bahrain, have based themselves on the GCC VAT Treaty to draft their laws. The next country to do so, Oman, has done the same.

There is a special group of VAT payers, which fulfill a particular role as stakeholders in the VAT system. They sit on the fringes of the VAT system, not being a full on taxable person, and neither simply a payer, like private persons would be.

In the EU, this special group is sometimes called the “group of four”, or the “persons benefiting from a special regime”. These are the non taxable legal persons, the exempt tax payers, the small business and the farmers.

Together with the capital assets scheme, it is one of the more technical matters in VAT, and its status under GCC VAT is lacking clarification. Below, we explore the status of the non taxable legal persons. In the upcoming articles, we will be covering the other categories of special taxable persons in the GCC, which are listed below. Going forward we will refer to them as “special tax payers”.

GCC VAT and its origins

While not explicitly stated, the origin of the GCC VAT Framework (or “Common VAT Agreement of the States of the Gulf Cooperation Council” in full) lies in the EU VAT directive 2006/112/EC. More specifically it corresponds to the version applicable after 2011 and before 2013. The reasons for drawing inspiration from the EU VAT directive are obvious. The GCC had ambitions to copy the EU model. 

For example, the Economic Agreements between the GCC States of 1981 and 2001 read like the Treaty of Rome, which established the European Union.

The GCC had ambitions to form a similar trade bloc like the EU. While it indeed negotiates free trade agreements together, internally it works in a different way. It tried to establish a currency union as well, but was unsuccessful, although given that the countries have pegged their currency (relatively closely to) the US dollar, in practice they may have implemented certain elements of the monetary union. One of the more eye catching provisions of the Economic Agreements is that GCC citizens are allowed free circulation within the GCC. Such free circulation is again exactly the same principle which applies to EU citizens.

In addition to wanting to follow in the footsteps of the EU politically, there is another good reason to incorporate EU VAT provisions. The EU has the oldest VAT systems, and has the oldest VAT systems integrated in a customs union (see https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=15 for a discussion on the genesis of the laws).

The copy is never better than the original

Like VHS tapes, the copy is never better than the original. This holds even more true when the copy is made from an old original. The GCC VAT Treaty does not incorporate the important changes to the EU VAT directive entered into force in 2013, 2015 and now in 2021.

At the same time, that does not necessarily need to mean that adverse consequences are triggered for the GCC States. The UAE has for example integrated the 2015 changes in its guidance and de facto applies them (see https://www.aurifer.tax/news/e-commerce-vat-rules-in-the-gcc-a-missed-opportunity-at-perfect-harmonization-with-the-eu/?lid=482). Bahrain has done the same in its guidance for the place of supply rules applicable to telecoms services.

A special group of tax payers

Like EU VAT, GCC VAT has two important main groups of stakeholders. They are the taxable persons on the hand and the private individuals on the other. The taxable persons are the businesses complying with VAT. That means they charge it, collect it and pay it to the tax authority. The private individuals are the consumers who carry the economic burden of the VAT and pay it to the businesses. They are the ones hit with the rise in cost.

Let us say that the taxable persons are “all in” and the private individuals “all out”. The private individuals (almost) have no obligation whatsoever. Although it may surprise, they have no legal obligations, except for their contractual obligations towards their contracting parties (and for imports made by private individuals).

There is another special group though. They often go by a special name even. In France, for example, they call them the persons benefiting from a special regime (“personnes beneficiant d’un regime derogatoire”). Elsewhere they may call them the “group of four”. In this article, we refer to them as the “special tax payers”.

Whether the special tax payers have VAT obligations or not, depends on their activity. The special tax payers in the EU are:

  • Small businesses
  • Exempt tax payers
  • Non taxable legal persons (including government bodies and charities)
  • Farmers and tax payers subject to a lump sum regime

Out of these four categories, the first two need to report VAT on services they receive from abroad. The last two need to report VAT on services they receive from abroad if they are already registered for VAT purposes because they have acquired goods from other EU Member States in excess of a threshold (between EUR 35,000 and EUR 100,000).

The special tax payers in the GCC are:

  • Small businesses (i.e. businesses below the mandatory registration threshold)
  • Exempt tax payers
  • Non taxable legal persons
  • Government bodies
  • Charities and Public Benefit Establishments
  • Companies exempt under international event hosting agreements
  • Citizens constructing their own homes
  • Farmers and fishermen

The taxable person concept in the GCC

The concept of taxable person in the GCC is where the GCC deviates from more mature VAT systems. In the EU, a taxable person is “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity”. Economic activity is then “Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions…”.

Although at first sight only subtly different, a taxable person in the GCC is “A Person conducting an Economic Activity independently for the purpose of generating income, who is registered or obligated to registered”. The last bit of the phrase is crucial.

In the EU, the registration is a consequence of the fact that an economic activity is conducted, it is not a defining element of it. Note also that it is a global concept in the EU, i.e. anyone in the world can be a taxable person. In the GCC, anyone in the world can conduct an economic activity, a subtle difference.

As a comparison, the GCC inspired itself on the UK definition of a taxable person, which is “A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.”

VAT registration requirements

A Person is required to register for VAT purposes when resident in a Member State and making annual supplies in that State above the Mandatory registration threshold of SAR 375,000 (USD 100,000 or its equivalent in local currency). Non resident businesses making taxable supplies in a Member State need to be registered as from the first cents made.

A person can voluntarily register when resident in a Member State and making annual supplies in that State above the Voluntary registration threshold of SAR 187,500 (USD 50,000 or its equivalent in local currency), or incurring taxable expenses for the same value.

The GCC Member States have not deviated from this principle yet, although the UAE has set the forward looking threshold for the next 30 days instead of the next year (mimicking the UK).

Calculating the thresholds

According to the GCC VAT Treaty, and the Omani VAT law, in order to calculate the threshold, the following elements need to be included:

  • The value of taxable supplies, except for capital assets (category 1)
  • Value of goods and services supplied to the Taxable Person who is obliged to pay Tax (category 2)
  • The value of intra-GCC supplies which have a place of supply in another State but would have been taxable had they taken place in the State of residence (category 3)

The third category is not applicable right now, as none of the GCC Member States recognize each other as Implementing States.

The first category is straightforward, the second is much less so. The second category has been implemented in the UAE to take only into account imports of goods and services. In KSA, the receipt of reverse charged purchases are taken into account (which may include goods which are already in KSA when supplied by a non-resident and therefore not imported, contrary to the UAE). KSA and Bahrain also include deemed supplies in the calculation.

The second category mentions that the recipient must be a Taxable Person. It may be a Circular reasoning, since a business may not be a Taxable Person, but as a result of purchasing from abroad may become a Taxable Person and therefore may be required to register.

The first group of Special Tax Payers – the Non Taxable Legal Persons

In this series of articles, we will be covering the special tax payers in the GCC listed above, and their VAT obligations. We start with the Non Taxable Legal Persons.

This group of special tax payers is not explicitly mentioned in any of the GCC legislations so far. Its category is created following the application of the concepts of VAT law. 

It is possible that a legal entity, such as, but not limited to, LLC’s, PJSC’s, … is simply not in scope of VAT. Even though a company is usually set up to conduct business, in a number of a cases, it might not actually be conducting business from a VAT perspective. Such an entity would not constitute a taxable person.

There are a number of other situations as well though, where legal entities are in business but are not making supplies in the material scope of VAT (we are not covering supplies which are in the material scope of VAT but outside the GCC based on the place of supply rules).

Conducting an economic activity, or its colloquial term, being in business, is defined as “An activity that is conducted in an ongoing and regular manner including commercial, industrial, agricultural or professional activities or services or any use of material and immaterial property and any similar activity”.

The definition of economic activity is as broad as possible, and intended to encompass a maximum number of situations. It generally includes all types of commercial activities.

In regards to non-taxable legal persons, we therefore distinguish:

  • passive legal persons
  • legal persons in business but making material out of scope supplies

We discuss these in further detail below.

Passive legal persons and legal persons not in business

The first category could be described as passive legal persons. Although they are a legal entity and therefore potentially (or presumably) set up to conduct business, they do not do so. An example is a holding company, such as JAFZA offshore companies which are set up simply to hold shares or an asset (see https://www.aurifer.tax/news/more-often-than-not-jafza-offshores-need-to-register-for-vat/?lid=482&p=12 for a discussion on the matter). Another such an example is a charity not conducting business, a dormant company, or an entity only receiving subsidies.

Given the fact that they are not in business (not conducting an economic activity), they cannot qualify as a taxable person and therefore, they remain outside of the remit of the scope of VAT. 

This means that they are the equivalent of a final consumer, i.e. they pay the burden of VAT since they cannot recover any input VAT. Domestic input VAT incurred in the GCC is not deductible, and, importantly, they are not required to apply the reverse charge mechanism on any services they receive from abroad. 

In regards to import VAT, they are considered the equivalent of a consumer (but cannot benefit from certain import exemptions). For imports of goods by non-registered persons, the UAE’s FTA has stated that the payment of VAT needs to be made directly to the FTA, separately from the payment of customs duties. Alternatively, a non-registered person can use a courier company, with the latter unable to recover the import VAT.

Note that this is different in the EU, where this type of entities would have the obligation to pay VAT on services received from abroad, when it is already registered for VAT purposes, for example because it made intra-community acquisitions of goods from other EU Member States. Such a registration is an obligation, even if the entity does not make any other taxable supplies, but makes purchases from other EU Member States.

Legal persons in business but having materially out of scope income

A company could be conducting an economic activity, but not be making taxable supplies. An example is a business making investments in futures (although the UAE considers these exempt from VAT), recording unrealized capital gains, recording an appreciation of the value of a portfolio, or collecting dues from borrowers after purchasing a non performing loan portfolio. 

The question then begs what the VAT status is of such non taxable legal persons, if it is in business but not making taxable supplies.

When such an entity is conducting an economic activity, in order to calculate the registration threshold, this category would not have any income which counts towards taxable supplies (category 1 above).

However, one also needs to count the value of category 2. As mentioned above, there is some divergence between the approaches in the GCC States. Oman and Bahrain follow the GCC VAT Treaty, taking into accounts goods and services supplied to a Taxable Person who is obligated to pay VAT, whereas KSA takes into account the receipt of goods and services, and UAE only the “imports” of goods and services by Persons.

KSA confirmed its stance, and requires foreign businesses making supplies to non taxable persons (note it does not say “legal persons”) to register “where appropriate”. Presumably, GAZT means situations where the place of supply rules designate KSA as the appropriate jurisdiction to levy tax. GAZT confirms that if the recipient is carrying out an economic activity and the recipient is not registered for VAT purposes, the receipt of services will count towards the mandatory registration threshold.

In short, this category of legal persons, when it conducts an economic activity, needs to register for VAT purposes when it exceeds the registration threshold based on expenses or imports. It will then need to apply the reverse charge mechanism on services received from abroad, and be unable to recover that VAT.

Categories
GCC Tax

E-commerce VAT rules in the GCC: a missed opportunity at perfect harmonization with the EU?

E-commerce VAT rules in the GCC: a missed opportunity at perfect harmonization with the EU?

With the publication of an e-Commerce guide and a well established practice since the introduction of VAT on 1 January 2018, this webinar looks at the different aspects of VAT applicable on aspects of e-Commerce. We will give practical examples and show how to comply in practice with the rules. Given the enormous importance of the e-Commerce in the region, this webinar is a must attend for all tax practitioners.