Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

1.     Introduction 

The United Arab Emirates (UAE) is a tax friendly country, imposing no personal income tax and no federal corporate income tax. Nevertheless, it has recently introduced a set of new tax driven disclosure requirements which have significantly increased the level of transparency for individuals and multinational groups with operations in the country.

This development mostly originates from the work delivered by the Organization for Economic Co-operation and Development (OECD) and G20 during the past few years on measures against Base Erosion and Profit Shifting (BEPS), more specifically Action 5 of the BEPS Action Plan introducing certain minimum standards that countries should implement to counter harmful tax practices and Action 13 introducing Country-by-Country Reporting (CbCR) to increase global tax transparency. The Financial Action Task Force (FATF) on the other hand has been the key driver behind the recent Ultimate Beneficial Owner disclosure rules.

This analysis will cover the main three components of the new UAE measures, namely:

1.     CbCR - governed by Cabinet Resolution No 44 of 2020

2.     Economic Substance Regulations (ESR) – governed by Cabinet Resolution No 57 of 2020 and Ministerial Decision No 100 of 2020

3.     Ultimate Beneficial Owner (UBO) declaration – governed by Cabinet Decision No 58 of 2020

We will not be analysing Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA), which are also disclosure regimes but which have been in place for longer.

This article comes at a time where the deadlines for compliance with these new disclosure requirements are fast approaching (i.e. filing of CbCR and ESR reports and resubmission of Notifications before 31 December 2020), while other compliance dates have already passed, such as for the submission of UBO data before or on 27 October 2020 and the initial submission of CbCR and ESR Notifications before 31 December 2019 and 30 June 2020 respectively. 

Keeping this in mind, this publication aims to 1. provide the reader with an understanding of the new compliance requirements, 2. highlight the impact for individuals and multinational groups 3. illustrate some common pitfalls for those preparing and submitting CbCR, ESR and UBO reports and 4. explain why consistency in the information is of the essence.

2.     New disclosure arrangements

2.1  CbCr

2.1.1.     Context

In the Framework of the Base Erosion and Profit Shifting (BEPS) project of the OECD and the G20, countries agreed, amongst others, to implement BEPS action 13 in order to tackle the shortcomings of the international tax system. 

This action prescribes that countries implement legislation requiring multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business certain relevant financial and qualitative information, which is subsequently exchanged with other countries. The data should allow tax administration and governments to assess MNEs’ Transfer Pricing risks and it could also provide a first indication whether MNEs are involved in BEPS behaviours.

2.1.2.     Scope

The UAE’s legislation very much mirrors the common and internationally accepted standard imposed by the OECD which has by now been adopted by almost 100 countries globally. The CbCR disclosure requirement is applicable to UAE headquartered groups with operations in at least two different tax jurisdictions. The rules are only applicable if the consolidated revenues during the Financial Year preceding the Financial Year in scope is equal to or exceeds AED 3.15 billion.

Ultimate Parent Entities (UPEs) in the UAE of large MNEs will therefore have the obligation to file a CbCR to the Ministry of Finance (“MoF”). As of yet, the Federal Tax Authority is not involved in the CbCR process, even though it would also be competent according to its Establishment Law. There is no (longer a) requirement for notifications for UAE constituent entities for MNEs of which the UPE is located outside the UAE.

Whilst there is also a requirement for Transfer Pricing Master Files and Local File documentation as part of the OECD’s BEPS Action 13, the UAE has currently not introduced such a requirement. We do not expect the UAE to implement a requirement to file a Master File or Local File as long as it does not have Federal Corporate Income Tax. Furthermore, there is no requirement to file a Controlled Transactions Disclosure Form or similar document (KSA on the other hand has recently implemented such requirement). Since there is no requirement for CbCR filing by foreign headquartered MNEs in the UAE, there is also no need to monitor the implementation of exchange of information relations between countries . 

2.1.3.     Disclosures

In Table 1 of the CbCR , MNEs need to list financial information grouped on a country per country level regarding revenues (third-party and intercompany), profits (losses) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and non-cash or cash-equivalent net tangible assets.

In addition to the above information, Table 2 of the CbCR asks for information about activities for each company of the MNE (e.g. Research & Development, Holding Intellectual Property, Procurement, Manufacturing, Sales, Marketing, Distribution, Administrative support services, third-party services, intercompany financing, financial services, insurance, holding, dormant or others). Additionally, the tax residency, address and Tax Identifications Numbers for each of the subsidiaries needs to be disclosed. Table 3 provides a free field for MNEs to provide additional information (such as source of data, reporting periods, foreign exchange rate used, strategic positions taken, etc.).

The CbCR needs to be filed by the end of 2020 for companies with a financial year matching Gregorian calendar years. The portal can be found here: https://www.mof.gov.ae/en/StrategicPartnerships/Pages/Country-by-Country-Reporting.aspx. 

2.1.4.     Impact

The importance of the first time submission to the Ministry of Finance of the CbCR for large multinational groups headquartered in the UAE cannot be underestimated. 

This is because companies operating in the UAE so far had no strict requirement to disclose financial information about their own operations and/or that of affiliated companies to any regulatory authority in the country (except for publicly listed companies). For most of the privately owned large multinational businesses headquartered in the UAE, the CbCR requirement results in the first-time disclosure of such global scale (and sometimes considered sensitive) information to a regulatory body.

With the CbCR data, the Ministry of Finance (and foreign governments) will gain valuable insights, not only about the financial position of the aforementioned privately owned large multinational groups, but will also receive data about publicly listed companies which may not have been available in the public domain previously (e.g. headcount, taxes paid rather than tax provisions, functional profile of affiliates, etc.).

In line with the OECD’s intention, the Ministry of Finance has stated on its website (FAQ section) that the CbCR data will be used for 1. assessment of high-level transfer pricing risk, 2. assessment of other BEPS-related risks and 3. for economic and statistical analysis. This being said, it is yet to be observed how the Ministry (and potentially other governmental bodies) will analyze and/or use this wealth of information for decision-making. For example, neighboring countries with income tax regimes such as the Kingdom of Saudi Arabia and Oman may be interested in such information.  

2.1.5.     Common pitfalls

Although the CbCR may look seemingly straightforward to fill out, there is a range of errors which can be made. The OECD already listed a number of them[1]. The below section is listing (in a non-exhaustive manner) a few important considerations which we formulate and which should be kept in mind by those preparing and/or submitting a CbCR:

      i.         Sourcing of information

At the outset, one should be able to determine if a multinational group headquartered in the UAE exceeds the AED 3.15 billion global revenue threshold for filing of a CbCR. While we discuss below what exactly constitutes a multinational group and what should (not) be included under revenues in this calculation, many may face time-consuming and burdensome challenges in the data collection process. Importantly, revenues are an indicator of size, and size is an indicator of complexity.

Even though the CbCR Table 1 groups the financial information on a country-by-country level, the underlying workings usually require the information to be sourced for each legal entity separately. In this respect, some enterprises may have a single and all-encompassing source of information available to them that covers all companies in the group (e.g. consolidation and/or enterprise resourcing system), others will typically operate in an environment where information about the parent company and affiliates (such as stand-alone financial accounts, headcount data, functional profile, taxes paid, tax numbers for all legal entities, etc.) is available across different platforms and/or is managed by various teams at a global scale.

In such cases, it is important for those preparing a CbCR to consistently follow either a “top-down approach” (starting from consolidated information that is centrally available and filling in gaps by sourcing of information from other platforms and various teams) or a “bottom-up” approach (aggregation of data from all decentralized sources). In addition, a reconciliation of both approaches may be advised.

In all cases, it would be appropriate to standardize and document the approach that is consistently followed in a company specific process document and make mention of this approach in Table 3 of the CbCR.

     ii.         Defining a “Group of companies”

In line with the OECD standards, a Group is defined in the Cabinet Resolution as “A group of companies related through ownership or control, such that it either is required to prepare Consolidated Financial Statements for the purposes of preparing financial reports under the applicable accounting principles, or would be so required if the equity interests in any of the companies were traded on a public securities exchange”. This definition is primarily dependent on applicable accountings standards, such as the International Financial Reporting Standards (IFRS) for example.

Furthermore, in order to fall under the scope of the UAE CbCR requirements, a group of companies should be headquartered in the UAE, have operations in two or more countries (and exceed the AED 3.15 billion threshold as mentioned earlier). The UAE has limited the CbCR disclosure to UAE headquartered groups, whereas the previously repealed legislation also required Surrogate Parent Entities (“SPE”) for foreign headquartered MNEs to file the CbC report.

At first glance, the definition of “group of companies” may appear straight-forward. However, there are certain important considerations that should be kept in mind for CbCR purposes, such as:

·       The CbCR preparation requires information to be collected at a legal entity / permanent establishment level (which may not always align with an enterprise-specific IT and/or corporate coding structure)

·       There may be differences between the legal structure and accounting consolidation. For example, are there any legal entities that are in- or excluded from the accounting consolidation that should have been ex- or included if the group were publicly listed under IFRS 10 rules? 

·       Whilst legal entities may be legally owned by (a part in) the group, there could exist special arrangements following which “control” is with other parts of the group or even an outside party or vice versa (e.g. side agreements)

·       For Joint Venture arrangements, the OECD has clarified earlier that an entity that is not required to be consolidated under applicable accounting rules (e.g. equity accounted companies), does not have to be considered for the CbCR.

As a final note on this subject, it is worth mentioning that the OECD mentioned in the public CbCR consultation paper of February 2020 that it is looking at a possible revision to the definition of a “group of companies” so that in the future one CbCR may need to be filed for different groups / accounting consolidations that are under common control (by an individual for example).  

    iii.         Definition of “revenues”

For CbCR purposes, revenues are the “top-line” in the income statement which includes all trading income, gains, or other inflows shown in the financial statement prepared in accordance with the applicable accounting rules. This definition also includes extraordinary income and gains from investment activities (e.g. extraordinary or below the line income from services, royalties, interest on loans, premiums, net gain on sale of property, etc.).

A common pitfall is to include dividend income from subsidiaries for the calculation of the AED 3.15 billion threshold and/or for the reporting of revenues and profits before taxes in Table 1 of the CbCR. On the other hand, dividend income from associates, joint ventures, and investment securities should be included in revenues and profits before taxes.

Reversals (of provisions and impairments), foreign exchange conversion differences and other non-business income type of items should be excluded from revenues.

When amounts are reported on a net basis in the financial statements under applicable accounting rules (e.g. net interest income for financial institutions) this should be reported as net in the CbCR as well.

    iv.         Foreign exchange rate

Most UAE based large multinational groups that will have to file a CbCR will do so in the AED currency. Because the report contains financial information from companies abroad using a non-AED currency for financial reporting, it is important to consider what foreign exchange rate needs to be used for translation of such non-AED currency amounts into AED.

A common mistake made by preparers of the CbCR is to rely solely on the FX rate conversion system that is embedded in the consolidation or accounting software , which would typically use year-end exchange rate for balance sheet amounts and transaction dated exchange rate for P&L amounts. The guidance provided by the OECD clearly states however that for the CbCR preparation, foreign currency amounts should be translated to the single CbCR functional reporting currency using the internal average foreign exchange conversion rates for the financial year concerned for both balance sheet and PL amounts (see OECD Transfer Pricing Guidelines, version 2017, page 513).

     v.         Definition of tangible assets

This Column in Table 1 of the CbCR requires reporting of the sum of the net book values of tangible assets (accounting definition), including inventory, properties, plants, equipment, investment properties and development properties.

A common mistake made in the CbCR data reporting is that cash or cash equivalents, intangible assets and/ or financial assets are included.

    vi.         XML conversion

Filing of the CbCR on the MoF portal is required in XML format in accordance with the OECD reporting schema. The UAE requires the filing to be made in Schema version 2.0, which may be challenging because the OECD only expects countries to adopt the Schema 2.0 standard as from February 2021 (most countries have adopted the 1.0 Schema thus far). Many software providers are not yet ready to offer the Schema 2.0  solution and the guidance notes released by the OECD for XML conversions to be done by MNEs are limited.

Most preparers of the CbCR will use standard functionalities of Excel to collect and aggregate the data. The process of conversion of this Excel data into XML format can be complicated and time-consuming for those unfamiliar with XML technology. Therefore, companies should start thinking about creating this capability in-house or using external service providers, some of which have developed easy to use applications for CbCR XML generation.

2.2.     ESR

2.2.1.     Context

On 30 April 2019, the UAE issued Cabinet Decision No. 31 concerning economic substance requirements (Economic Substance Regulations or “ESR” in short). It later replaced this Cabinet Decision with Cabinet Decision No. 57 of 2020, which had different Implementing Regulations.

UAE onshore and free zone entities that carry on specific activities mentioned in the regulations need to examine whether they meet the economic substance requirements. Failing to meet those will trigger penalties.

The introduction of a legal framework regulating the economic substance criterion in the UAE is a direct consequence of the OECD’s ongoing efforts to combat harmful tax practices under Action 5 of the BEPS project. 

It also follows the increased focus by the European Union (EU) Code of Conduct Group (COCG) on companies established in jurisdictions with a low or no income tax regime, resulting in the publication of the first EU list of non-cooperative jurisdictions. In response to the EU COCG initiatives, the governments of Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos islands all recently introduced economic substance rules. The UAE followed suit as well.

There has also been growing interest and scrutiny from the public opinion as to whether entities established in no or low tax jurisdictions should be required to have sufficient economic substance before being able to benefit from beneficial tax regimes and benefits under double taxation agreements. 

The purpose of ESR is to curb international tax planning of certain business activities, which are typically characterised by the fact that they are “mobile” in nature because they do not require extensive fixed infrastructure in terms of human and technical capital, in a way which allows the business (and attached profits) to be shifted to no or nominal tax jurisdictions, as opposed to taxing profits where the company has actually created economic value. 

One of the many reasons why the UAE has attracted so many businesses is because there is currently no income tax regime at a federal level. The ESR legislation therefore is specifically targeted at businesses that do not have genuine commercial operations and management in the UAE to support the underlying activities and therefore also the underlying income.

Economic substance requirements are used to analyze whether a company’s presence in a country such as the UAE has a commercial and/or business purpose rather than reduction of a tax liability. 

2.2.2.     Scope

The Economic Substance Regulations apply to UAE onshore and free zone entities that carry out one or more of the following activities:

· Banking

· Insurance

· Fund management

· Lease-finance (including intercompany lending for interest income)

· Headquarters

· Shipping

· Holding company

· Intellectual property (IP)

· Distribution and service centre

Especially the definition of distribution and service centre catches a great deal of businesses. Service centre is defined as “providing services to foreign related persons”. Given the fact that the UAE is a regional hub focused on Foreign Direct Investment, a very important part of UAE incorporated businesses falls into this scope.

Entities are required to meet the Economic Substance Test when they conduct any of the above activities and earn income from such activities.

For each Activity, the regulations have defined the so-called Core Income Generating Activities (“CIGA”). This is a list of activities that must be conducted in order to meet the Economic Substance Test. For example, for intellectual property the CIGA would consist of research and development.

In general, the Economic Substance requirements will be met:

· If CIGA are conducted in the UAE;

· If the activities are directed and managed in the UAE;

· If there is an adequate level of qualified full-time employees in the UAE, 

· If there is an adequate amount of operating expenditure in the UAE,

· If there are adequate physical assets in the UAE.

In case the CIGA are carried out by another entity, these need to be controlled and monitored.

In accordance with EU recommendations, the regulations provide for less stringent requirements for Holding Company Businesses (“Holding Companies”). Then again, for IP Companies, the standards are set higher.

2.2.3.     Disclosures

Businesses that conducted a Relevant Activity during the 2019 Financial Year were required to file an ESR notification by end of June 2020 to the respective licensing authorities, such as the Ministry of Economy for onshore companies and free zone regulators for offshore companies.

Whilst the Ministry of Economy did not require companies to submit an ESR Notification if no Relevant Activity was conducted in the Financial Year 2019, some free zone authorities required a Notification for all companies irrespective of the nature of their activities (e.g. DIFC).

2020 was a transitional year with a revised ESR legislation retroactively impacting businesses and a change in the structure in terms of the enforcement (i.e. the Federal Tax Authority now has the mandate to review ESR filings, issue penalties where appropriate and handle litigation matters).

As a consequence of the revised legislation, businesses now need to resubmit their ESR notifications if Relevant Activities have been performed in FY 2019 and file their economic substance report if income was earned from the Relevant Activities by the end of December 2020  to the Ministry of Finance.

The revised ESR legislation introduced 5 categories of exemptions, amongst which the UAE branch of a foreign head office is the most common exception. However, for this particular exception to apply, it requires that the UAE branch’s income is subject to tax abroad in the country of the head office (to be demonstrated by a copy of the foreign income tax return). The exemptions generally entail important administrative requirements. Benefiting from the exemptions means that no Economic Substance Report needs to be filed (but the Notification is still required).

If a business conducts a relevant activity and has relevant income, and cannot benefit from an exemption, it needs to demonstrate substance in the UAE. The UAE has chosen for a substance over form method and not a “one size fits all” approach, where the conducted activity is important and there is no minimum threshold for meeting the substance.

The requested information as part of the ESR Notification and ESR Report is listed in the official templates published by the MoF, along with a link to the portal for submissions: https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx  

2.2.4.     Impact

Similar to the effect of CbCR, the UAE companies that are in scope of the new ESR reporting requirements at the year-end will need to disclose, possibly for the first-time ever, sensitive financial and other information (revenues, profits, operating expenditures, headcount, etc.) to a regulatory body in the UAE.

Specifically, the requirement to inform the Ministry of Finance whether the financial accounts of the company (or its consolidating parent company) are being audited and the need to upload financial statements (it is assumed that also non-audited financial statements will be accepted) can trigger the attention of companies’ Tax, Finance and Legal teams. This is because so far compliance with the requirement for UAE companies to prepare and/or submit financial statements to a UAE regulatory body has been spotty.

Finance teams of UAE companies that have not been preparing financial statements and that are in scope of the new ESR regulations will need to prepare a set of financial accounts in a format that is presentable to the Ministry of Finance (expected to cover at a minimum a balance sheet, income statement, cash flow statement and notes).

Similarly, some companies may need to prepare and keep available, for the first time ever, formal Board resolutions (or single manager decisions) which can be requested by the Ministry of Finance and/or the Federal Tax Authority at any time. For companies without a formal Board of Directors, which are for example operating under the leadership of a single Director or Manager, this may pose the question if sufficient evidence for the “directed and managed” test can be provided to the MoF.

2.2.5.     Common pitfalls

A thorough and well-documented process for the examination of the substance (not only the form) of activities for each UAE license is absolutely necessary. For this process, the scope of “Relevant Activities” needs to be well understood, because although some definitions may appear straightforward at first glance (e.g. Lease-Finance), the reality of their application may be wider than initially thought (e.g. Lease-Finance includes intercompany lending for interest income while trade credit arrangements are not in scope).

The examination of Relevant Activities should be made on per license basis. For example, while a legal entity with multiple licenses in the UAE (e.g. one onshore and two different licenses in two separate free zones) is generally involved in routine trading operations and therefore would initially be considered outside the scope of the ESR rules, it may be required to file an ESR Notification and/or Report if a significant Relevant Activity is conducted under one of the licenses (e.g. one of the free zones branches is regulated by the Insurance Authority and underwrites insurance for the products sold).

The UAE MoF has clarified that “Relevant Income” means all of an entity’s gross income from a Relevant Activity as recorded in its books and records under applicable accounting standards. A literal interpretation of this clarification would mean that abstraction needs to be made of any actual cash flows for the income in scope. For example, a holding company that records a dividend income in its FY 2019 financial statements, but that is not actually receiving the dividend cash proceeds, would still be required to submit an ESR Notification and Report.

A common reason why businesses might not meet the substance test is that Board Meetings are not physically held in the UAE. In addition, the meeting minutes need to be signed by all members. It may surprise that this condition is necessary in a globalized world, where board members can be dialing in from other countries. These antiquated methods may conflict with modern decision making. In addition, where UAE businesses are looked after by a local manager, he may have a certain degree of autonomy but perhaps not full autonomy. What meets the substance level then?

In a country where free zones often act as landlords as well, it may surprise that the UAE has not prescribed a minimum level of space for offices per license, as this would have created a higher demand for commercial real estate (we do note however that the square footage needs to be provided as part of the ESR report). Additionally, the ESR sometimes conflict with commercial considerations for free zones (e.g. attracting IP for solely licensing purposes would not meet the DEMPE criterion under the ESR).

2.3.     UBO

2.3.1.     Context and scope

By way of Cabinet Decision No. 58 of 2020, the UAE has implemented a new UBO regime applicable to businesses established in the UAE, except for ADGM and DIFC businesses which already have their own UBO requirements in place. Government owned businesses are excluded from the UBO regulations.

Under the new UBO regime, businesses in the UAE are subject to stricter disclosure obligations. Some Free Zone companies, such as the ones established in the DIFC, already were subject to UBO requirements and therefore the new regime does not change much for them.

The new UBO regime is derived from the Financial Action Task Force (FATF)’s Guidance on Transparency and Beneficial Ownership and it stems from the Anti Money Laundering legislation in the UAE, more in particular Federal Decree-Law No. 20/2018 and its Implementing Regulation. It is suspected to target amongst others disclosures of nominee structures.

The new UBO regime requires businesses in the UAE to maintain beneficial ownership and shareholder registers at their registered office, and to submit information from these registers to their regulatory authority (e.g. Department of Economic development, DED in short or a Free Zone Authority). Any changes in the information previously provided need to be disclosed as well.

2.3.2.     Disclosures

The requirement to submit the UBO Register was earlier based on ad hoc requests from the licensing authorities, for example whenever requesting for issuance of a new trade license for a new legal entity in the UAE. However, with the latest Decision, UAE entities are required to maintain a UBO Register more consistently and update the Regulators accordingly for any changes.

A beneficial owner can be determined as follows:

1.     Any physical person who owns or ultimately controls through direct or indirect ownership shares at the rate of 25% or more, or whoever has the right to vote at the rate of 25% or more, including retaining ownership or control through other means such as the right of appointment or dismissal of most of the Managers.

2.     If no physical person was determined as per (1), the physical person who exercises control over the legal person through other means such as the right of appointment or dismissal of most of the Managers

3.     If no physical person can be determined as per (1) or (2), then the physical person who holds the position of the person in charge of Senior Management.

The UBO Register needs to contain the following information on the UBO:

· Name, nationality, date and place of birth

· Place of residence or address 

· Number of travel document/ID card, country, date of issuance and expiry

· Basis on which the UBO is the UBO

· Date of acquiring capacity as UBO

· Date on which UBO ceased to be UBO 

In this section, we are not discussing the Shareholder or Partner Register. 

2.3.3.     Impact

In addition to similarities with ESR regulations which also require the disclosure of the UBOs as part of some of the Notifications and Reports, the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) already required UAE businesses to provide a certain level of information regarding the UBOs. From a tax perspective, it should be ensured that the information provided to the financial institutions and relevant Regulatory Authorities (MoF and licensing authorities) is consistent and under no circumstances incorrect. Inconsistent or misleading information may lead to significant penalties being imposed by the Authorities. 

3.         Conclusion – Managing and matching disclosures is a delicate exercise

In recent years, the UAE has been signing up to different international standards and conventions to request from companies certain information and exchange this with other countries. From a tax perspective, the UAE did already have broad exchange of information provisions in its large network of double tax treaties.

With the introduction of FATCA/CRS and CbCR, the UAE signed up to different Multilateral Competent Authority Agreements (MCAA in short) for the automatic exchange of information with other countries.  

A few years back, the UAE MoF put different MoU’s in place with different authorities, such as e.g. the DIFC, DMCC, RAKFTZ and others. The intention was to allow these authorities to act as agents to collect information from their members, which the MoF required in its international relations.

The recently introduced set of regulations around CbCR, ESR and UBO add another layer to the obligations of UAE businesses.

Whilst the new UAE disclosure requirements detailed above are governed by three separate Cabinet Resolutions, it is important to keep in mind that the information that needs to be provided under the separate regulations is centralized in the hands of the Ministry of Finance (CbCR and ESR), the Federal Tax Authority (ESR) and Licensing authorities (UBO). These bodies can compare and check the consistency of the information being provided for a specific UAE company.

For example, the Ministry of Finance would be able to check if a UAE company that was reported under a certain classification in Table 2 of the CbCR (e.g. Holding, Headquarter, Dormant, IP company, etc.) matches with the information (not) submitted as part of the ESR declarations.

Another example is that where the identity of the UBOs declared to the Licensing authorities as part of the new UBO requirements should match with the UBO information included in ESR filings.

With the implementation of the different regulations, the UAE has lifted itself onto the level of global transparency for tax matters. Although some businesses are still waking up to the impact, insufficiently realizing the consequences of setting up shell companies and other companies, the wake-up call should really be answered now. For other international businesses, it simply entails that they have additional compliance obligations in the UAE, like they would have in other countries. The level of “red tape” is still relatively doable from a tax perspective, given that there is no federal corporate income tax. The UAE keeps its position as an attractive tax jurisdiction given that it additionally applies no withholding taxes and no capital gains tax.

Few events in the last decade have contributed as much to the growth of the digital economy as Covid-19. The pandemic forced entire populations to go into lockdown, working from home became the norm and outdoor activities were limited to a bare minimum out of fear of infection. All these factors have contributed to a change in consumer behavior as a result of an increase in screen time, which has in turn significantly increased our exposure to digital advertisements. To no one’s surprise, electronic platforms and digital marketplaces have reported an enormous surge in online engagement due to people massively ordering goods and services via the internet. At a time where large numbers of brick-and-mortar stores are experiencing a serious economic slowdown, the e-commerce sector in the GCC is set to reach a value of over $24 billion by the end of 2020, a figure which is $3 billion higher than the projected value of $21 billion (of which more than $2 billion is reportedly due to Covid-19)[1]. It is against the background of a thriving e-commerce sector that we will have a closer look at the applicable VAT rules for electronic services in the GCC [2]. This article does not consider supplies of goods, which are subject to an even more complicated regime in the GCC.

VAT status in the GCC

In 2016, all six GCC countries signed a multilateral treaty titled the 'Common VAT Agreement of the States of the Gulf Cooperation Council' (GCC VAT Agreement), in which all Member States agreed to implement VAT in their respective jurisdictions. 

Although initially all six GCC countries were expected to implement VAT over the course of 2018 and 2019, only the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) did so on 1 January 2018, followed one year later by Bahrain on 1 January 2019. Oman is expected to introduce VAT in April 2021, thereby becoming the fourth GCC country to implement VAT.

The GCC VAT Agreement forms the basis of the legal VAT framework in the GCC. Conceptually, the GCC VAT system is heavily inspired by the EU VAT system. Nevertheless, it would be unfair to state that the GCC VAT system is a mere reproduction of the EU VAT directive. For better or for worse, for each similarity there are also a significant amount of differences between these two VAT systems. It is not always clear whether these differences are the result of conscious policy decisions or whether they are simply inevitable byproducts of performing a legal transplant with GCC legislators looking at the same concepts through different eyes.

In this article, we will compare the e-commerce VAT rules for services in the GCC and highlight some remarkable similarities and differences. Where relevant, we will draw parallels with the applicable VAT rules in the EU.

Definition of electronic services

In the EU, ‘electronically supplied services’ are defined as services which are (1) delivered over the Internet or an electronic network, (2) are essentially automated, (3) involve minimal human intervention, and (4) are impossible to ensure in the absence of information technology [3]. In addition, the EU VAT Implementing Regulation contains an indicative list of services which are considered to qualify as electronic services [4]. The EU has very extensive guidance, which multiple jurisdictions have adopted as their own internal guidance.

By contrast, the GCC VAT Agreement does not include a definition of the term 'electronic services'. In this respect, it should be noted that contrary to Bahrain and the UAE, KSA considers the GCC VAT Agreement to be an integral part of its domestic VAT legislation. This approach is a bit different from the position which has been taken by the two former countries. In general terms the difference in the positions adopted by these three countries can be summarized very concisely as follows: where Bahrain and the UAE have effectively transposed the GCC VAT Agreement into their own domestic VAT legislation, KSA has chosen to use its domestic VAT legislation to build further on the GCC VAT Agreement and supplement it where required. Given this background, it is perhaps a bit surprising that KSA has not taken the opportunity to include a broad-based definition of electronic services in its domestic legislation. KSA has instead limited itself to including an indicative list of electronic services, based on the EU list of services [5]. An approach which was also taken by Bahrain [6].

Only the UAE has defined electronic services as follows: "services which are automatically delivered over the internet, or an electronic network, or an electronic marketplace” [7]. In this definition, the UAE has also included a non-exhaustive list of electronic services. It should be noted that this definition does not include any reference to the criterion of human intervention.

In its administrative guidance, the Federal Tax Authority (UAE) has clarified that the meaning of the term 'automatically delivered' implies that there should be minimal or no human intervention (although a small degree of human intervention is acceptable to enable or complete a supply) [8]. The National Bureau for Revenue (Bahrain), on the other hand, has stated in its guidance that "Electronic services are services provided over the internet or any electronic platform, and which operate in an automated manner with limited human intervention and which are impossible to complete without the use of information technology”. Although not completely based on the law, both Bahrain and the UAE have incorporated a definition which comes very close to the concept of electronically supplied services in the EU, in the sense that a joint reading of the law and administrative guidance will generally lead to the same outcome in the both the EU and these two GCC countries. 

From a policy perspective, it is the author’s opinion that the approach taken by Bahrain and the UAE seems to be more preferable as compared to KSA, which has not implemented the concept of minimal human intervention. Especially foreseeability internationally for businesses supplying electronic services is important. The different positions unfortunately also open the door to diverging outcomes between different GCC countries in terms of the qualification of certain services.

Given the ever-evolving and constantly changing nature of the digital economy and in particular, electronically supplied services, it is seemingly more convenient for taxpayers to be able to rely on a broad-based definition, based on general criteria such as the requirement that the services is essentially automated and requires minimal human intervention, rather than having to make an assessment to see whether a particular service fits the indicative list of electronic services or not. In other words, it could be argued that a broad-based definition would generally lead to more legal certainty in terms of the qualification of services as electronic services.

Place of supply of electronically supplied services

Under the EU VAT legislation, the place of supply of electronically supplied services supplied to non-taxable persons shall be the place where that person is established, has his permanent address or usually resides [9].

According to the GCC VAT Agreement, the place of supply of electronically supplied services supplied to non-taxable persons shall be the place of actual use of or enjoyment of these services [10].

Although both place of supply rules are different, this is a clear example of how the GCC VAT system re-uses concepts of EU VAT law, but implements them in a (slightly) different way. Readers who are familiar with EU VAT will have undoubtedly picked up on the reference to the so-called 'effective use and enjoyment' rules [11].

In short, EU Member States may decide to shift the place of supply of services, which are either inside or outside the EU to inside or outside their territory, when according to the effective use and enjoyment of the service this differs from the place of supply as determined on the basis of the normal place of supply rules [12].

It is worth noting, however, that whereas under the EU VAT system, use and enjoyment rules function as a correction mechanism in regard to the place of supply rules to prevent double taxation, non-taxation or distortion of competition, under the GCC VAT system, the use and enjoyment rules surprisingly simply function as a regular place of supply rule. 

They are the criterion to determine where the services are actually used or enjoyed for VAT purposes by a private individual. In other words, where there is a potential two-step approach to determine the actual place of supply of electronic services under the EU VAT rules (firstly on the basis of the normal place of supply rules and secondly on the basis of the applicable use and enjoyment rules, which may lead to a correction of the outcome determined under the first step), there is only a singly step when determining the place of supply under the GCC VAT rules.

To determine where the use and enjoyment of electronic services effectively takes place, the GCC VAT legislator has once again drawn inspiration from the EU VAT system, whilst at the same time providing its own interpretation of the rules in question. The conflating of the concepts can be traced back to the implementation in the UK of the place of supply rules for electronically supplied services which substantially deviates from the Recast EU VAT directive 2006/112/EC. Although the end result may come down to the same, the place of supply rules in the EU are not use and enjoyment rules, since they do not correct another place of supply rule. While UK VAT practitioners use the term loosely, it leaves other European practitioners scratching their heads. In turn, it makes the GCC laws conceptually less clear.

Broadly speaking, the EU VAT system has a tiered system to determine the location of a non-registered costumer. In first instance, the EU VAT Implementing Regulation provides a number of presumptions for specific situation, such as the provision of services at a physical location, through a land line or mobile network [13]. Secondly, in situations where the aforementioned presumptions are not applicable, the supplier must capture and retain two pieces of non-contradictory information as evidence of the location of the customer [14] [15], such as the billing address, IP address or country code of the SIM of the customer [16]. Finally, if the supplier has reason to doubt the location given from the presumed list then they must provide three pieces of non-contradictory information as evidence for their rebuttal [17].

Although slightly different, the rules to determine the location of the customer in the GCC are clearly inspired on these rules. In the UAE and KSA, the VAT law differentiates between electronic services provided in a specific location and electronic services not provided in a specific location (e.g. on a portable device):

1. The first category refers to the situation where electronic services are provided at a telephone box, a telephone kiosk, a Wi-Fi hot spot, an internet café, a restaurant or a hotel lobby or other cases where the physical presence of the customer at a particular location is needed for those services to be provided. In such a case, the customer is considered to have actually used and enjoyed in that location. 
2. For the second category, the place of use and enjoyment is determined on the basis of the customers (usual place of residence (see Bahrain and KSA) or location at the time the services are supplied (see UAE). For the purpose of determining the location of the recipient the supplier may use the following indicators:

• the internet protocol (“IP”) address of the device; 
• the country code stored on the SIM card; 
• the place of residence of the recipient; 
• the billing address of the recipient; and / or 
• the bank account details of the recipient.

This non-exhaustive list is based on the list of evidence used to determine where the customer is established under the EU VAT system. Note, however, that there is no requirement to collect two non-contradicting pieces of evidence [18].

Another point worth noting is that in Bahrain, the application of these indicators is limited to the supply of electronic services to taxable customers only, whereas such a limitation does not apply in the UAE and KSA [19]. Since the decision to restrict the application of these indicators to registered customers does not appear to be motivated by a specific policy reason, it is the author’s view that this restriction is the result of an oversight by the Bahraini legislator.

In the UAE, these rules were implemented through administrative guidance, rather than by force of law [20], whereas KSA and Bahrain have effectively implemented the principles outlined above in their VAT legislation, followed by the publication of administrative guidance by the respective tax authorities which confirmed these principles [21] [22].

Conclusion

Electronically supplied services are highly mobile services. In order to ensure compliance from the tax authority perspective, they require harmonization and standardization. This should translate into a common legislative framework with no or little differences between jurisdictions, an easy sign up, easy reporting and paying. While this article only covered the first aspect, there are substantial issues with the differences in the legislative framework and their interpretation, as well with the other aspects. Non-compliance with VAT rules around electronically supplied services is extremely hard to police and enforce because in almost all cases the tax authority deals with a foreign supplier. The EU has led the way in making compliance easy, and it is perhaps a missed chance that the GCC has not gone the same way so far.

 [1] Source: Kearney analysis GCC e-commerce sector, https://www.consultancy-me.com/news/3092/gccs-e-commerce-sector-surging-ahead-amid-covid-19.

[2] The term GCC refers to the Cooperation Council for the Arab States of the Gulf, originally known as the Gulf Cooperation Council. The Member States are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates

[3]  Art. 7, paragraph 1 of the Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax (EU VAT Implementing Regulation)

[4] See Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “Recast EU VAT Directive”), Annex II (indicative list of electronically supplied services). See also Art. 7, paragraph 2 of the EU VAT Implementing Regulation. See also EU VAT Implementing Regulation, Annex I.

[5] Art. 24 (1) of the KSA VAT Implementing Regulations

[6] Art. 18, A of the Bahrain Executive Regulations of the Value Added Tax Law

[7] Art. 23 (2) of the UAE VAT Executive Regulations

[8] FTA, E-Commerce VAT Guide, VATGEC1 (August 2020), https://www.tax.gov.ae/-/media/Files/EN/PDF/Guides/E-Commerce---VAT-Guide---EN---09-08-2020.pdf, p. 20.

[9] Art. 58 (1) (c) of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax

[10] Art. 20 of the GCC VAT Agreement

[11] In KSA referred to as the consumption and enjoyment of services (see Art. 24 (2) and (3) of the KSA VAT Implementing Regulations)

[12] The implementation of use and enjoyment rules is optional for EU Member States. See Article 59a of the Recast EU VAT Directive

[13] Art. 24a, paragraph 1 and 2, Art. 24b paragraph 1, (a) - (c) of the EU VAT Implementing Regulation

[14] Art. 24b, paragraph 1, (d) of the EU VAT Implementing Regulation

[15] It should be noted that only one item of evidence is required for so-called micro-businesses.

[16] Art. 24f of the EU VAT Implementing Regulation

[17] Art. 24d, paragraph 1 of the EU VAT Implementing Regulation

[18] In the UAE, the FTA has stated, however, that the supplier should give priority to the factors which give the most precise information regarding the actual place where the electronic services will be used and enjoyed.

[19] Art. 18, B - C of the Bahrain Executive Regulations of the Value Added Tax Law

[20]  For UAE, see FTA, E-Commerce VAT Guide, VATGEC1 (August 2020), https://www.tax.gov.ae/-/media/Files/EN/PDF/Guides/E-Commerce---VAT-Guide---EN---09-08-2020.pdf

[21] For KSA, see GAZT, Digital Economy Guide, Version 1, https://gazt.gov.sa/en/HelpCenter/guidelines/Documents/Digital%20Economy.pdf

[22] For Bahrain, see NBR, VAT Digital Economy Guide , version 1.0 (March 2019), https://s3-eu-west-1.amazonaws.com/nbrproduserdata/media/hOLhJKSh8QwUx0uUAcn9Ovhcv9H9L3SHfhrNb4YW.pdf.