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Below we analyse in a comparative manner how the VAT regimes apply to the health care sector in the GCC Member States which have implemented VAT so far, which are the UAE, KSA, Bahrain and Oman. As for Qatar and Kuwait, we are still expecting further announcements from the governments there as regards to the timeline of the implementation. It is still expected they will implement at some point.
Medical Care
The principal supply within the healthcare sector is the direct medical care given to patients by medical practitioners. In today’s world of modern medicine, this encompasses a long list of services and related products. This includes, for example, the basic doctor to patient care, specialist medical treatments within clinics or hospitals, dental or optician services, and physical and mental therapies.
Most VAT regimes around the world implement exemptions (with no recovery of VAT on associated costs) for healthcare, as a basic human need. The affected businesses are often partially state funded through grants and other mechanisms.
The GCC VAT regime has also considered this approach, however zero-ratings (which give deduction of VAT on associated costs) have mainly been favored across the region, in order to shield the sector during initial implementation from aspects such as price inflation and supply/demand economics. This has been different only for Oman.
VAT treatment for health care services
Article 29 of the GCC VAT Agreement gives Member States the option to apply an exemption or a zero rate to the healthcare sector. Therefore, the option to exempt, zero-rate or standard-rate some or all of the healthcare sector transactions (in goods and services) is at the discretion of each member state. While the GCC VAT Agreement discusses sectors, from a VAT point of view there is no such thing as a sector exemption. Only transactions can be exempt.
The UAE, as per article 45 of Federal Decree-Law No. 8/2017 on Value Added Tax, and Bahrain, as per article 53 of Bahrain Decree-Law No. 48/2018 on Value-Added Tax, have applied the zero-rating to preventative and basic healthcare services and related goods and services which are necessary for the treatment of a patient and are administered by licensed healthcare providers. This includes, for example, hospitals, mediclinics, doctors, nurses, dentists, and pharmacies.
Article 69 of Bahrain Resolution No. 12/2018 Issuing the Executive Regulations of the VAT Law provides further insights on the types of transactions falling within the zero-rating, such as treatment of mental illness, speech therapy and sight/hearing tests.
Similar to other global VAT regimes, article 41 of Cabinet Decision No. 52/2017 on the Executive Regulations of Federal Decree-Law No. 8/2017 on Value Added Tax in the UAE and article 69 of Bahrain Resolution No. 12/2018 specifically exclude elective cosmetic treatments from the zero-rating.
The KSA has applied the standard VAT rate of 5% (now 15% since 1 July 2020) on all private healthcare services, unless they are provided to Saudi nationals. For Saudi nationals, effectively, a zero rate has been implemented.
Public healthcare services are kept outside of the scope of VAT. This means that they also cannot recover any input VAT, unless they fall under the refund scheme for government entities.
In Oman, the legislator has settled on a policy to exempt health care services and related goods and services (article 47, 2 Omani VAT Law). This is much in line with EU VAT systems. Its implementation has an adverse impact on the input VAT recovery for businesses making such supplies (e.g. hospitals). Given the very recent implementation, with the application of VAT as of 16 April 2021, there is currently no guidance available in Oman.
Ancillary services
Often when a patient requires medical care, they will need various types of diagnostics, tests, prescriptions, hospital or respite stays, products or devices, transportation, accommodation, and more to support their treatment. In other words, there may be many ancillary goods and services supplied. The ancillary services generally follow the treatment of the main supply (out of scope, exempt, zero rated, or standard rated).
From a VAT perspective, these ancillary services introduce an extra layer of complexity, as the VAT rules are applied on a transaction-by-transaction basis.
The VAT rules do however recognise that when various goods and/or services are supplied together, at times for one single consideration, there may be one principal supply and VAT treatment, with the other supplies ancillary in nature (i.e., a single composite supply). Alternatively, each good and service may be an individual supply in its own right, with an aim in itself and individual VAT treatments applicable (i.e. multiple supplies).
Given the presence of the various regimes in the GCC, taxpayers may resort to wanting to include as many items as possible in the applicable zero rates or exemptions (despite the input VAT deduction limitation for exemptions). To mitigate this risk, in KSA, ZATCA states that “Private Healthcare Providers should not seek to artificially value zero-rated medicines and medical goods supplies at a higher value than commercially appropriate, and should be able to provide support of the commercial pricing adopted upon request.” (ZATCA Healthcare Guideline , Section 4.2).
Some jurisdictions have specifically taken a position in regard to the VAT treatment applicable to ancillary services, when these are not considered to be part of a single composite supply.
United Arab Emirates
Bahrain
Oman
Subcontracting
There are often complex supply chains in the healthcare sector before the final services/goods can be provided to end consumers. Often, the medical practitioner dealing with the patient seeks external professionals for core healthcare services in specific areas of expertise. They are sometimes referred to as “consultants”. At times, these are engaged between two businesses within the healthcare sector.
It was generally expected that these supplies would similarly avail of the healthcare zero-rating regardless of the fact that the person contractually “receiving” them may not be the ultimate “beneficiary” – i.e. that the zero-rating applies throughout the full supply chain.
This is the case for example in Bahrain, where the zero rate is not limited to the B2C supply to the patient. When a hospital insources the services of a VAT registered medical practitioner for example, the VAT registered practitioner can apply VAT at a zero rate (Section 4.6 of the Bahraini VAT Health Care Guide).
However, in the UAE, the subcontracting of normally zero rated healthcare services is not subject to a zero rate, on the account of the fact that a business cannot be the person who receives the treatment (Public Clarification VATP016).
Pharmaceutical products and medical equipment
The UAE, KSA, Bahrain and Oman have implemented a zero-rating for certain pharmaceuticals and medical equipment, with lists of approved products available from the regulating health authority for each country. This zero rating was mandatory under article 31 of the GCC VAT Treaty.
As there are no references to the person supplying the products, the zero-rating will be applicable regardless of what stage in the supply chain the transaction takes place. This means they also apply on imports.
All other goods sold in to or within the healthcare sector, or imported, which do not fall within the prescribed list of pharmaceuticals and medical equipment, or other related goods, would be liable to VAT at the standard rate of 5% (or 15% in KSA).
It is not required that the ultimate recipient or user has a prescription or verified medical use for such commodities.
The Private Healthcare Providers in Saudi Arabia which are charging VAT on their services must identify the qualifying goods that are eligible for zero rating, which are provided to the patient as part of the therapeutic service. This does not apply to medicines or medical goods of a trivial value which are consumed or discarded during the provision of services.
Below, we have mentioned the requirements per jurisdiction.
Government bodies
Public healthcare services will generally be outside the scope of VAT, when undertaken by government bodies empowered to engage in such activities in a sovereign capacity (i.e., they are not carried out in competition with the private sector), as per article 10 of the UAE VAT Law and article 9 of the Bahraini VAT Law. KSA stated that a Government body acting in its capacity as a public authority shall not be considered as conducting an economic activity (Article 9 VAT Implementing Regulations).
KSA has issued guidance in this respect and considers that income of government bodies are outside the scope when those entities carry out designated activities assigned to them by the State through the Law, Royal Decree or order establishing those bodies to carry out public functions (ZATCA VAT Guideline for government bodies in KSA, issued on 12 August 2021, version 1.0).
Supplies not carried out within a public capacity, are subject to normal VAT rules (e.g., certain car parking, gifts shops within hospitals, etc.), including registration requirements.
Special regimes, as allowed for in article 30 of the GCC VAT Agreement, are available for government bodies, which are not within the scope of the VAT regime, in order to allow them a refund of VAT on associated costs.
The KSA VAT regime for public hospitals is an anomaly, as the public hospitals enter into competition with the private sector.
For an overview of the VAT regime applicable to non taxable legal persons, you can read one of our previous articles here.
Insurance
The provision of health insurance, re-insurance and associated broker services are all subject to the standard VAT rate of 5% (or 15% in KSA) across the region to date.
This VAT may only be deducted when incurred by a VAT registered person, for business purposes, and if such VAT is not specifically blocked under the local VAT deduction rules – for example, where a business is obliged to provide health insurance to its employees under local employment law, the associated VAT would be deductible.
Where businesses in the health insurance industry pay VAT on supplies made by healthcare professionals to the insured, care should be taken when determining the business’ VAT deduction entitlement, as only VAT on costs contracted for and incurred by the insurer are deductible.
e-Healthcare
The development of the digital economy has created challenges within global VAT regimes in terms of the treatment of goods and/or services previously supplied in physical form or face-to-face, and now rendered digitally. There are some instances, for example physical and digital books, which have seen alternative treatments in other regions.
However, generally speaking, the VAT treatment should not change, for the supply of healthcare goods and services, as a result of them being rendered or ordered digitally.
The treatment of any associated technology or digital services should be assessed under separate VAT rules.
Registration, compliance & penalties
With certain reliefs available from registration and invoicing for wholly zero-rated activities or transactions, as set out within article 13 of Federal Decree-Law No. 8/2017 in the UAE, article 32 of Bahrain Decree-Law No. 48/2018, and article 9 of Saudi Arabia Administrative Decision No. 3839/1438 on the Approval of the Implementing Regulation of the VAT Law, businesses should assess their registration and compliance obligations in the region, comply and/or avail of reliefs where available, in order to mitigate the risk of penalties.
Further evolution?
The VAT regime applicable to healthcare services is certain to further evolve, subject to positions adopted by the tax authorities, case law and policy decisions made after testing the initial adoption. In addition, the different health care authorities may influence the process, and are also empowered to change the VAT regime for certain items.
Keeping a finger on the pulse for the health care sector is therefore a requirement.
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