The Gulf Cooperation Council (GCC) member states have recently agreed and signed a long awaited Framework agreement that will provide the basis for the introduction of a uniform VAT system. This means that the GCC region consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates will soon introduce a VAT.

 

The Framework agreement will be introduced in the local laws of each GCC member state. It is expected that detailed insight can be provided by mid-2017 when GCC member states will be releasing their local VAT laws, administrative requirements and guidelines. Even though the current expectation is that all member states will apply the VAT system starting 2018, member states can delay the introduction until 2019. The standard VAT rate for the region will likely be set at 5%. As with the VAT system in the EU region, exemptions and reduced rates may apply and these may differ per GCC member state involved.

 

For businesses that are established within the GCC, the impact of a VAT will be significant as they will need to assess and address the consequences for the complete scope of their business activities and processes. In this context, VAT registrations need to be applied for in one or more jurisdictions, procurement and sales contracts will need to be addressed, VAT accounting needs to be set up and IT systems need to be upgraded so that these can cope with the VAT requirements. Personnel involved in VAT affairs needs to be properly trained as well.

 

But please be aware that that not only businesses established in the GCC region are affected by the introduction of the VAT. Foreign established businesses that trade in or with the GCC can also be required to meet new local VAT obligations. At this point specifics are not clear as the national VAT laws have not yet been released for publication. In the meantime, it seems fair to assume that negative consequences for traders active within the EU will apply on a more or less same basis within the GCC region.

 

Aside from administrative requirements that will need to be met in the GCC region, business should especially assess whether they risk loss of margin. This could for example be the case if a current contract describes the agreed pricing for goods or services as being “VAT inclusive” (typical sellers risk) or if VAT on costs unexpectedly becomes chargeable without opportunity to recover (a buyers risk). Working capital requirements must also be assessed for each supply chain involving the GCC region. Not only to determine the VAT cash flow impact, but also to review whether efficiencies need to or can be achieved.

 

Such “VAT ready” business reviews should already be made. At the same time -and this cannot be repeated enough- the capability of IT systems should be reviewed as the implementation of updates can be very time consuming and burdensome.

 

Forewarned is forearmed.

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