GCC companies should start preparing for VAT, excise tax

Companies in the Gulf Cooperation Council countries must begin preparing for value added tax (VAT) and excise tax, consultancy PwC has urged in a new report.

The GCC finance ministers held an extraordinary meeting on June 16 in Jeddah and approved in principle VAT and excise tax treaties.

While some administrative matters still need to be resolved, the ministers agreed upon the basic guidelines including the items that will be exempt from VAT such as food and healthcare.

A joint GCC committee will provide its recommendation by the end of summer in view of the formal announcement of the treaties, which is expected in the last quarter of this year.

The excise tax is slated to be imposed from January 1, 2017, while VAT is expected to come into effect from January 1, 2018.

Also read: UAE introduces VAT threshold for firms in phase 1

PwC Middle East Indirect Taxes partner Jeanine Daou said: “The introduction of VAT and excise tax constitute an important policy reform aiming to help GCC governments achieve medium to long term social and economic policy goals and reduce reliance on hydrocarbon revenues.

“Approval of the treaties is an important development as it sets out common principles that will guide the application of VAT and excise tax at a national level by each individual member state.

“Companies should take action now, if they have not already, to prepare for the implementation of the new tax systems and be ready by go-live date.”

Once the treaties are ratified, each member state will need to issue its own national VAT and excise tax legislation based on the agreed common principles.

This process is expected to happen ahead of the expected go live date, allowing sufficient time for businesses to get ready.

Also read: 80% of professionals would leave GCC if income tax introduced

For now, the GCC states are anticipated to apply a VAT rate of 5 per cent across the region.

The system will be based on a destination principle according to which VAT is charged at import and on local supplies of goods and services, and exports are zero-rated, PwC said.

Registered businesses will be required to charge VAT on their supplies, and will be entitled to deduct VAT incurred on their purchases, including capital assets and imports.

The VAT treaty will determine how and where intra-GCC transactions are taxed.

Meanwhile excise tax, a single-phased tax, will be levied once at import or at production stage within the country. It will be collected by businesses on behalf of the tax authority.

Similarly to VAT, the excise tax treaty will determine the treatment of intra-GCC movement of excisable goods, which should be taxed in the place of consumption.

“There would be a need for common GCC mechanisms to collect and monitor the excise tax due in the appropriate jurisdiction,” PwC said.

“In any case businesses need to start preparing in advance to be able to comply with the new tax obligations including charging, collecting and paying VAT and excise tax to the tax authority in a timely manner.”

It added: “It is the right time to start creating awareness and increase knowledge throughout the organisation, as well as start assessing the potential impacts of the new taxes on the business, including impact on margins and cash flow. It is also essential to ensure the right systems and processes are in place to apply the tax correctly and generate the required reporting and documentation.”