There is a new fiscal revolution under way in the Middle East in relation to value added tax (VAT) and excise duties, which is of importance to UK oil and gas companies with operations there. The oilfield services sector in particular is strongly linked to that part of the world and must take heed.
For a long time the Middle Eastern countries of United Arab Emirates (UAE), Saudi Arabia, Qatar, Bahrain, Kuwait and Oman, also known as the Gulf Cooperation Council (GCC), have been associated with the oil industry and low taxation. Therefore, it came as a bit of a surprise when this economic and political union of Arab States of the Persian Gulf announced at a press conference in February last year that they will, as a union, adopt a VAT regime by January 1, 2018.
Many companies have woken up to the reality that achieving business readiness for such new tax systems is not a small undertaking. Indeed, within the very short timeframe before these taxes take effect, the task is looking very formidable indeed.
The GCC VAT and Excise Framework Agreements were adopted by the GCC states in early 2017. Each country in the GCC states have been working feverishly to introduce their national VAT and excise laws and put in place the administrative tools to deal with the associated revenue collections from January 1, 2018 or shortly thereafter. The timelines are challenging for tax administrations and the business community alike, and there is a lot of activity under way in both sectors to undertake the process of addressing the organisational needs for VAT implementation, management and compliance from 2018.
VAT will be levied on goods and services at each stage of the production and distribution cycle, as well as on imports. The scope of VAT set out in the GCC VAT Framework Agreement is very wide and most countries are restricting exemptions from VAT to limited business sectors, primarily government services and certain financial services. The detailed and wide-ranging nature of VAT makes it very complex, and its introduction will have significant implications on the supply chain of businesses in the GCC.
With the average rate of VAT across the VAT regimes currently being around 15%, GCC’s rate of 5% on most goods and services appears to be relatively low. As the pressure on national incomes in these countries increases, particularly if the oil prices remain around the $50 per barrel mark, the initial 5% may only be a start.
There is potential to expand the tax base with the introduction of other taxes, perhaps even income tax in the future. With the revenues from VAT being estimated at $25billion across the bloc, it is easy to see how taxation may be the way to manage a desirable level of national income in the current low oil price environment.
So what does this mean for the oil industry? Depending on which of the GCC countries the business has operations in, there will be a requirement for an additional VAT registration(s) and associated compliance. From the draft legislation published so far it appears that input tax may need to be offset against output tax which means that businesses without any output tax against which input tax could be offset may be seeing building up of input tax credits in certain jurisdictions.
However, the biggest challenge for business appears to be IT platforms which are capable of supporting the VAT implementation along with invoice requirements and invoicing in Arabic.
Worryingly, Thomson Reuters & ACCA’s recent VAT Readiness Survey identified that only 11% of respondents understood the impact that the VAT implementation will have on their business and have used this knowledge to draft a VAT policy, consider compliance models and identify IT system gaps. Nearly half (49%) of respondents said they were waiting for the law to be finalised before commencing their VAT impact assessments and 75% of the organisations surveyed have not yet engaged with their tax advisor on the subject of VAT. Therefore, with only five months to go, time is running out.
Niall Blacklaw is EY’s UK head of indirect tax