Value Added Tax (VAT) is an indirect tax based on the consumption applied to all goods and services sold for consumption or use, products sold for export or services provided to customers abroad are usually not subjected to VAT whereas imports are taxed.
Value Added Tax applies to all commercial activities involving the production and distribution of goods and provision of services. Under any VAT regimen, end customers are borne to the ultimate tax burden.
The VAT in GCC Countries
Under the GCC VAT agreement approved by the six GCC member states, VAT is introduced in the GCC region. KSA and UAE are the initiators of the VAT with the implementation of 5% on 1st January 2018.
Kingdom of Saudi Arabia implemented Value Added Tax in a phased manner: the first phase, came in to effect from 1st January 2018, the second phase, came into effect from 1st January 2019.
Kingdom of Bahrain implemented the first phase of VAT from 1st January 2019, the second phase, from July 2019 while the third phase is set to implement from January 2020.
Under the unified GCC VAT agreement, the member states have the discretion to establish their own in respect to certain aspects of the Value Added Tax. There may be various levels in the application of these provisions, which is likely to create differences in the VAT rules and compliance requirements when one compares two different GCC Countries. When comparing the national legislation of three implementing GCC states, UAE, KSA, and Bahrain, this is evident.
Key terms of the Unified Agreement
- The VAT will apply to goods and services at a standard rate of 5%.
- Businesses with an annual turnover of SAR 375,000 (or its equivalent from any other GCC member state currency) should register for VAT.
- Businesses generating about half of the threshold turnover may register for VAT voluntarily.
- According to the Unified Agreement, the following sectors are applicable for a 0% VAT rate at the discretion of each member state.
- Medicine and medical equipment
- Transport of goods and passengers (intra-GCC and international) and associated ancillary services
- Export of products outside of the GCC
- Certain transactions in gold and silver
- Certain food items (bread and milk)
- Oil and gas including oil derivatives
- Supply of means of transportation for commercial purposes
- Financial services
- Goods imported
5. The Unified Agreement states the VAT due on import of products to be paid at the first point of entry in the Gulf Corporate Council (GCC).
Businesses in Oman have time to plan and ensure a smooth rollout of the Value Added Tax (VAT) similar to the VAT of the UAE.
Oman is demographically different from other GCC countries, with less dependence on oil and petroleum products and increasing focus on agricultural produce exports like dates, seafood, etc., speciality chemicals, and expanding tourism and hospitality industries.
It is an excellent time to commence VAT implementation by conducting extensive VAT impact analysis (both technical and fiscal), ERP changes, and preparation of action plan for transitioning into the VAT regimen, with the GCC Framework and laws of the three-member states available.
For your taxation needs in Oman, read our blog on taxation services in Oman, get great tips on how to ensure your tax preparation business succeeds, get insights on VAT registration in UAE, Dubai, and VAT implementation in UAE.
Preparing for VAT in Oman in 2019
As VAT is unlikely to be introduced in Oman till 1st September 2019, it is imperative for companies to review the existing contracts continuing till the introduction of VAT or beyond that date and determine whether or not the deals include clauses relating to VAT payment. In an event where such a transitional contract does not have VAT clauses, it may be useful to determine if the counterparty will agree to the amendment to include a VAT clause; if it is in the interest of the company to do so. It also may be helpful to identify to what portion of the supply will subject to VAT.
In an event where the transitional contracts do not have the VAT clause, it is worthwhile to consider if the company will practically be able to collect the amount of VAT chargeable in respect where such a contract has already been made.
All the contracts continuing till or beyond 1st September 2019, should include relevant VAT clauses. The parties should also determine who will be paying the Value Added Tax.
The effect of VAT on the cashflow, especially in instances where customers are invoiced but will not require to make payment until later.
Nonetheless, VAT is payable upon the issuance of a tax invoice even if the customer did not pay such a price, which may have a significant impact on the company’s cash flow and may require reconsideration of payment terms.
The Unified Agreement, in the case of a group of companies, provides for a group of companies in the same member state to be treated as a single taxable entity or a tax group. That group of companies will determine if this process is advantageous for them to register as a tax group.
Practically, it is better for companies to ensure their working software takes into account VAT pricing and that they can issue tax invoices under relevant legislation.
Key Impact Areas
Over the decades of observing VAT law in other countries, there are a few key impact areas of the law namely
- Finance and Accounting
- IT and system refresh
- Marketing and Sales
- SCM (Supply Chain Management)
- Ongoing Contracts
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