Over supply of oil and under demand due the current economic crisis caused by COVID-19 has led to WTI prices for oil fall below zero as at 21 April 2020. Storage capacity is near full and therefore expensive. In the present situation, sellers are paying buyers to take oil off of their hands.
The situation is complicated for the oil sector and adds another “unprecedented” badge to the state in which the world currently finds itself in dominated by a health and economic crisis. Like oil companies, tax authorities now also face the task of having to consider how their legal frameworks apply to negative oil prices. We analyse those issues below.
Buyers are doing sellers a service for VAT purposes
At first sight Value Added Tax rules are made for transactions happening with a positive value. They calculate VAT on the price agreed with the customer. Whether the VAT laws implicitly assume that the transactions are always at a positive value is probably debatable, but certainly not unreasonable.
The tax authorities are expecting VAT revenue on the sales, not having to refund VAT to the sellers. Although the VAT law allows you to sell at a loss, to make no sales but have the intention of selling and still recover input VAT, hand out goods for free (taxed as deemed supplies), it does not foresee the situation of negative values charged when a good is sold.
The current situation is very similar to a furniture store charging a pick up fee for picking up your old furniture. The furniture store receives the ownership of the old furniture for free and charge a service fee for the pick-up. It then goes on to perhaps on-sell the old furniture, up-cycle it or use it for its own purposes.
Irrespective of the technical debate, tax authorities will be lukewarm to the idea to allow sellers to issue invoices with negative values. This would effectively mean that for each sale made, the tax authority would have to refund VAT to the seller. The only negative values allowed to be mentioned by sellers are usually reserved for credit notes. It therefore stands to be reasonably expected that tax authorities will take the view that buyers are rendering a service to the sellers. Therefore the buyers will need to issue an invoice to the sellers.
Depending on the applicable place of supply rules, that service will then effectively be subject to VAT, or not. Given that most of the sellers and buyers will be businesses with full input VAT recovery, that should not constitute an issue.
With the place of supply rules in the individual GCC countries, which deviate from the GCC VAT Framework, and their mix up with the zero rating rules (oddly imported from New Zealand), this may trigger some additional concerns for foreign sellers, which may be charged with 5% GCC VAT when the service relates to a good in the GCC. Even though a business refund is foreseen, it is only currently effectively available in the UAE, and only on condition of reciprocity.
In the UAE, VAT registered buyers of crude or refined oil are expected to apply the reverse charge mechanism on the domestic purchase of these goods. Instead of reverse charging on purchases for negative amounts, they will now likely need to apply VAT on a service. In a domestic context, this means an additional 5% VAT added for the seller, which, recoverable as it may be, will lead to added pre-financing for the seller. In KSA, local traders were already used to applying 5% VAT to each other. In Bahrain, a zero rate applies for oil and oil derivates.
It is safe to say that this is uncharted territory and that diverging opinions on the topic may emerge.
Non deductible expenses and additional withholding taxes
The situation from a corporate tax point of view seems, again prima facie, slightly more straightforward. The corporate tax is generally calculated on the basis of the books of account of the seller. From a financial point of view, and from a conceptual point of view, those books could record negative revenue (Note: the author of this article is not an accounting expert).
Negative revenue goes untaxed, because the business is not making positive sales. However, does the negative revenue constitute a deductible expense which reduces your corporate tax liability? This issue will surely be hotly debated with the tax authorities in the GCC which will be required to take a stance.
Additionally, in countries with broad withholding tax provisions on services, like KSA, there may be an additional element of surprise. The main concern with the fact that buyers may now be providing services to the sellers, is that when such a service takes place in an international context, the Saudi payer may need to apply a withholding tax (subject to relief in double tax treaties).