Member states of the Gulf Cooperation Council (GCC) have enacted a Unified Agreement for VAT (Value-Added Tax). This agreement creates the framework for the implementation and operation of a VAT across all member states. It is up to each member state to implement the framework through legislation or other processes. Saudi Arabia and the UAE have been first to announce a VAT to take effect on January 1, 2018.
This will directly affect businesses importing goods into GCC countries. What does it mean for you and how can you prepare your business operations to be VAT ready?
What is Value-Added Tax (VAT):
Value-Added Tax is a consumption tax that is placed on the value that is added at each stage of the supply chain from production to the end consumer for a good or service. Instead of a sales tax that collects all consumption tax at the end of the supply chain, this tax is distributed along the whole supply chain.
VAT is used in many countries around the world, but is most commonly seen in the European Union (EU). The GCC VAT framework is most commonly compared to the EU.
Example of VAT:
When a server with a Total Import Value of $10,000 enters the UAE, a VAT of $500 (5% of $10,000) is levied to the UAE VAT Registered business. The $500 goes directly to the customs department upon arrival of the server.
Key Features of GCC VAT:
- The VAT will apply to goods and services at a standard rate of 5%
- VAT registration is mandatory for businesses or individuals with supplies exceeding SAR 375,000 in a 12 month period.
- VAT registration is voluntary for businesses or individuals with supplies exceeding SAR 187,500 in a 12 month period.
- VAT paid for imported goods can be reclaimed at the end of each tax period by registered members.
- Specific VAT tax compliance requirements (Tax groups, record keeping, tax periods and deadlines) will be left to each member state.
Paying VAT on Imports:
- VAT-registered and unregistered businesses are required to pay VAT on imports to the Customs department upon arrival of goods.
- If you are unable to prove a previous VAT payment from another GCC for a specific import you will have to repay the VAT.
- The total taxable value of the imported goods is equal to the value of the goods plus:
- Customs duties
- Excise duties
- Insurance duties
- Freight duties
- Any incidental services to import the goods
- The Place of Supply, where the tax levied, for wired and wireless telecommunications and electronic services is determined by where the customer resides.
Why this matters to you:
The VAT presents a extra 5% upfront cost to anyone importing goods in GCC member states. This will be reflected in the pre-shipment payment businesses will pay logistics/import service providers to ensure DDP incoterms. It is important to remember this VAT is reclaimable with the proper registration and documentation when your company is the importer of record. With the corresponding import receipt, your accounting team can reclaim the 5% VAT paid during importing. When using a third-party importer of record service, VAT reclamation is not possible.
Businesses will need to be compliant with VAT registration and specific procedures. If your business exceeds mandatory and volunteer thresholds, you will need to become VAT registered by completing a Tax Registration application in 30 days of importing goods. Also, operations procedures and systems must be updated to follow record keeping and reports procedures to redeem VAT tax credits after each tax period.
With the Gulf Cooperation Council VAT on the verge of being implemented it is critical for your business prepared all departments and upgrade systems asap.