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.

Download the Frequent Question and Answer about UAE Corporate Taxation

1. How is VAT or Sales Tax Defined in this jurisdiction?

It is expected that VAT law will be announced in Qatar during 2022. Together with the other GCC States, it has signed up to the GCC VAT Framework and has committed to implement the common VAT system through national VAT legislation in the near future.

Under the GCC VAT Framework, it is referred to as a ‘general tax on consumption in the GCC known as (VAT) levied on the import and supply of Goods and Services at each stage of production and distribution'.

2. What is the name of the main legislation covering VAT or sales tax?

VAT has not yet been implemented in Qatar under national legislation. However, the GCC VAT Framework sets out the general, high level, VAT rules under which the Qatar VAT system will operate once implemented.

3. What is the rate of VAT or Sales Tax in this jurisdiction?

VAT is calculated as a percentage of the sales price of goods and services. As per the Framework, one of two rates will apply, depending on the type of goods or services being sold – either 5 percent (standard rate) or 0 percent (zero rate). The same rates will apply on imports.

4. Are there any products or services on which VAT exemption or zero rating apply?

The GCC VAT Framework sets out the following categories within which GCC Member States, including Qatar, may choose to implement certain exceptions and/or zero-ratings:

Education;
Health;
Real estate;
Local transport;
Oil, oil derivatives and gas;
Supply of Foodstuffs, Medicines and Medical Equipment; Intra-GCC and International Transportation;

Supply of Means of Transport;
Supply of Investment Gold, Silver and Platinum; Supplies to Outside the GCC Territory; and Financial Services.

The Qatar national VAT Law and Regulations will need to set out which, if any, of the above exemptions and zero-ratings will apply in Qatar.

5. Are there any products or services where a lower than standard VAT rate applies?

As the standard rate of VAT is proposed to be implemented in Qatar at 5%, it is not expected there will be any lower rates of VAT introduced initially. The GCC VAT Treaty allows for reduced rates, for example for foodstuffs. Bahrain and Oman hav implemented a reduced rate on foodstuffs.

It is allowed under the GCC VAT Treaty as well to introduce a profit margin scheme for used goods.

Since 1 July 2020, KSA has introduced a higher standard rate at 15%, and Bahrain since 1 July 2022 has introduced a higher standard rate at 10%.

6. How does the penalty regime work for VAT?

Under Article 72 of the GCC VAT Framework the authority is given to each GCC Member State, including Qatar, to implement penalties in the event of violation. Although the exact penalty regime which may be introduced in Qatar for VAT purposes is unknown, we can expect it to be punitive, given the penalty regimes introduced to date in the region.

7. When does VAT or Sales Tax apply?

After the implementation of VAT in Qatar, VAT will generally apply when there is a supply of goods or services for consideration in the course of carrying out an economic or business activity. It may also apply in respect of the import of goods and the provision of a supplies free of charge i.e. for deemed supplies.

8. Who is able to register for VAT?

Any individual or legal entity who/which conducts economic activity to generate income (i.e., they sell goods or services which are considered as taxable) must register for VAT purposes, provided that their annual taxable turnover exceeds QAR 364,000. Those registered are commonly known as ‘taxable persons’. The voluntary registration threshold will be half of that amount.

In assessing a person's obligation to register, generally, the total value of taxable supplies of goods and services has to be calculated, together with imports of goods and services.  

9. Who is required to register for VAT?

Any individual or legal entity who/which conducts economic activity to generate income (i.e., they sell goods or services which are considered as taxable) must register for VAT purposes, provided that their annual taxable turnover exceeds QAR 364,000. Those registered are commonly known as ‘taxable persons’. The voluntary registration threshold will be half of that amount. There will be no threshold for non-residents.

In assessing a person's obligation to register, generally, the total value of taxable supplies of goods and services has to be calculated, together with imports of goods and services.

10. Is it possible to deregister for VAT purposes?

Deregistration is generally expected to be mandatory where a person stops making taxable supplies, and/or the value of taxable supplies or expenses in the previous 12 months did not exceed the voluntary registration threshold of half of QAR 364,000 and are not expected to exceed this threshold in the coming 12 months.

De-registration is also likely to be optional where a person no longer exceeds the mandatory registration but is above the voluntary registration.

It is possible Qatar will implement a fixed penalty in the event a person does not de-register on a timely basis.

11. Can group companies register together for VAT purposes?

The GCC VAT Framework allows for the application of VAT grouping between different taxable persons. If implemented, there will also be joint liability for VAT purposes.

It will be at the discretion of Qatar as to whether these provisions are introduced. Not all VAT regimes across the globe have VAT Group provisions. Where implemented in Qatar, certain criteria will be set out which must be met before a VAT Grouping application will be approved, with the final approval at the discretion of the Tax Authority.

Generally, these criteria include:

• All persons must be Qatari residents or have a fixed establishment in the country
• All persons must be Related Parties for VAT purposes;
• All persons must be connected economically, financially or regulatorily.

VAT Groups generally make all persons in the VAT Group joint and severally liable for all VAT liabilities and penalties which arise for any member of the group.

12. Which authority or authorities administer VAT collection and registration?

The General Tax Authority (GTA) of Qatar monitors the compliance with tax regulation in the mainland. It is responsible for the enforcement of tax law and the collection of tax revenues. Taxes are not implemented at a national level in Qatar and therefore, there are separate authorities which implement taxes in business and financial zones in Qatar. For example, the Tax Department of the Qatar Financial Centre Authority.

13. Is it possible to recover VAT or Sales tax? When can this be done?

Generally, VAT incurred on costs associated with taxable supplies will be deductible in a person's periodic VAT returns, through a netting exercise against tax due in the same period. VAT incurred on costs directly attributable to exempt supplies or non-business activities, will not be deductible.

A ‘carry forward' of VAT Refundable to be used against future VAT due, may be possible, in addition to a request for payment of all VAT Refunds due. Generally, if a taxpayer has outstanding amounts due to the relevant authority for other tax types, this will be deducted before any amount of VAT refund would be settled.

14. How and when are registered entities required to make payments to authorities?

Persons registered for VAT in Qatar will have to settle all amounts of tax and any penalties due, at the time of filing their periodic VAT returns or closing of a Tax Authority enquiry. Payments are generally accepted by means of bank transfer and credit card, once the relevant Tax Authority payment processing software has been activated.

15. What kind of VAT records are registered entities required to keep?

Persons registered for VAT in Qatar will have to retain all relevant records for a Statute of Limitations period which is expected to be five or six years. The period of retention may be extended for Real Estate related transactions.

Generally, hard copy and /or digital copies of records may be retained, subject to certain procedures for ensuring the authenticity, legibility and ability to be reproduced on request.

The person must retain all books of account, management and financial data, commercial documentation, communications, etc which support the values, details and VAT treatment of activities undertaken.

16. Is there a difference to the way VAT is treated with business to business transactions?

The status of the customer in a transaction may affect the VAT treatment of the transaction in Qatar, after the implementation of VAT. Generally, the status of the customer may affect the place of taxation, the party to the transaction who is obliged to account for the VAT, the VAT rate and the timing of VAT becoming due.

There will not be significant differences in VAT treatment between business to business (B2B) transactions and business to consumer (B2C) transactions when undertaken domestically in Qatar. However, there will be greater disparity in treatment when there is a cross-border element to the transaction, i.e. goods are delivered cross-border and/or one of the parties to the transaction (i.e. supplier or customer) is resident outside of Qatar.

The type of supply (i.e. goods or services, and the exact nature of the supply) will also generally dictate whether the status of the customer is important in determining the VAT treatment.

17. Are there key points which need to considered when drawing up a contract from a VAT perspective in this jurisdiction?

Yes. The application of any ‘transitional' rules for the implementation of VAT in Qatar will be important to consider in the drafting of contracts which may span the effective implementation date. In particular, it is important the contract clearly states whether any consideration due under the contract is VAT inclusive and/or VAT exclusive and grants persons under the contract the ability to charge VAT where obliged to do so under local tax regulation, and potentially takes into account rate changes.

Aside from the actual wording of the contract, the parties to the contract should assess the VAT impact of the transactions under the contract up front in order to identify any cost, cash flow burden and/or regulatory compliance resulting from the contract.

18. Are there any specific rules governing when a VAT registered business is sold as a going concern?

While the GCC VAT Framework does not specifically deal with the transfer of a business as a going concern, it is expected Qatar may introduce provisions to relieve the application of VAT in these instances. The exact criteria for a TOGC being treated as ‘outside the scope of VAT' tend to differ from one VAT regime to another and so we will need to await further clarity.

19. Are there any specific rules governing when a VAT registered business merges or is acquired by another business?
The merger or acquisition of a business will follow the general VAT rules in Qatar, once implemented, for the:

(1) sale of shares;
(2) sales of tangible and intangible assets; and/or;

(3) TOGC.

Sales of shares are expected to be generally exempt, with consideration required in relation to the deduction entitlement of the parties of VAT incurred on any associated costs.

Sales of business assets which do not quality for TOGC relief should be individually valued as part of the transfer deal and assessed from a VAT treatment perspective . Generally, these will be taxable sales at the expected standard rate of 5%, subject to limited zero-ratings and/or exemptions.

20. Are there any specific rules involving VAT and charities or other not for profit organisations?

There is the potential for VAT reliefs in Qatar for charities and other not for profit (NFP) organisations. Generally, these are implemented in the form of zero-ratings or exemptions for real estate used for charitable purposes, VAT refunds on associated costs even where the entity is not VAT registered, exemption for imports etc.

21. Are there any specific rules governing what happens when a VAT registered business faces bad debt?

The GCC VAT Framework allows for the ability to adjust Tax Due by a person as a result of bad debts. It is likely Qatar will introduce a VAT adjustment for those who have accounted for VAT on taxable supplies and the amounts remain outstanding after a fixed period of time.

As with all VAT Bad Debt Relief provisions in VAT regimes across the globe, Qatar will likely implement strict criteria and procedures which must be followed in order to benefit from the Bad Debt relief, including evidencing follow up with the debtor, writing off the bad debts in books of account etc.

22. What is the impact on VAT when the transaction is cross border in the GCC or other economic trade area which this country is a member of?

There are specific intra-GCC VAT rules allowed for in the GCC VAT Framework. These rules aim to make trade between the GCC Member States easier to conduct and relieve some of the cash flow and administrative burden associated with such transactions.

In line with the GCC VAT Framework, an Electronic Service System (ESS) should be set up between each of the GCC Member States' Tax Authorities so there is visibility over intra-GCC transactions, their VAT treatment and there is no avoidance of tax or misuse of the intra-GCC rules. As ESS is not yet in place, and until it has been implemented, it is expected Qatar will treat all transactions between Qatar and another GCC Member State on the same footing as transactions with non-GCC States (i.e. it will not ‘activate' the intra-GCC rules).

23. What is the impact on VAT when the transaction is an electronic cross border one?

After VAT Implementation in Qatar, there should be specific VAT rules dealing with e-commerce transactions into and out of Qatar. These will generally determine the place of taxation and also the alternative treatments where the transaction is B2B versus B2C. As set out in the GCC VAT Framework, electronically supplied services will be taxed where they are effectively used and enjoyed.

24. Are there any specific industries or transaction types which have different VAT rules?

Generally, VAT rules mainly differ based on:

• The application of exemptions or zero-ratings, rather than the standard rate of VAT;
• The place of taxation which is based on the type of goods/services supplied;
• Who is obliged to account for the VAT due on the transaction, the supplier or the customer under the reverse-charge mechanism (RCM).

Special rules on place of taxation and/or RCM may apply in Qatar in the following industries/transaction types:

• Telecommunications and electronically supplied services;
  Restaurant, hotel and catering services;
• Cultural, artistic, sport, educational and recreational Services;
• International transport of goods and passengers.

25. Do the VAT authorities have any inspection or investigatory powers?

It is expected the GTA and other financial zone authorities tasked with monitoring the enforcement of VAT in Qatar will also have inspection and investigatory powers in the form of issuing enquiries, performing audits, reviewing supporting tax records etc.

Other than in the event of fraud or tax evasion, these powers should also be restricted by the applicable Statute of Limitations set out in the Qatari VAT Regime.

26. Is it possible to challenge decisions of the VAT authority and how is this done?

It is expected similar to other VAT regimes in the GCC and the other tax regimes already in place in Qatar, there will be a process where a taxpayer may:

1. Request clarification on the technical tax treatment of a transaction or the tax authority's view on the correct application of the law,

2. Request for the tax authority to reconsider a tax technical position already taken,
3. Refer a matter in dispute with the tax authority to an independent competent body for dispute resolution, and

4. Refer the matter in dispute to the competent court for hearing through the court system

The exact way in which each of these steps is administratively undertaken and the bodies involved in supporting the process at each stage will need to be confirmed after the implementation of VAT. The process is expected to be different between mainland disputes and financial zone disputes and will likely involve different bodies. It may be aligned with the current process for tax disputes in Qatar (outside of VAT) or may have special provisions/divisions/judges assigned for VAT disputes specifically.

27. Does VAT apply in the freezones? Does this change if goods pass from the freezone to onshore?

To date, the business and financial zones in Qatar, like the QFC, have implemented their own tax legislation governing the application of taxes. These do offer certain tax benefits, but are not wholly tax free zones. Therefore, the exact VAT treatment of a transaction which involves mainland and/or a financial zone, will depend on the entities involved, the type of transaction and the governing law.

It is expected the VAT legislation across Qatar will mainly be aligned, regardless of the regulatory body or zone which it is covering, with some possible reliefs to support key industry sectors or foreign direct investment which is aligned with Qatar's vision.

Other countries, such as the UAE and Oman, so far have implemented deviating regimes for Free Zones.

28. Will VAT be a cost for my business?

VAT is applied at each stage of the supply chain, however if businesses ensure that they fully understand how to recover the VAT they pay and implement effective control systems and procedures, in most cases, the cost of VAT on the business will be negligible. There will be an associated administrative cost.

29. What do businesses need to do to ensure that they comply with VAT?

Businesses and individuals who need to pay VAT to the government will do so through a self-assessment mechanism called VAT reporting. To ensure that this is done accurately, it is essential that businesses keep accurate documentation about transactions and that their IT and accounting systems are configured to store and process VAT information. Incorrect calculation or reporting of VAT could result in financial penalties.

30. What is the VAT reporting period?

The minimum VAT reporting period is 1 month, but each Member State has the discretion to extend this when setting local VAT regulations.

1. How is VAT or Sales Tax Defined in this jurisdiction?

Kuwait has not yet implemented a domestic VAT or Sales Tax Regime. However, together with the other GCC States, it has signed up to the GCC VAT Framework and therefore has committed to implement this common VAT system through national VAT legislation in the near future.

Under the GCC VAT Framework, it is referenced as a ‘general tax on consumption in the GCC known as (VAT) levied on the import and supply of Goods and Services at each stage of production and distribution'.

2. What is the name of the main legislation covering VAT or sales tax?

VAT has not yet been implemented in Kuwait under national legislation. However, the GCC VAT Framework sets out the general, high level, VAT rules under which the Kuwait VAT system will operate once implemented.

3. What is the rate of VAT or Sales Tax in this jurisdiction?

VAT is calculated as a percentage of the sales price of goods and services. As per the Framework, one of two rates will apply, depending on the type of goods or services being sold – either 5 percent (standard rate) or 0 percent (zero rate). The same rates will apply on imports.

4. Are there any products or services on which VAT exemption or zero rating apply?

The GCC VAT Framework sets out the following categories in which GCC Member States, including Kuwait, may choose to implement certain exceptions and / or zero-ratings:

Education sector;
Health sector;
Real estate sector;
Local transport sector;
Oil, oil derivatives and gas sector;
Supply of Foodstuffs, Medicines and Medical Equipment; Intra-GCC and International Transportation;

Supply of Means of Transport;
Supply of Investment Gold, Silver and Platinum Supplies to Outside the GCC Territory; and Financial Services.

The Kuwait national VAT Law and Regulations will need to set out which, if any, of the above exemptions and zero-ratings will be applicable in Kuwait.

5. Are there any products or services where a lower than standard VAT rate applies?

As the standard rate of VAT is proposed to be implemented in Qatar at 5%, it is not expected there will be any lower rates of VAT introduced initially. The GCC VAT Treaty allows for reduced rates, for example for foodstuffs. Bahrain and Oman hav implemented a reduced rate on foodstuffs.

It is allowed under the GCC VAT Treaty as well to introduce a profit margin scheme for used goods.

Since 1 July 2020, KSA has introduced a higher standard rate at 15%, and Bahrain since 1 July 2022 has introduced a higher standard rate at 10%.

6. How does the penalty regime work for VAT?

Under Article 72 of the GCC VAT Framework the authority is given to each GCC Member State, including Kuwait, to implement penalties in the event of violation. Although it is unknown as to the exact penalty regime which may be introduced in Kuwait for VAT purposes, we can expect it to be punitive, given the penalty regimes introduced to date in the region.

7. When does VAT or Sales Tax apply?

After the implementation of VAT in Kuwait, VAT will generally apply when there is a supply of goods or services for consideration in the course of carrying out an economic or business activity. It may also apply in respect of the import of goods and services and the provision of a supplies free of charge i.e. for deemed supplies.

8. Who is able to register for VAT?

Any individual or legal entity who/which conducts economic activity to generate income (i.e., they sell goods or services which are considered as taxable) must register for VAT purposes, provided that their annual taxable turnover exceeds the local equivalent of 375,000 Riyals. Those registered are commonly known as ‘taxable persons’.

The mandatory registration threshold is expected to be approximately the local equivalent of 375,000 Riyals and the voluntary registration threshold is expected to be half of that. There will be no threshold for non-resident people.

In assessing a person's obligation to register, generally, one will be required to calculate the total value of taxable supplies of goods and services, together with imports of goods and services.

9. Who is required to register for VAT?

Any individual or legal entity who/which conducts economic activity to generate income (i.e., they sell goods or services which are considered as taxable) must register for VAT purposes, provided that their annual taxable turnover exceeds the local equivalent of 375,000 Riyals. Those registered are commonly known as ‘taxable persons’.

The mandatory registration threshold is expected to be approximately the local equivalent of 375,000 Riyals and the voluntary registration threshold is expected to be half of that. There will be no threshold for non-resident people.

In assessing a person's obligation to register, generally, one will be required to calculate the total value of taxable supplies of goods and services, together with imports of goods and services.

10. Is it possible to deregister for VAT purposes?

De-registration is generally expected to be obligatory where a person: Stops making taxable supplies, and/or the value of taxable supplies or expenses in the previous 12 months do not exceed the voluntary registration threshold of approximately the local equivalent of 375,000 Riyals and are not expected to exceed this threshold in the coming 30 days.

De-registration is also likely to be optional where a person no longer exceeds the mandatory registration but is above the voluntary registration.

It is possible Kuwait will implement a fixed penalty in the event a person does not de-register in a timely way.

11. Can group companies register together for VAT purposes?

The GCC VAT Framework allows for the application of VAT grouping between different taxable persons. If implemented, there will also be joint liability for VAT purposes.

It will be at the discretion of Kuwait as to whether these provisions are introduced. Not all VAT regimes across the globe have VAT Group provisions. Where implemented in Kuwait, certain criteria will be set out which must be met before a VAT Grouping application will be approved, with the final approval at the discretion of the Tax Authority.

Generally, these criteria include:

• All persons must be Kuwaiti residents or have a fixed establishment in the country
• All persons must be Related Parties for VAT purposes;
• All persons must be connected economically, financially or regulatorily.

VAT Groups generally make all persons in the VAT Group joint and severally liable for all VAT liabilities and penalties which arise for any member of the group.

12. Which authority or authorities administer VAT collection and registration?

The Tax Authority (TA) of Kuwait monitors the compliance with tax regulation and is responsible for enforcing tax law and collecting tax revenues.

13. Is it possible to recover VAT or Sales tax? When can this be done?

Generally, VAT incurred on costs associated with taxable supplies will be deductible in a person's periodic VAT returns, through a netting exercise against tax due in the same period. VAT incurred on costs directly attributable to exempt supplies or non-business activities, would not be deductible.

A ‘carry forward' of VAT Refundable to be used against future VAT due, may be possible, in addition to a request for payment of all VAT Refunds due. Generally, if a taxpayer has outstanding amounts due to the relevant authority for other tax types, this will be deducted before any amount of VAT refund would be settled.

14. How and when are registered entities required to make payments to authorities?

Persons registered for VAT in Kuwait will have to settle all amounts of tax and any penalties due, at the time of filing their periodic VAT returns or closing of a Tax Authority enquiry. Payments are generally accepted by means of bank transfer and credit card, once the relevant Tax Authority payment processing software has been activated.

15. What kind of VAT records are registered entities required to keep?

Persons registered for VAT in Kuwait will have to retain all relevant records for a Statute of Limitations period which is expected to be five or six years. The period of retention may be extended for Real Estate related transactions. Generally, hard copy and/or digital copies of records may be retained, subject to certain procedures for ensuring the authenticity, legibility and ability to be reproduced on request.

The person must retain all books of account, management and financial data, commercial documentation, communications, etc which support the values, details and VAT treatment of activities undertaken.

16. Is there a difference to the way VAT is treated with business to business transactions?

The status of the customer in a transaction may affect the VAT treatment of the transaction in Kuwait, after the implementation of VAT. Generally, the status of the customer may affect the place of taxation, the party to the transaction who is obliged to account for the VAT, the VAT rate and the timing of VAT becoming due.

There will not be significant differences in VAT treatment between business to business (B2B) transactions and business to consumer (B2C) transactions when undertaken domestically in Kuwait. However, there will be greater disparity in treatment when there is a cross-border element to the transaction, i.e. goods are delivered cross-border and/or one of the parties to the transaction (i.e. supplier or customer) is resident outside of Kuwait.

The type of supply (i.e. goods or services and the exact nature of the supply) will also generally dictate whether the status of the customer is important in determining the VAT treatment.

17. Are there key points which need to considered when drawing up a contract from a VAT perspective in this jurisdiction?

Yes. The application of any ‘transitional' rules for the implementation of VAT in Kuwait will be important to consider in the drafting of contracts which may span the effective implementation date. In particular, it is important the contract clearly states whether any consideration due under the contract is VAT inclusive and/or VAT exclusive and grants persons under the contract the ability to charge VAT where obliged to do so under local tax regulation, and potentially takes into account rate changes..

Aside from the actual wording of the contract, the parties to the contract should assess the VAT impact of the transactions under the contract up front in order to identify any cost, cash flow burden and/or regulatory compliance resulting from the contract.

18. Are there any specific rules governing when a VAT registered business is sold as a going concern?

While the GCC VAT Framework does not specifically deal with the transfer of a business as a going concern, it is expected Kuwait may introduce provisions to relieve the application of VAT in these instances. The exact criteria for a TOGC being treated as ‘outside the scope of VAT' tend to differ from one VAT regime to another and so we will need to await further clarity.

19. Are there any specific rules governing when a VAT registered business merges or is acquired by another business?

The merger or acquisition of a business will follow the general VAT rules in Kuwait, once implemented, for the

(1) sale of shares

(2) sales of tangible and intangible assets and/or

(3) TOGC.

Sales of shares are expected to be generally exempt, with consideration required in relation to the deduction entitlement of the parties of VAT incurred on any associated costs.

Sales of business assets which do not quality for TOGC relief should be individually valued as part of the transfer deal and assessed from a VAT treatment perspective. Generally, these will be taxable sales at the expected standard rate of 5%, subject to limited zero-ratings and/or exemptions.

20. Are there any specific rules involving VAT and charities or other not for profit organisations?

There is the potential for VAT reliefs in Kuwait for charities and other not for profit (NFP) organisations. Generally, these are implemented in the form of zero-ratings or exemptions for real estate used for charitable purposes, VAT refunds on associated costs even where the entity is not VAT registered, exemption for imports, etc.

21. Are there any specific rules governing what happens when a VAT registered business faces bad debt?

The GCC VAT Framework allows for the ability to adjust Tax Due by a person as a result of bad debts. It is likely Kuwait will introduce a sales tax adjustment for persons who have accounted for VAT on taxable supplies and the amounts remain outstanding after a fixed period of time.

As with all VAT Bad Debt Relief provisions in VAT regimes across the globe, Kuwait will likely implement strict criteria and procedures which must be followed in order to avail of this Bad Debt relief, including evidencing follow up with the debtor, writing off the bad debts in books of account, etc.

22. What is the impact on VAT when the transaction is cross border in the GCC or other economic trade area which this country is a member of?

There are specific intra-GCC VAT rules allowed for within the GCC VAT Framework. These rules aim to make trade between the GCC Member States easier to conduct and relieve some of the cash flow and administrative burden associated with such transactions.

In line with the GCC VAT Framework, an Electronic Service System (ESS) should be set up between each of the GCC Member States' Tax Authorities so there is visibility over intra-GCC transactions, their VAT treatment and there is no avoidance of tax or misuse of the intra-GCC rules. As ESS is not yet in place, and until it has been implemented, it is expected Kuwait will treat all transactions between Kuwait and other GCC Member States on the same footing as transactions with non-GCC States (i.e. it all transactions between Kuwait and other GCC Member States on the same footing as transactions with non-GCC States (i.e. it will not ‘activate' the intra-GCC rules).

23. What is the impact on VAT when the transaction is an electronic cross border one?

After VAT Implementation in Kuwait, there should be specific VAT rules dealing with e-commerce transactions into and out of Kuwait. These will generally determine the place of taxation and also the alternative treatments where the transaction is B2B versus B2C. As set out in the GCC VAT Framework, electronically supplied services will be taxed where they are effectively used and enjoyed.

24. Are there any specific industries or transaction types which have different VAT rules?

Generally, VAT rules mainly differ based on:

• The application of exemptions or zero-ratings, rather than the standard rate of VAT;
• The place of taxation which is based on the type of goods/services supplied;
• Who is obliged to account for the VAT due on the transaction, the supplier or the customer under the reverse-charge mechanism (RCM).
• Special rules on place of taxation and/or RCM may apply in Kuwait in the following industries /transaction types:
• Telecommunications and electronically supplied services Restaurant, hotel and catering services
• Cultural, artistic, sport, educational and recreational Services
• International transport of goods and passengers

25. Do the VAT authorities have any inspection or investigatory powers?

It is expected the TA tasked with monitoring the enforcement of VAT in Kuwait will also have inspection and investigatory powers in the form of issuing enquiries, performing audits, reviewing supporting tax records, etc.

Other than in the event of fraud or tax evasion, these powers should also be restricted by the applicable Statute of Limitations set out in the Kuwait VAT Regime.

26. Is it possible to challenge decisions of the VAT authority and how is this done?

It is expected that similar to other VAT regimes in the GCC and the other tax regimes already in place in Kuwait, there will be a process whereby a taxpayer may:

1. Request clarification on the technical tax treatment of a transaction or the tax authority's view on the correct application of the law,

2. Request for the tax authority to reconsider a tax technical position already taken,
3. Refer a matter in dispute with the tax authority to an independent competent body for dispute resolution, and

4. Refer the matter in dispute to the competent court for hearing through the court system

The exact way in which each of these steps is administratively undertaken and the bodies involved in supporting the process at each stage will need to be confirmed after the implementation of VAT. The process is expected to be different between mainland disputes and financial zone disputes and will likely involve different bodies. It may be aligned with the current process for tax disputes in Kuwait (outside of VAT) or may have special provisions divisions/judges assigned for VAT disputes specifically.

27. Does VAT apply in the freezones? Does this change if goods pass from the freezone to onshore?

It is expected the VAT legislation across Kuwait will mainly be aligned, regardless of the regulatory body or zone which it is covering, with some possible reliefs to support key industry sectors or foreign direct investment which is aligned with Kuwait's vision.

28. Will VAT be a cost for my business?

VAT is applied at each stage of the supply chain, however if businesses ensure that they fully understand how to recover the VAT they pay and implement effective control systems and procedures, in most cases, the cost of VAT on the business will be negligible. There will be an associated administrative cost.

29. What do businesses need to do to ensure that they comply with VAT?

Businesses and individuals who need to pay VAT to the government will do so through a self-assessment mechanism called tax reporting. To ensure that this is done accurately, it is essential that businesses keep accurate documentation about transactions and that their IT and accounting systems are configured to store and process VAT information. Incorrect calculation or reporting of VAT could result in financial penalties.

30. What is the VAT reporting period?

The minimum VAT reporting period is 1 month, but each member state has the discretion to extend this when setting local VAT regulations.

1. How is VAT or Sales Tax Defined in this jurisdiction?

Together with the other Gulf Cooperation Council (GCC) States, Oman has signed up to the Common VAT Agreement of the States of the GCC (GCC VAT Framework) which commits it to implementing a generally common VAT system by issuing national VAT legislation.

Under the GCC VAT Framework, it is referenced as a ‘general tax on consumption in the GCC known as VAT levied on the import and supply of Goods and Services at each stage of production and distribution'.

2. What is the name of the main legislation covering VAT or sales tax?

Oman has committed to the implementation of its domestic value-added tax (VAT) regime with effect from 16 April 2021 i.e. 180 days after the publication of the Oman Sultani Decree No. 121/2020 Promulgating the Value Added Tax Law (Oman VAT Law) in the Official Gazette of the Sultanate of Oman no. (1362) on 18 October 2020.

Further detail on the Oman VAT Regime is set out within the Implementing Regulation (Oman VAT Regulations) which were issued on 10 March 2021 by way of Tax Authority Decision No. 53 of 2021.

3. What is the rate of VAT or Sales Tax in this jurisdiction?

In line with Article 37 of Oman Sultani Decree No. 151/2020, the standard rate of VAT in Oman is 5%, with limited exemptions and zero-ratings.

4. Are there any products or services on which VAT exemption or zero rating apply?

Zero-Rating

In line with Articles 51, 52 & 53 of Oman Sultani Decree No. 151/2020, the following transactions will be zero-rated for Oman VAT purposes:

1. Supply of listed food commodities–product list and/or categories yet to be released.
2. Supply of medicines and medical equipment–product list and/or categories yet to be released.
3. Supply of investment gold, silver and platinum.
4. Supplies of international transport of Goods or passengers and related services.
5. Supply of means of marine, air and land transportation, for the transport of goods and passengers for commercial purposes, and supply of related goods and services.
6. Supply of rescue and aid aircraft and vessels.
7. Supply of crude oil and its petroleum derivatives, and natural gas.
8. Export of goods.
9. Supply of goods or services to one of the customs tax suspension situations stipulated in the Unified Customs Law, or within it.
10. Re-export of goods which were temporarily entered into the Sultanate for the purpose of repair, restoration, transfer or processing and the services added to them.
11. Supply of services by a Supplier Taxpayer who has a Residence in the Sultanate to a Customer who does not have a Residence in the Sultanate (to be extended to GCC States once GCC VAT rules are activated), provided the Customer benefits from the services outside the GCC countries [except for services which avail of special place of taxation rules as set out within Article 24 of Oman Sultani Decree No. 151/2020].

These zero-ratings are applicable within the limits, conditions and circumstances set out in the Oman VAT Regulations, once published. Zero-ratings should always be interpreted and applied narrowly, as they are a limited exception to the standard rate of 5%.

Exemption

In line with Articles 47, 48 & 49 of Oman Sultani Decree No. 151/2020, the following transactions are exempt for Oman VAT purposes:

1. Financial services.
2. Healthcare services and their related goods and services. 3. Educational services and their related goods and services. 4. Undeveloped or vacant lands.
5. Re-sale of residential real estates.
6. Local transport of passengers.
7. Lease of real estates for residential purposes.
8. Imports of goods in the following circumstances:

a) Goods imported in the cases where the supply of the goods is exempt from tax or subject to tax at the zero rate at the final destination;

b) Goods imported to diplomatic and consular bodies and international organisations and to heads and members of the diplomatic and consular corps approved by the Sultanate, on condition of reciprocity.

c) Ammunition, weapons, military equipment and means of transport, and parts imported to the armed forces and security forces in all their sectors.

d) Personal belongings and used household items brought by nationals residing abroad and foreigners coming to reside in the country for the first time.

e) Necessities of non-profit charitable societies and people with special needs, and

f) Returned Goods.

The above exemptions are applicable within the limits, conditions and circumstances which will be set out in the Oman VAT Regulations, once published, together with the Unified Customs Law (as applicable). Exemptions should always be interpreted and applied narrowly, as they are a limited exception to the standard rate of 5%.

5. Are there any products or services where a lower than standard VAT rate applies?

The Oman VAT Law lays down a zero rate for:

- foodstuffs

- Means of transport used for commercial transport, rescue airplanes, boats and aid by land

- crude oil (and derivatives) and gas.

6. How does the penalty regime work for VAT?

Under Article 72 of the GCC VAT Framework the authority is given to each GCC Member State, including Oman, to implement penalties in the event of violations.

Chapter 12 of the Oman VAT Law, covering Articles 99–103, deals with the application of Penalties under the Oman VAT regime, including those acts which may result in the application of penalties.

Under Article 100 of Oman Sultani Decree No. 151/2020, the first level of possible penalties and/or jail terms for non- compliance with the Oman VAT regime are as follows:

1. A penalty fine of at least 1,000 Rials and no more than 10,000 Rials, and/or

2. Jail for between two months and one year.

This first level of penalties/jail terms apply to the following acts:

• The Taxpayer deliberately refrains from determining the Person in Charge.
• The Person in Charge deliberately refrains from notifying the Tax Authority and obtaining its consent to appoint another Person in Charge during their absence for a period of more than 90 days.
• The Taxpayer deliberately refrains from notifying the Tax Authority of any amendments to the data submitted to the Tax Authority for VAT Registration purposes, in line with Article 65 of Oman Sultani Decree No. 151/2020.
• The Person in Charge deliberately refrains from attending at the request of the Tax Authority.
  The Person in Charge deliberately refrains from submitting the Tax Declaration for any Tax Period.
• The Person in Charge deliberately refrains from keeping regular accounting records and books in line with the provisions of the Oman VAT Law.
• Deliberately refrains from keeping Tax Invoices and documents for the period specified in line with the provisions of the Oman VAT Law.
• Deliberately refrains from issuing a Tax Invoice which will be issued in line with the provisions of the Oman VAT Law.
• Issuing an invoice deliberately recording the amount of Tax, other than the Tax imposed in line with the provisions of the Oman VAT Law.
• Carrying out any act, action, procedure or omission which would obstruct the employees of the Tax Authority, or those who are assisted by them from carrying out the functions and tasks assigned to them under the Oman VAT Law.
• The Taxpayer or any Person deliberately refrains from submitting any documents, data, records, accounting books, Tax Invoices or others in line with Article 78 of Oman Sultani Decree No. 151/2020.
• Deliberately including incorrect data or information in a VAT refund request.

In the context of the above first level of penalties, a ‘Person in Charge' is defined in Article 1 of Oman Sultani Decree No. 151 /2020 as ‘Any Person related to the Taxpayer in any way, and replaces him in carrying out his obligations imposed under the provisions of this Law'. Article 2 goes on to further explain who the Person in Charge would normally be, depending on the type of corporate structure through which the Taxpayer is trading, for example, for an Oman established entity this would generally be the owner, general manager or an appointed agent.

Under Article 101 of Oman Sultani Decree No. 151/2020, the second level of possible penalties and/or jail for non-compliance with the Oman VAT regime are as follows:

1. A penalty fine of between 5,000 and 20,000 Rials, and/or

2. A penalty fine of between 5,000 and 20,000 Rials, and/or 2. Jail for between one and three years.

This second level of penalties/jail terms applies to the following acts:

• Deliberately refrains from registering with the Tax Authority.
• Deliberately refrains from including in the Tax Declaration the real data with the Taxable Value and the Tax due on it.
• Submitting forged Tax Declarations or documents or records to avoid paying Tax in whole or in part.
• Deliberately destroying, hiding, or disposing of any documents, records, accounts, lists or others as required by the Tax Authority to be submitted according to the provisions of the Oman VAT Law, if the destruction, hiding, or disposal is done within one year of the date of receiving the notification from the Tax Authority.
• Deliberately instigating or assisting the Taxpayer to submit declarations, records, or other incorrect documents related to the Tax obligation of the Taxpayer.

In the context of the above second level of penalties, the Court may decide to confiscate the means, devices and tools used in committing these crimes.

In the event of repetition of offences, the Court may double the fine and increase the legally prescribed maximum jail term but this cannot exceed half of the limit.

The Oman VAT Regulation specify further detail on the application of administrative fines and penalties on violators, including the appeal procedures.

7. When does VAT or Sales Tax apply?

In line with Article 36 of Oman Sultani Decree No. 151/2020, VAT is applicable on all taxable supplies of goods and services (i. e. excluding those which are specifically exempt from VAT) within the scope of Oman VAT.

VAT also applies to deemed supplies as set out in Articles 14 and 17 of Oman Sultani Decree No. 151/2020 on the basis that purchases VAT related to these supplies has been deducted (other than those subject to exemption) as follows:

• Assigning Goods for purposes other than the Taxable Activity, whether the assignment is made for a fee or not.
• Changing the use of Goods to make non-Taxable Supplies.
• Keeping Goods after suspending the practice of the Taxable Activity.
• Supplying Goods without a Fee, unless the Supply is related to a Taxable Activity such as giving gifts or free samples.
• The Taxpayer's use of Goods, which are part of their assets, without a fee, for purposes other than the Taxable Activity. Supply of services without a Fee.

VAT is also applicable to purchases of goods and services imported from outside Oman on the reverse-charge mechanism basis (RCM) in line with Article 20 of Oman Sultani Decree No. 151/2020; where the Oman resident and tax registered business customer must account for Oman VAT on its receipt of the goods and/or services in the Sultanate.

8. Who is able to register for VAT?

In line with Article 55 of Oman Sultani Decree No. 151/2020, any resident person who engages in taxable activities which have exceeded the mandatory registration threshold in the preceding 12 months or expect to exceed the mandatory threshold in the coming 12 months, have to register for VAT purposes. The timeline and form for registration will be clarified in the Oman VAT Regulations, once published.

In line with Article 61 of the Oman VAT Law, any resident person who engages in taxable activities (including purchases) which have exceeded the voluntary registration threshold in the preceding 12 months or expect to exceed the voluntary threshold in the coming 12 months, may optionally register for VAT purposes.

The mandatory registration threshold is 38,500 Rials and the voluntary registration threshold is 19,250 Rials.

In line with Article 57 of Oman Sultani Decree No. 151/2020, all non-resident persons who are liable to account for Oman VAT on a transaction in goods or services, must register from the first 1 Rial of taxable activities.

In assessing a person's obligation to register, all taxable supplies and transactions liable to the reverse-charge mechanism should be summed, together with expenses from a voluntary registration perspective.

9. Who is required to register for VAT?

In line with Article 55 of Oman Sultani Decree No. 151/2020, any resident person who engages in taxable activities which have exceeded the mandatory registration threshold in the preceding 12 months or expect to exceed the mandatory threshold in the coming 12 months, have to register for VAT purposes.

In line with Article 61 of the Oman VAT Law, any resident person who engages in taxable activities (including purchases) which have exceeded the voluntary registration threshold in the preceding 12 months or expect to exceed the voluntary threshold in the coming 12 months, may optionally register for VAT purposes.

The mandatory registration threshold is 38,500 Rials and the voluntary registration threshold is 19,250 Rials.

In line with Article 57 of Oman Sultani Decree No. 151/2020, all non-resident persons who are liable to account for Oman VAT on a transaction in goods or services, must register from the first 1 Rial of taxable activities.

In assessing a person's obligation to register, all taxable supplies and transactions liable to the reverse-charge mechanism should be summed, together with expenses from a voluntary registration perspective.

10. Is it possible to deregister for VAT purposes?

A Taxable Person must apply to the Tax Authority to cancel its VAT registration in any of the following cases:

1. If they stop practising the Taxable Activity.
2. If they stop making Taxable Supplies.
3. If the value of their Taxable Supplies falls below the Voluntary Registration Threshold.

A Taxable Person may also optionally apply to cancel its VAT registration where the value of its supplies falls below the mandatory registration threshold of 38,500 Rials but continue to exceed the voluntary registration threshold of 19,250 Rials.

11. Can group companies register together for VAT purposes?

Article 58 of Oman Sultani Decree No. 151/2020 allows two or more Persons to register with the Tax Authority as a Tax Group, according to conditions and criteria set out in the Oman VAT Regulations:

• Each person needs to be an Omani resident
• All members are legal persons
• Each person must be VAT registered
• One person, whether a member of the group or not, has control over all other members of the tax group
• None of the members is a member of another tax group
• None of the members is a free zone company

Control means that a person has the right to directly or indirectly control other persons’ activities or commercial matters, or owns more than 50% of the voting rights of the legal person or more than 50% of the capital of the legal person.

Once registered, the Tax Group will be considered as a Taxpayer independent of the Persons who are members of the group. Tax Grouping will make all persons in the Group jointly and severally liable for all VAT liabilities and penalties which arise for any member of the group.

12. Which authority or authorities administer VAT collection and registration?

The Tax Authority (TA) of Oman monitors the compliance with the Oman VAT Law, Oman VAT Regulations (once published) and any other national tax regulations. They are also responsible for the enforcement of tax law and the collection of tax revenues.

13. Is it possible to recover VAT or Sales tax? When can this be done?

The rules governing the calculation of Oman VAT, including the claim of deduction for VAT on purchases, are set out within Chapter 5 of the Oman VAT Law.

VAT incurred on costs associated with taxable supplies (i.e. liable at both 5% and 0%) are deductible in a person's periodic VAT returns, through a netting exercise against tax due on taxable sales in the same period. VAT incurred on costs directly attributable to exempt supplies or non-business activities, are not deductible. VAT incurred on costs associated with both taxable and exempt activities, will be deducted on an apportioned basis as indicated in the Oman VAT Regulations, once published.

VAT which is correctly deductible by a person may be deducted within the first VAT return in which the person qualifies for deduction or anytime after that for up to three years.

Where a person is in an overall refund position for any particular VAT return, it may request the refund or ‘carry forward' the VAT Refundable to be used against future VAT due.

14. How and when are registered entities required to make payments to authorities?

Persons registered for VAT in Oman have to settle all amounts of tax and any penalties due, at the time of filing their periodic VAT returns or closing of a Tax Authority enquiry. Periodic VAT returns are due for filing by the 30th day of the month following the end of the Tax Period. The Tax Period will not be less than monthly but may be quarterly or other length of period.

Payments are generally accepted by means of bank transfer and credit card.

15. What kind of VAT records are registered entities required to keep?

The Oman VAT Regulations specify the records and books that the Taxpayer will keep as well as the rules and procedures related to them, the data to be recorded in them and the documents which will be kept. Generally, it is expected a person must retain all books of account, management and financial data, commercial documentation, communications, etc which support the values, details and VAT treatment of activities undertaken, including imports, exports and RCM transactions.

The Taxpayer will not keep any accounting records or books in a foreign currency without the prior written consent of the Tax Authority.

Persons registered for VAT in Oman have to retain all relevant records for a standard period of 10 years. The period of retention is extended to 15 years for Real Estate related transactions. Generally, hard copy and/or digital copies of records may be retained, subject to certain procedures for ensuring the authenticity, legibility and ability to be reproduced upon request.

16. Is there a difference to the way VAT is treated with business to business transactions?

The status of the customer in a transaction may affect the VAT treatment of the transaction in Oman. Generally, under Oman VAT Law, the status of the customer may affect the place of taxation, the party to the transaction who is obliged to account for the VAT, the VAT rate and the timing of VAT becoming due. There are not significant differences in VAT treatment between business to business (B2B) transactions and business to consumer (B2C) transactions when undertaken domestically in Oman.

However, there is a greater disparity in treatment when there is a cross-border element to the transaction – i.e. goods are delivered cross-border and/or one of the parties to the transaction (i.e. supplier or customer) is resident outside of Oman.

The type of supply (i.e. goods or services, and the exact nature of the supply) would also generally dictate whether the status of the customer is important in determining the VAT treatment.

One example of a VAT treatment which is impacted by the status of the customer is the application of the RCM – i.e. the party who is obliged to account for the Oman VAT due on the transaction will differ depending on whether the resident customer is a B or a C.

17. Are there key points which need to considered when drawing up a contract from a VAT perspective in this jurisdiction?

Yes. The application of any ‘transitional' VAT rules for the implementation of VAT in Oman will be important to consider in the drafting of contracts which may span the effective implementation date of 16 April 2020. In particular, it is important the contract clearly states whether any consideration due under the contract is VAT inclusive and/or VAT exclusive and grants persons under the contract the ability to charge VAT where obliged to do so under local tax regulation, and potentially takes into account rate changes.

Aside from the actual wording of the contract, the parties to the contract should assess the VAT impact of the transactions under the contract up front in line with Oman VAT Law and Oman VAT Regulations (once published) in order to identify any cost, cash flow burden and/or regulatory compliance resulting from the contract.

18. Are there any specific rules governing when a VAT registered business is sold as a going concern?

Yes, Article 18 of Oman Sultani Decree No. 151/2020 states supplies of goods or services will not be subject to Tax when they are part of the transfer of a Taxable Activity, in whole or in part, to another Taxpayer.

Article 13 of the Omani VAT Executive Regulations state that the following conditions need to be met, in order to consider a transfer a transfer of a going concern which is outside the scope of VAT:

- Part of the activity that has been partially transferred is capable of operating by itself

- The supply includes all of the elements of the transferred activity

- The transferee uses the assets to carry out the same type of activity that the transferor is engaged in

- The transferor is a taxable person, and the transferee becomes taxable as a result of the supply if he was not taxable separate from the supply

- There must not be a series of consecutive transfers of the assets

19. Are there any specific rules governing when a VAT registered business merges or is acquired by another business?

The merger or acquisition of a business would follow the general VAT rules in Oman for the sale of shares, sales of tangible and intangible assets and/or TOGC.

Sales of shares are generally exempt, with consideration required in relation to the deduction entitlement of the parties of VAT incurred on any associated costs.

Sales of business assets which do not quality for TOGC relief should be individually valued as part of the transfer deal and assessed from a VAT treatment perspective. Generally, these will be taxable sales at the standard rate of 5%, subject to limited zero-ratings and/or exemptions.

20. Are there any specific rules involving VAT and charities or other not for profit organisations?

Yes – imports for non-profit charities are VAT exempt from tax.

21. Are there any specific rules governing what happens when a VAT registered business faces bad debt?

Article 40 of Oman Sultani Decree No. 151/2020 allows for an adjustment of VAT due in the event a taxpayer fails to collect any consideration due from a customer, in whole or part. The requirements for this reclaim are laid down in article 51 of the Oman VAT Regulations.

22. What is the impact on VAT when the transaction is cross border in the GCC or other economic trade area which this country is a member of?

There are specific intra-GCC VAT rules allowed for in the GCC VAT Framework and in the Oman VAT Law. These rules aim to make trade between the GCC Member States easier to conduct and relieve some of the cash flow and administrative burden associated with these transactions.

In line with the GCC VAT Framework, an Electronic Service System (ESS) should be set up between each of the GCC Member States' Tax Authorities so there is visibility over intra-GCC transactions, their VAT treatment and there is no avoidance of tax or misuse of the intra-GCC rules. ESS is not yet in place, and until it has been implemented, Oman will treat all transactions between Oman and other GCC Member States on the same footing as transactions with non-GCC States (i.e. it will not ‘activate' the intra-GCC rules).

23. What is the impact on VAT when the transaction is an electronic cross border one?

As set out in the GCC VAT Framework, electronic services will be taxed where they are effectively used and enjoyed. Similarly, Article 24 of Oman Sultani Decree No. 151/2020 sets out that services provided electronically will be taxable at the place of actual use of these services, or the benefit from them. Further clarification on what falls within the scope of ‘services provided electronically' and how to determine their place of ‘actual use' is expected in the Oman VAT Regulations, once published.

24. Are there any specific industries or transaction types which have different VAT rules?

Yes, the Oman VAT rules for transactions differ based on:

• The application of exemptions or zero-ratings, rather than the standard rate of VAT at 5%; The place of taxation which is based on the type of goods/services supplied;
• Who is obliged to account for the VAT due on the transaction – the supplier or the customer under the reverse-charge mechanism (RCM).
• Other than the categories listed in Question 4 above, which are liable to exemption/zero-rating in Oman,

Special rules on place of taxation apply in Oman in the following industries/transaction types:

• Telecommunications and electronically supplied services in line with Question 23 above Restaurant, hotel and catering services
• Cultural, artistic, sport, educational and recreational/entertainment services
• Transport of goods and passengers and related supplies
• Real estate related services
• Leasing means of transport.

25. Do the VAT authorities have any inspection or investigatory powers?

Yes, the Oman Tax Authority is tasked with monitoring the enforcement of VAT in Oman and also has inspection and investigatory powers in the form of issuing enquiries, performing audits, reviewing supporting tax records etc.

Other than in the event of fraud or tax evasion, these powers are restricted by the standard applicable Statute of Limitations of five years for audit purposes, which is extended to 10 years in the event of later registration.

26. Is it possible to challenge decisions of the VAT authority and how is this done?

Similar to other VAT regimes in the GCC, the Oman VAT Law has introduced a layered Tax Dispute process whereby a taxpayer may:

1. Request clarification on the technical tax treatment of a transaction or the tax authority's view on the correct application of the law,
2. Request for the tax authority to reconsider a tax technical position already taken,
3. Refer a matter in dispute with the tax authority to an independent competent body for dispute resolution (Committee), and
4. Refer the matter in dispute to the relevant court for hearing through the court system.

The exact way in which each of these steps is administratively undertaken, the bodies involved in supporting the process at each stage and the associated timelines are indicated within the Oman VAT Law per Chapter 11.

27. Does VAT apply in the freezones? Does this change if goods pass from the freezone to onshore?

The treatment of transactions in goods for VAT purposes when the goods are moving in and out of the Sultanate of Oman, together with transactions in goods within Customs Zones, generally follow the treatment as outlined within the Unified Customs Law.

However, for specific VAT reliefs relating to transactions in goods cross-border, including with customs zones, see answer to Question 4 above which sets out import/export specific zero-ratings and exemptions.

28. Will VAT be a cost for my business?

VAT is applied at each stage of the supply chain, however if businesses ensure that they fully understand how to recover the VAT they pay and implement effective control systems and procedures, in most cases, the cost of VAT on the business will be negligible. There is an associated administrative cost.

29. What do businesses need to do to ensure that they comply with VAT?

Businesses and individuals who need to pay VAT to the government will do so through a self-assessment mechanism called tax reporting. To ensure that this is done accurately, it is essential that businesses keep accurate documentation about transactions and that their IT systems are configured to store and process VAT information. Incorrect calculation or reporting of VAT could result in financial penalties.

30. What is the VAT reporting period?

The minimum VAT reporting period is 1 month, but each member state has the discretion to extend this when setting local VAT regulations.