The United Arab Emirates (UAE) introduced the Economic Substance Regulations (ESR) in April 2019 to be excluded from the EU’s COCG grey list (European Union's Code of Conduct Group) and not to be classified as a harmful tax jurisdiction by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
Not long after its introduction, UAE launched a new (amended) ESR legislation in August 2020, which was based on the outcome of the review of the no or only nominal tax (NOON) jurisdictions, concluded in June 2019, by the OECD’s Forum on Harmful Tax Practices (FHTP). The new law is more aligned to the international standards stipulated in the BEPS Action 5 and is retroactively effective from 1 January 2019.
The new ESR law introduced exciting amendments, such as: granting exemptions to branches and permanent establishments of foreign entities from meeting the substance test, expanding the scope of the distribution and service centre business, extending its applicability to government entities having a global presence, etc. In addition to this, the new ESR legislation granted substantial powers to the Federal Tax Authority (FTA) to oversee compliance, perform assessments and impose administrative penalties on defaulters.
The Ministry of Finance (MoF) also built a dedicated portal for licensees to submit their ESR notifications and reports to encourage compliance. Through this portal, licensees remain up to date about their ESR obligations, receive enquiries and assessment and penalty notices from the Regulatory Authorities (RA) or the FTA through the same channel.
In response to the ESR submissions made by the licensees for FY 2019, the RA and FTA have been reasonably active in asking for explanations and documentary pieces of evidence to substantiate the exemption status or meeting the economic substance test. In certain cases, the Regulatory Authorities have requested licensees to provide their land lease agreements, minutes of board meetings, outsourcing agreements, and other documentary evidence to prove that it meets the economic substance test. In other cases, the request for information was vague and broad, leaving room for a lot of interpretation. It is also observed that the RA/FTA have not hesitated to levy penalties in cases where the licensees have failed to comply with the ESR obligations.
To resolve technical errors, the support team at the Ministry of Finance (MoF) has been responsive over emails and calls. Additionally, licensees are allowed to rectify/amend the submitted ESR notifications or reports without levying additional penalties (although the deadline may be very short, e.g., five (5) business days).
Despite the available guidance and technical support from the MoF, licensees faced several challenges in meeting the ESR requirements, e.g., identifying the ultimate parent entity and/or ultimate beneficial owners in limited liability partnership structures, calculating the income/expense related to the relevant activities in the absence of prescribed methods, classification of the relevant activities, meeting the branch exemption, etc. Licensees also struggled to meet the substance test that requires them to substantiate the fact that they carry out the relevant activity, i.e., they are directed and managed in the UAE, and they meet the "adequacy test", i.e., they have adequate expenditure, premises and employees to conduct their business operations in the UAE, either themselves or through an outsourcing service provider.
With several factors involved in doing business globally, Multinational Enterprises (MNE's) might fail to meet the substance test in the UAE. Failure in meeting the substance test results in an administrative penalty of AED 50,000 for the first offence and AED 400,000 for a subsequent one. Further, it may also result in other countries taking defensive measures such as denying deductions, imposing withholding taxes on payments to companies or applying controlled foreign corporation rules to subsidiaries in such jurisdictions.
The key takeaway from this discussion is:
- Licensees should evaluate whether they carry out a relevant activity in the UAE and be prepared to demonstrate that their core income-generating activities are in line with the income and profits reported in the UAE.
- Licensees that have failed to meet the ESR requirements for FY 2019 must take all necessary steps to ensure they comply with the ESR requirements for FY 2020 to avoid penalties, sanctions and other measures taken by the foreign tax jurisdictions.
- Licensees must retain all documentary pieces of evidence for claiming an exemption status or meeting the substance test.
- Licensees must be vigilant to provide documentary evidence/explanations to the enquiries they might receive from the RA/FTA during the ESR assessment.
- Successively, licensees must ensure they submit the notification within six months from the end of its financial year and if it is liable to submit an ESR report, it must submit it within twelve months from the end of its financial year.
The implementation of ESR by the UAE is subject to a peer review from January 2021 to ensure the standard is effectively implemented by UAE. As a result, UAE may amend its ESR legislation in the future again.
Round 1 of the ESR was underestimated by the businesses, but the RA/FTA took it seriously. Therefore, as a forewarning for round 2, businesses that carry out one or more relevant activity in the UAE must either consider increasing their substance if not adequate or consider alternative restructuring options, e.g., redomiciliation into another jurisdiction, restructuring, liquidation, etc., to dodge the substance requirements. Tax payers who fail to meet the substance test for a second consecutive year will be exposed to a penalty of AED 400,000, and, what is probably worse, the tax authority of the parent jurisdiction will be informed of the lack of substance in the UAE.
Our previously conducted webinar may help in filling out the notifications and forms. Additionally, consistency in meeting the different disclosure requirements is important, as Ultimate Beneficial Owner filings and the Country by Country reporting may require similar information to be disclosed and these disclosures allow reconciliation with the ESR information disclosed.
Round 2 starts with notifications by end of June 2021 for FY 2020. Tax payers have been warned.
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.
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
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:
- real estate
- local transport; and
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.
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.
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.
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.
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.