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.

At a glance

On 30 April 2019, the United Arab Emirates ("UAE") issued Cabinet Decision No. 31 concerning economic substance requirements ("Economic Substance Regulations"). UAE onshore and free zone entities that carry on specific activities mentioned in the regulations will need to examine whether they meet the economic substance requirements. Failing to meet those will trigger penalties. But why is this at first glance inane looking piece of legislation so important for the UAE?

Background

The introduction of a legal framework regulating the economic substance criterion in the UAE is a direct consequence of the Organisation for Economic Co-operation and Development's ("OECD") ongoing efforts to combat harmful tax practices under Action 5 of the Base Erosion and Profit Shifting ("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, which currently includes the UAE (“EU Blacklist”). In response to the EU COCG initiatives, the governments of the Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019.

There has also been growing interest and scrutiny from the public opinion as to whether entities established in such jurisdictions should be required to have sufficient economic substance before being able to benefit from beneficial tax regimes. 

The purpose of the Economic Substance Regulations is to curb international tax planning of certain business activities, which are typically characterised by the fact that they do not require extensive fixed infrastructure in terms of human and technical capital, in a way which allows 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 reasons why the UAE has attracted so many businesses is because there is currently no income tax regime at a federal level. The economic substance legislation is specifically targeted at businesses that do not have genuine commercial operations and management in the UAE.

The main reason why the UAE has decided to introduce economic substance legislation lies in the country's aim to further align its legislative framework with international tax practice and the standards set out in the OECD BEPS action plan.

What is economic substance?

Economic substance is a concept introduced to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and have an economic outcome that is aligned with value creation. In other words, economic substance requirements are used to analyze whether a company’s presence has a purpose besides the mere reduction of a tax liability. 

Which entities are in 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
• Headquarters
• Shipping
• Holding company
• Intellectual property (IP)
• Distribution and service centre

Entities that are directly or indirectly owned by the UAE government fall outside the scope of the Economic Substance Regulations.

Economic Substance Test

Entities are required to meet the Economic Substance Test when they conduct any of the above 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”).

Outsourcing

The CIGA may be outsourced, if there is adequate supervision and the outsourced activity is conducted in the UAE. Economic substance requirements will not be met if multiple Licensees outsource the same activity to the same service provider. There is no possibility for double counting the same service provider.

Reporting and compliance 

Licensees will need to prepare and submit an annual report to their Regulatory Authority (Free Zone Authority or DED), within a period of twelve months after the end of each financial year. The Regulatory Authority will then submit the report to the Ministry of Finance (“Competent Authority”).

Since the Economic Substance Regulations came into effect per 30 April 2019, for existing entities, the first report will have to be submitted in 2020. 

Administrative penalties and sanctions

In case of continuous non-compliance, Regulatory Authorities may suspend, revoke or deny renewal of an entity’s license.

Exchange of information

If a Licensee fails to meet the Economic Substance Test for a financial year, the Regulatory Authority will inform the Minister of Finance for the financial year in question. 

The Minister of Finance will then inform the foreign competent authority where the parent company, ultimate parent company or ultimate beneficial owner is established of the non compliance. This may lead in these countries to denying treaty benefits. This requires that the UAE has entered into a Treaty or similar arrangement with that country.

Takeaway - much ado about?

UAE entities involved in banking, insurance, fund management, investment holding, financing and leasing, distribution and service center, headquarter companies and intellectual property (IP) activities should asses whether their current presence and activity level meets the newly introduced Economic Substance requirements. 

Where required, they make the necessary adjustments to ensure that their business is compliant with the UAE regulations which entered into force on 30 April 2019, in order to avoid  administrative penalties, and potentially deregistration.

Moving away from the dusty provisions of the law, what consequences does the Economic Substance law now really trigger?

Operational companies should be little worried. They will not be impacted. The very small companies should be slightly worried. The businesses that were attracted by 50 year tax holidays and other promises and failed to develop any substantial activity in the UAE should be more worried.

How much the UAE will be effectively policing this legislation remains to be seen. Merely taking the example of Switzerland, that country had signed up to multiple exchange of information obligations but dragged its feet for the longest time. 

For now though, the UAE has an argument towards the EU and, more importantly, individual countries, to get the UAE off their blacklists. This is important, since some UAE headquarters are currently being denied double tax treaty benefits in a number of countries, because of its failure to comply with international norms.

The legislation may potentially become obsolete though, if the UAE introduces Corporate Income Tax at a rate considered high enough to no longer be considered as a low tax jurisdiction.

Read our previous article on the introduction of Economic Substance Requirements in the UAE here. 

The Holy Month of Ramadan is the ninth month of the Islamic calendar, observed by Muslims worldwide as a month of fasting, prayer, self-reflection and enhanced community spirit. The annual observance of Ramadan is one of the five pillars of Islam. 

Ramadan is regarded as a time of piety, charity and blessings. Charities and foundations are noticeably more active during the Holy Month, providing assistance to those in need. Meals are provided at mosques, malls and other public places in a spirit of generosity.

Businesses see the Holy Month of Ramadan as an opportunity to organize sales and offer promotions, deals, discounts, gifts and benefits of all kinds. For example, companies may offer "buy one, get one free” or "two for the price of one” promotions or combined offers, where certain products are offered for free or at a reduced priced when bought together with another product (e.g. receiving one year of car insurance free of charge when buying a new car). 

Traditionally, businesses also celebrate the Holy month by hosting Iftar parties, hand out Iftar snack boxes or give gifts in cash or in kind during Eid al Fitr, the religious feast which marks the end of Ramadan.

This article discuss how to deal with UAE VAT in the spirit of generosity.

There is no such thing as a free lunch?

VAT does not like free items. It taxes so-called deemed supplies, where businesses give things away for free for which it previously deducted input VAT. However, not all free supplies are deemed supplies. Even though both look similar, i.e. a third party seemingly receives something without paying for it, only deemed supplies carry VAT consequences.

As part of its sales strategy, a business may provide a customer with a free item. A supermarket could offer a ‘buy one get one’ formula, for example for shampoo bottles. Although it is providing the second bottle for free, the customer has actually paid a lower price for two bottles. Therefore, this situation is rather a so-called joint offer, and not a deemed supply. 

The same reasoning holds for promotional discounts, where a business is slashing its prices with 50% during Ramadan. A business is not offering half of the product for free, but rather a discount on the price.

Perhaps a business considers giving a different item in addition to the item bought. Upon purchase of an electrical toothbrush, the seller offers 2 free tubes of toothpaste. Although the item is given for free, it is still not a deemed supply. The free item is given with the objective of increasing sales of the main item and is ancillary to it.

It is a very different situation when a grocery store decides to donate food supplies to a shelter or to allow all employees to pick an item from its stock for Ramadan. Those constitute deemed supplies and VAT needs to be charged on them. This means that VAT on these deemed supplies constitutes a cost for the business since it is giving the items for free. 

If employers upon purchase however already know that they are purchasing items which are not intended for taxable supplies, they cannot recover the input VAT (and the subject of the deemed supplies is not even on the table).

The business making the deemed supplies needs to issue a tax invoice for the deemed supply and ideally deliver it to the recipient. The VAT on the tax invoice is not deductible in the hands of the recipient.

In the UAE, the taxable value of deemed supplies is its cost. This constitutes the taxable basis on which VAT should be accounted for.

However, even though a supply may constitute a deemed supply, two thresholds apply. If a business stays below the thresholds, it can continue to recover the input VAT and does not have to account for VAT on the deemed supply.

There are two thresholds:

• The output tax chargeable on all deemed supplies should not exceed AED 2,000 in a 12 month period (i.e. AED 40,000 of costs VAT exclusive), and;
• The value per person does not exceed AED 500 in a 12 month period (i.e. AED 10,000 of costs VAT exclusive) and it concerns samples or commercial gifts. 

These thresholds allow businesses to occasionally provide small benefits or gifts to their employees and third parties without incurring VAT liabilities.

Given the fact that these thresholds are very low, a business will easily exceed the threshold. Taking into account the substantial administrative burden of having to monitor the thresholds and put a process in place, a business could chose to ignore the thresholds and always account for output VAT. That is also what most informed businesses seem to do.

Entertainment and personal expenses made during Ramadan 

VAT is only recoverable when it is paid for goods and services bought for making taxable supplies. However, even though a business may exclusively make taxable supplies, there may still be expenses which are non-recoverable.

When an employer buys items and gives them to its employees for no charge and for their personal benefit, the employer cannot recover the input VAT. For example, if the employer decides to purchase chocolate dates for Ramadan to give to its employees, the input VAT paid is irrecoverable.

The same holds for so-called 'entertainment expenses’. Entertainment services are “hospitality of any kind”. This includes hotel stays, food and drinks, tickets for shows and events and trips for entertainment. 

Therefore, if a business organizes an iftar for its employees and for third parties, the input VAT is not deductible. Even though the event is held with the objective of improving social cohesion and increase sales, and therefore it has a clear business purpose, it is considered an entertainment expense.

In a public clarification published by the Federal Tax Authority, it did confirm however that VAT on certain entertainment costs is recoverable when used for a genuine business purpose, or when incidental to a business purpose. For example, VAT on food and drinks provided during a business meeting, is recoverable, if:

• The hospitality is provided at the same venue as the meeting;
• When the meeting is interrupted, it is only by a short break for the provision of the hospitality and then resumes as normal e.g. a lunch break;
• The cost per head of providing the hospitality does not exceed any internal policy the business has established; 
• The food and beverage provided is not accompanied by any form of entertainment e.g. a motivational speaker, a live band etc.

On the other hand, where the hospitality provided becomes an end in itself and is the purpose for attending an event, it will be considered as entertainment costs and VAT is not recoverable.

In other words, if the staff comes for the party or for the Ted talk, the business will not be able to recover the input VAT. If the gathering is serious business, the input VAT will be recoverable.

Complex charities

Despite the fact that charities will mostly carry out transactions which are out of scope of VAT,  given they do not charge any consideration, they may still occasionally render taxable supplies and therefore incur certain VAT obligations, such as the obligation to register for VAT purposes. 

Charities will mostly receive their income from subsidies or donations. Such income is outside of the scope of VAT. Occasionally, it may provide sponsoring opportunities to business, which are subject to VAT.

Under normal VAT recovery rules, input tax is only recoverable where it relates to taxable supplies. In most cases, charities will therefore be required to allocate and apportion VAT recovery between taxable activities (recoverable) and non-taxable activities or exempt activities (non-recoverable). The input VAT recovery may therefore prove to be quite complex.

A special refund scheme applies to so-called Designated Charities, which meet the criteria set by the Federal Tax Authority.

Conclusion

The Holy Month of Ramadan triggers VAT consequences for businesses. Businesses making sales promotions are required to examine the VAT consequences of these sales promotions. Business also may need to not recover input VAT on certain purchases or charge VAT on a deemed supply when providing employees with entertainment or gifts. Charities also do not have an easy task ahead in calculating their VAT liabilities.

Given the very strict penalty framework, it is important to be aware of the VAT consequences of these activities in order to avoid VAT claims or penalties. 

With the impending publication of the drafting of an economic substance law in the UAE, it is important to anticipate the consequences of the introduction of such a law on the UAE and offshore structures in the UAE. The UAE currently has no such substance requirements but has been strongly encouraged by the European Union to implement them. The impact on offshore structures will be substantial.

Current lack of substance requirements

The UAE is a federation of seven emirates. There is currently no direct tax legislation on a federal level in the UAE. However, some Emirates (e.g. Abu Dhabi, Dubai, Sharjah,...) have introduced income tax regimes for oil and gas companies and foreign banks. These decrees only apply to companies which are established in one of the aforementioned Emirates. The Income Tax Decrees do not contain any substance criteria.

Partly as a result of the current lack of substance requirements in the UAE, it has become increasingly important for international companies established or operating in the UAE to prove that the entity or structure has not been set up solely for tax purposes. 

Tax residency certificate

Corporations established in the UAE can apply for a ‘tax residency certificate’ ('TRC') with the Ministry of Finance of the UAE. A tax residence certificate (‘TRC’) is a certificate issued by the UAE government to eligible government entities, companies and individuals to benefit from Double Tax Treaties signed by the UAE.

The following documents are generally required in order to apply for the tax residency certificate:

• Valid Trade License.
• Certified Articles or Memorandum of association.
• Copy of identity card for the Company Owners or partners or directors.
• Copy of passport for the Company Owners or partners or directors.
• Copy of Residence Visa for the Company Owners, partners or directors.
• Certified Audited Report.
• Certified Bank Statement for at least 6 months during the required year.
• Certified Tenancy Contract or Title Deed.

Please note that although the requirements do not expressly mention that the certificate can only be granted to local companies, the Ministry of Finance does not issue tax residence certificates to offshore companies (not to be confused with free zone companies). 

Although the TRC may be helpful to obtain benefits under double tax treaties, in itself it cannot be considered as proof of economic substance in the UAE.

Developments on substance requirements in the UAE

Background

On 1 December 1997, the EU adopted a resolution on a code of conduct for business taxation with the objective to curb harmful tax competition. Shortly thereafter, the Code of Conduct Group on Business Taxation (COCG) was set up to assess tax measures and regimes that may fall within the scope of the code of conduct for business taxation.

On 5 December 2017, the COCG published the (first) EU list of non-cooperative jurisdictions for tax purposes, in cooperation with the Economic and Financial Affairs Council (ECOFIN).

The EU applies three listing criteria, which are aligned with international standards and reflect the good governance standards that Member States comply with themselves:

1. Transparency: Jurisdictions should comply with the international standards on exchange of information, automatic (1.1) and on request (1.2). In addition, jurisdictions should sign the OECD's multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange (1.3).
2. Fair Tax Competition: Jurisdictions should not have harmful tax regimes (2.1) nor facilitate offshore structures which attract profits without real economic activity (2.2).
3. BEPS Implementation: Jurisdictions should commit to implement the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards, starting with Country-by-Country Reporting.

The UAE was initially placed on the EU Black list. However, following commitments to take appropriate measures against the above criteria, the EU transferred the UAE to the EU Grey list. 

However, due to non-compliance with criterion 2.2, the UAE was subsequently put back on the Black list at the start of this year. Criterion 2.2 requires that a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction. 

Therefore, in order to fulfill its commitments to the EU, it is reasonable to expect that the substance requirements are likely to be introduced in the UAE in the foreseeable future. 

In accordance with the scoping paper on criterion 2.2 published by the COCG on 22 June 2018 and the associated work of the OECD's Forum on Harmful Tax Practices (FHTP), the below describes how businesses may be impacted and what substance requirements could potentially be introduced in the UAE in the future.

Expected substance Law requirements

The scoping paper suggest to implement the substantial activities requirement in three key steps: 

(1) identify the relevant activities in their jurisdiction; 

(2) impose substance requirements; 

(3) ensure there are enforcement provisions in place. 

According to the Scoping Paper, the economic substance test would be met if:

a) Taking into account the features of each specific industry or sector, the concerned jurisdiction introduces requirements concerning an adequate level of (qualified) employees, adequate level of annual expenditure to be incurred, physical offices and premises, investments or relevant types of activities to be undertaken.

b) The concerned jurisdiction ensures that the activities are actually directed and managed in the jurisdiction. Any UAE substance requirements are likely to further specify when this condition would be met e.g., depending on frequency of board of director meetings, directors physically present, minutes recording strategic decisions and the knowledge and expertise of the directors.

c) The core income generating activities are performed in the jurisdiction. These substance requirements should mirror the requirements used in the FHTP in the context of specified preferential regimes. As per the scoping paper, the core income generating activities for banking could be: raising funds; managing risk including credit, currency and interest risk; taking hedging positions; providing loans, credit or other financial services to customers; managing regulatory capital; and preparing regulatory reports and returns.

Comparison with the other low tax jurisdictions which introduced the substance requirements

Following the EU blacklist of non-cooperative jurisdictions, many other low and nil tax jurisdictions have introduced economic substance requirements. Jurisdictions where substance compliance is required from 2019 include Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey, and Jersey.

The Economic substance Law of BVI and Cayman Island are inspired by the core requirements in the scoping paper of the COCG and the FHTP requirements. The UAE is expected to follow the same path.

Conclusion

Currently, there are no substance requirements in the UAE. Corporations established in the UAE may apply for a ‘tax residency certificate’ with the Ministry of Finance of the UAE, when they qualify. Obtaining such a 'TRC' does not necessarily entail that a company has economic substance in the UAE.

Considering the efforts made by the UAE with respect to compliance with the fair tax competition criteria of EU, we anticipate that the UAE will issue economic substance requirements in the very foreseeable future, similar to the ones published recently by other low tax jurisdictions. 

The specific substance requirements in the UAE will likely depend on the type of activities conducted by the relevant business (e.g., banking, shipping and headquarter services would each require different substance requirements).

Businesses in the UAE should already assess their operations against the substance requirements in the light of the COCG and FHTP guidelines. 

In March 2019, the NBR published its fourth VAT Guide, i.e. the VAT Real Estate Guide. This guide aims to provide an overview of the rules and procedures regarding real estate in Bahrain as well as the necessary background and guidance to help taxable persons determine how a supply is treated for VAT purposes. In this article we elaborate on the Bahraini VAT treatment of transactions linked to Real Estate and we included the excerpts from our article “GCC - VAT on Real Estate Transactions – A Comparative View of Saudi Arabia and the United Arab Emirates”and “VAT in United Arab Emirates, Saudi Arabia and Bahrain - Transitional Rules”.

Definition of real estate

Real estate includes any area of land over which rights, interests or services can be created, as well as any building, structure or engineering work permanently attached to the land and any fixture or equipment which makes up a permanent part of the land or is permanently attached to a building, a structure or engineering works. Real estate does not include any furniture, fittings, plant and apparatus which are not attached to land or a building and which can be removed without damaging the property.

VAT treatment of the sale of Real Estate

Under the Bahraini VAT Law, a supply relating to the grant of rights in rem deriving from ownership giving the right to use real estate is considered as a supply of goods. Therefore the place of supply of real estate is there where the real estate is located. This is in line with the GCC agreement and the UAE and KSA apply the same place of supply rule for real estate.

The sale, lease or license of real estate located in Bahrain is an exempt supply, regardless of whether the real estate is residential, commercial or land (bare or partly developed). Even though the GCC VAT agreement allows the implementation of an exemption for both residential and commercial real estate, it is very striking that Bahrain used this opportunity since the KSA and UAE have a stricter exemption.

Some supplies are not considered as real estate for VAT purposes and the VAT implications of these supplies will need to be determined on a case by case basis. The following supplies will not be considered as the sale or rental of real estate and will therefore, be taxable at the standard rate of 5%: 

• Hotel accommodation
• Provision of paid car parking for periods of less than one month 
• Provision of serviced office space where the customer does not have the right to use a designated space on an exclusive basis 
• Rental of a function room, hall or similar facility 
• Providing permission to affix equipment and signage to land or buildings. 
• Provision of space for retail or promotional stands (e.g. at a shopping mall, retail or entertainment area) for a period of less than one month
• Serviced accommodation with a rental agreement for a period of less than a year 
• Rental of storage or warehousing facilities to a customer without the right to access the space
• Provision of labour accommodation which is not the principal place of residence of labourers in Bahrain

In the UAE, the sale of bare land is exempt. The sale and lease of commercial building is subject to VAT at 5% whereas, the first sale of the residential building made within three years of the completion date and lease of the same building is zero rated for VAT purposes. The subsequent sale and lease of the residential building is exempt from VAT. 

However, in the KSA sale of both commercial and residential land and buildings is subject to VAT at 5% whereas the lease of residential real estate is exempt for VAT purposes in the KSA. 

The difference in the application of VAT on sale of commercial and residential buildings and land makes the VAT treatment of the real estate much more complicated in the UAE and the KSA than in Bahrain. On the other hand, by applying a wide exemption on the supply of real estate , it is more likely that VAT becomes a cost for the real estate sector in Bahrain than in the other countries.

VAT treatment of Real Estate related services

Real estate related services in Bahrain are those services which are directly connected with the real estate. These include, but are not limited to, the following:

• Services by real estate experts or agents 
• Services which involve the preparation, coordination and performance of construction, destruction, maintenance, conversion and similar work 
• Accommodation services provided at extra charge such as management services, utilities, telecommunications, internet and television etc.
• Services by auctioneers, architects, interior designers, surveyors, engineers and others involved in matters relating to real estate 

For real estate related services the same place of supply rules apply as for the supply of real estate, which is that the supply takes place where the real estate is located. A resident taxable person making a supply of such services will account for VAT on the provision of these services. 

If a non-resident person makes a supply of these services in relation to Bahraini real estate to a Bahraini taxable person, the Bahraini taxable person will need to self-account for VAT under the reverse charge mechanism. That means that the supplier is not liable for Bahraini VAT and should not charge Bahraini VAT on its supply. Where the recipient is not a taxable person, or is a taxable person but not registered, the non-resident will need to register for VAT in Bahrain and account for VAT on the provision of the service.

The real estate services will be taxed at the standard rate of 5%, unless the supply is specifically exempt from VAT or zero-rated. 

Apart from the exemption for commercial real estate, the UAE and KSA apply similar rules for the supply of real estate related services.

VAT treatment of construction works

Construction generally means building something such as a house, office, factory, warehouse, road, bridge etc. Construction may also involve demolition, refurbishment/reconstruction of existing buildings or structures and site clearance activities. Construction involves providing a building service but may also involve providing goods as part of such a service.

Construction services and the goods supplied in Bahrain for construction are regarded as taxable supplies if they are carried out by a taxable person. This is irrespective of the type of building (e.g., residential, commercial, industrial building) being worked on or the type of other construction work (e.g., civil engineering works). 

Construction services and the goods supplied in the course of providing construction services for a new building are zero-rated for VAT purposes in Bahrain. All other taxable supplies of construction services or supplies of goods used for construction will be subject to the 5% VAT rate. 

All types of construction services performed in the KSA and in the UAE are supply of services which is subject to VAT at the 5% rate. This VAT treatment will apply regardless of the type of building which is being constructed.

Transfer of a going concern 

The transfer of a going concern in all three concerned GCC states (KSA, UAE and Bahrain), with or without consideration, does not fall within the scope of VAT if certain conditions are met. If a transaction involves real estate (e.g., the sale of the freehold interest in a building with tenants in situ) and all of the conditions for the transaction to be a transfer of a going concern for VAT purposes are met, the transaction will be outside the scope of VAT. If the relevant conditions are not met, the VAT implications of the transaction will need to be considered as it may involve both taxable and exempt supplies. 

Output VAT payment

For the sale of Real Estate, VAT becomes due on the date that property is transferred to the recipient. However, VAT can become due earlier if (i) a tax invoice is issued by the supplier before the transfer date or (ii) the recipient makes a payment to the supplier.

Typically, when there is a supply of services, some supplies will be considered as “one-off” services, which will follow the general tax due date rules set out above, whereas other services will be considered as continuous supplies (for example, rentals and lease agreements). In case of continuous supplies VAT becomes due across the period the goods and services are provided, in line with the invoicing and payment arrangements. 

When twelve months have passed from the start of the contract or from the previous tax due date, a tax due date will be triggered at that twelve-month point.

A construction contract may contain provisions whereby the customer may withhold a retention amount pending rectification of matters identified as part of the snagging process. The VAT treatment of such retentions often leads to important discussions.

Input VAT deduction

Deduction of input VAT is based on the intended use at the time of purchase. A VAT registered person may deduct input VAT charged on goods and services it purchases or receives for its taxable activities purposes. A person making both taxable and exempted supplies can only deduct the input VAT related to taxable supplies. 

For example, VAT incurred on expenses or purchases (i.e., professional legal fees, refurbishment, etc.) that is attributable to making exempt supplies of real estate will not be recoverable by the taxable person. When a taxable person will use the building for the purposes of fully taxable activities, it can recover the VAT on costs on the construction of the new building in full. 

The overhead costs/expenses incurred by the taxable person for making both taxable and exempted supplies must be apportioned to most accurately reflect the use of those costs in the taxable portion of the taxpayer’s activities. A prescribed default method of proportional deduction is calculated on the values of supplies made in the year, using the following fraction: value of total taxable supplies made by the taxable person divided by total value of taxable supplies and exempt supplies made by the taxable person. This fraction is identical to the input tax apportionment method in the KSA. However, in the UAE the apportionment is by default made on the basis of relevant input tax incurred.

Transitional provisions

The Bahraini VAT Law provides special rules for contracts concluded prior to the VAT-implementation date. In case the contracts do not contain any tax clauses, the agreed consideration is considered to be inclusive of VAT. Furthermore a zero rate applies for contracts entered into before 1 January 2019 with the government where the supply takes place after the implementation date. This zero rate can only be applied until the date of the contract's renewal, or its expiration, or 31 December 2023, whichever is earlier.

The transitional provisions in Bahrain are a combination of the KSA grandfathering rule (temporary zero rate on contracts concluded prior to 30 May 2017) and the UAE’s transitional rules (by default inclusive of VAT).