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.

51 years after the inception of the UAE today is the historic day on which the UAE announces the introduction of corporate income tax.

In a historic moment, the Ministry of Finance has announced today that the UAE will introduce a Federal Corporate Income Tax on business profits.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

• Cementing the UAE’s position as a world-leading hub for business and investment
• Meeting international standards for tax transparency and preventing harmful tax practices
• Accelerating the UAE’s development and transformation to achieve its strategic objectives

We include hereafter the main features of the new regime, as announced by the Mistry of Finance ("MoF") and the Federal Tax Authority ("FTA"). 

Scope

CIT will apply on the worldwide adjusted accounting net profits of the business. The UAE CIT regime introduces three different rates:

• An exemption will apply for taxable profits up to AED 375,000 to support small businesses and startups.
• The standard statutory tax rate will be 9 percent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level.
• A different tax rate will be applicable for MNEs that fall within the scope of under 'Pillar Two' of the OECD Base Erosion and Profit Shifting project. Specifically, MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion) will be subject to different tax rates.

For Free zone businesses, the CIT will apply but the tax holidays will continue to be granted to businesses established within UAE free zones that (1) comply with all regulatory requirements and (2) do not conduct business with the UAE mainland. Further details on the compliance obligations of free zone businesses will be provided in due course.

There will be no withholding tax on domestic and cross border payments. This means that foreign investors who do not carry on business in the UAE will in principle not be subject to corporate tax.

In principle, banking operations will be subject to CIT. Further details on the current Emirate level corporate taxation will be provided in due course.

Date of implementation 

The UAE CIT regime will become effective for financial years starting on or after 1 June 2023. Businesses will become subject to UAE corporate tax from the beginning of their first financial year that starts on or after 1st June 2023.

Exempt income

The following categories of income will not be subject to CIT:

• Capital gains and dividends received by UAE businesses from qualifying shareholding. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law.
• Qualifying intragroup transactions (presumably this refers to the fiscal consolidation regime) and restructurings (presumably this refers to tax neutral mergers).
• Income from the extraction of natural resources (relevant for the oil and gas industry). This income will remain subject to Emirate level corporate taxation.

Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CIT.

Transfer pricing 

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This likely means three tiers, master file, local file and country by country reporting. 

Administration and enforcement 

• The Ministry of Finance will be the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
• The Federal Tax Authority will be responsible for administration, collection and enforcement of the new corporate income tax regime.
• Business which are subject to UAE CIT will be required to file a CIT return electronically for each financial period. A financial period is generally a year. Businesses established in a free zone will be required to register and file a CIT return.
• Businesses will be subject to penalties for non-compliance with the CIT regime. 

Other

• Foreign tax will be allowed to be credited against UAE corporate tax payable.
• Fiscal consolidation: UAE companies will be able to form a “fiscal unity” for UAE CIT purposes.
• There will be beneficial transfer of losses and utilisation rules.

Our initial thoughts

The introduction of CIT is a direct result of OECD’s 'Pillar Two' which is part of the Base Erosion and Profit Shifting (“BEPS”) project.

With a headline rate of 9% on taxable income, carve outs for start-ups and small business and free zone companies, while at the same time imposing different tax rates for MNEs, the UAE is striking the right balance.

Interesting as well is that with the implementation of CIT, the UAE seems to have also introduced mandatory transfer pricing regulations.

Free zone companies are seemingly outside the scope of the new CIT regime, however, it seems that the carve out is at least subject to certain conditions, such as complying with all regulatory requirements and not conducting business in mainland UAE.

We also anticipate that the implementation of CIT will have an impact on the Economic Substance Regulations that were implemented in 2018.

Next steps 

UAE businesses will need to assess how CIT will apply to their activities and ensure they are ready for the implementation of CIT in 2023. Businesses and tax professionals will have to await the publication of the CIT law to know the exact scope.

For example, the law foresees in an income exemption for dividends received by UAE businesses from qualifying shareholding. What constitutes a qualifying shareholding will depend on the conditions in the law. 

What to look out for

We have listed 10 items to be looking out for once the Corporate Income Tax law is published:

• Extent non business expenses
• Interest deduction limitation
• Conditions participation exemption
• Clarifications Free Zones
• No special regimes? (Transparent partnerships, collective investment vehicles, investment trusts, …)
• Confirmation application FTP Law
• Transitional provisions
• Anti-avoidance rules (e.g. rep offices used for commercial purposes)
• Existence exit tax
• Extent PEs and profit allocation rules 

This is Aurifer's year end checklist with key tax pointers to address before year end closure.

The UAE is aspiring to become a leader in the cryptocurrency business in the region and it is aiming to attract more than 1,000 cryptocurrency businesses in 2022. To position itself against the regional and global competition, it has recently developed an advanced regulatory framework. Both central, on-shore authorities such as the Central Bank of UAE (“CB”) and Securities and Commodities Authority (“SCA”), and some of the free-zones, such as DIFC, ADGM and the DMCC have enacted advanced legal frameworks, while DWTC has announced an important partnership with a Crypto Exchange. It is expected that DWTC will also implement a comprehensive regulatory framework.

While the regulatory environment is quite advanced for this part of the world, the tax framework in the UAE is still relatively immature. In light of the UAE VAT law, it will be interesting to see how the Federal Tax Authority will take position vis-a-vis different transactions involving cryptocurrencies, crypto assets, and related services (wallets, brokerage, decentralised finance). Furthermore, in light of the potential introduction of Corporate Income Tax in the UAE as a consequence of the Global BEPS 2.0 initiative, it would be interesting to see the position of the UAE authorities taken towards taxation of the crypto space.

The authors aim to answer some of these questions, from the viewpoint of different possible taxes. This article does not aim to be comprehensive, nor explain how blockchain works.

The article has a focus solely on the UAE’s tax and regulatory framework, as it constitutes at least the most ambitious jurisdiction in the region, intending to stimulate the development of a crypto sector in the UAE. Other jurisdictions, such as Bahrain, have also enabled exchanges to establish themselves there. Bahrain has a relatively comparable tax framework to the UAE. The other GCC countries are largely absent in the field.

We will not be covering the Emirate Banking Tax Decrees nor the General Tax Decrees in the Emirates, which constitute taxation on a local (i.e. Emirate) level.

The framework is fast paced and subject to fast evolution, as adoption spreads. It is also shaky, with Tesla accepting and then again denying cryptocurrencies as payment for its cars, and China cracking down on crypto.

Regulatory Context
The Regulatory Framework in the UAE which could impact crypto is determined on the one hand for mainland companies by the Securities and Commodities Authority (SCA) and the Central Bank (CB), and on the other hand by the Federal Financial Free Zone Authorities established in the Dubai International Financial Center, and the Abu Dhabi Global Markets.

In on-shore UAE, the CB and the SCA share responsibility for the regulatory oversight of the UAE's financial and capital markets. This includes the non-financial free zones, such as the Dubai Multi Commodities Centre (DMCC) and Dubai World Trade Center (DWTC). On the other hand, financial free zones, i.e. ADGM and DIFC have provided their separate regulatory framework for the entities established within their jurisdictions.

From the on-shore side of regulation, the CB has regulated crypto assets and included digital tokens (such as digital currencies, utility tokens or asset-backed tokens) and any other virtual commodities,^[1] While the CB maintains that crypto-assets are not legal tender, the CB explicitly allows crypto-assets to be used as a stored value when purchasing other goods and services.

The SCA framework^[2] applies generally to SCA regulated "Financial Activities” in respect of crypto-assets in the UAE, which include promotion and marketing, issuance and distribution, advice, brokerage, custody and safekeeping, fundraising and operating an exchange of crypto assets.

The DIFC freezone regulates only “Investment Tokens” which are basically securities or derivatives based on the blockchain technology. This means that key cryptocurrencies, as well as stablecoins, will remain unregulated under the Investment Tokens regime.

The ADGM freezone issued the most advanced and comprehensive framework regulating the operation of crypto-asset businesses. It has regulated virtual assets (such as non-fiat virtual currencies), digital securities, fiat tokens (i.e. stablecoins), and derivatives and funds (i.e., derivatives over any digital assets and collective investment funds investing in digital assets) while other crypto assets remain unregulated. From a regulatory policy perspective, the FSRA treats virtual assets as commodities. Even though not all virtual assets are specified investments, any market operator, intermediary or custodian is required to be approved by ADGM as a financial service permission holder in relation to the applicable regulated activity.^[3]

One topic that has not been regulated both on-shore and in the free zones is the growing DeFi industry, which is becoming central to the blockchain and crypto space globally. There are no incentives for permissionless peer-to-peer systems and DeFi to develop. It remains to be seen whether this stance will change in the near future, and hence we will not analyse the tax consequences in the DeFi industry. A further area of uncertainty is the status of NFTs as they remain undefined.

DeFI, Investment Tokens (digital securities), and utility tokens asset based tokens are not further discussed in this article.

The VAT conundrum - Out of scope as money, or a service?

The mining, exchange or disposal of cryptocurrencies, as well as other transactions occurring in the crypto industry may have VAT consequences. Hence, the definition of the crypto-assets and related services is particularly important in determining their VAT treatment. VAT is a consumption tax with a wide scope, and therefore it is imaginable that some transactions may be subject to VAT.

In contrast with income taxation, where the accounting treatment is usually followed directly, with some adjustments, in the comparative VAT practice, cryptocurrencies are often treated as akin to fiat currencies in the VAT treatment of transactions involving their exchange or disposal.

Regulatory definitions and the framework can give some guidance when interpreting the potential VAT treatment of different types of crypto-assets and the related services. There is a relatively broad similarity among EU countries as to the VAT treatment for transactions involving cryptocurrencies. There is greater divergence among countries comparatively in the treatment of “related” or “back-office” services, such as custodial services, online wallet services and exchange services.

GCC and UAE VAT for Financial Services

The Gulf Cooperation Council’s VAT Agreement of 2016 was based on the EU VAT directive in a version after 2011 but before 2013. However, for the Financial Sector, it allowed significant leeway to implement local policies. Article 36 of the GCC VAT Agreement prescribes that financial services provided by licensed banks and financial institutions are exempt from VAT. It further allows that Member States apply fixed refund rates for financial institutions (with inspiration drawn from Singapore), and in its second paragraph allows full freedom to apply “any other tax treatment”.

In the Financial Services sector, the UAE and the Gulf Cooperation Council have deviated significantly from the European VAT directive, which do not grant the same liberty in terms of setting tax policy to its Member States.

When the UAE and KSA issued their laws in 2017, and with KSA being the first, they had prescribed a system where financial services where the provider makes money on the basis of a spread are VAT exempt (see here for our article on VAT exempt persons: https://www.aurifer.tax/news/special-tax-payers-in-the-gcc-exempt-taxable-persons/?lid=438), and where these are fee-based, they are taxed. Since then Bahrain in 2019, and Oman on 16 April 2021, have not deviated from their predecessors.

Far clearer than the VAT regimes applicable to financial services in Europe, given that the scope is narrower, it also entails more services are subject to VAT. This is a double edged sword, as the input recovery increases, but also the cost for customers that do not recover input VAT.

The VAT laws in the UAE and the GCC focus on more traditional banking services, and do not discuss the novelties which are the subject of this article. Neither do the laws in the rest of the world for that matter. That is not surprising, as the VAT laws are general set of rules, intended to apply widely on a large number of situations. 

In the UAE, the UAE VAT law in article 46, 1 simply refers to financial services as being exempt from VAT and relies on the UAE VAT Executive Regulations. Article 42, 2 of the UAE VAT Executive Regulations then refers to “services connected to dealings in money (or its equivalent)”. The same article then goes on the list a number of services by way of illustration which would constitute such exempt financial services. None of these services listed link directly to cryptocurrencies.

The only principle to go by, is that the UAE’s FTA states that “the starting point for the UAE VAT treatment is that VAT should be charged on financial services where it is practicable to do so”. This is however not easy to implement, and may even seem at odds with the exemption for interest on loans, since it may be practicable to add VAT to interest.

Tax authorities are usually late to the game with this type of novelties, and therefore the GCC are no different. However, given that the UAE wants to position itself on the matter, it may be good if it considered a clear position. We have therefore analysed below a number of typical transactions involving crypto and their applicable VAT regime.

It is to be noted, that even in the carved out Federal Financial Free Zones, in terms of taxation, currently in the UAE, no exceptions apply to the general regime.

Starting with mining crypto

There is a relatively broad consensus among countries as to the VAT treatment for transactions involving the mining of virtual currencies. The mining of virtual currencies is their creation through mining activities. The person mining the currency therefore acquires assets in the process of mining.

There is no public position from the UAE’s Federal Tax Authority on the matter, but it may draw inspiration from research conducted by the OECD (OECD (2020), Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues, OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging- tax-policy issues.htm).

In that research, the OECD cites an EU VAT Committee report (an advisory body with no legal power; you can find the VAT Commitee’s Working Paper 854 on Bitcoin here), which found that mining activities should be out of scope of VAT.

This is largely attributed to the fact that there is no direct link between the remuneration of the mining and the activity itself.

The possible alternative qualification in the EU is that mining constitutes a service related to currency, and is therefore exempt from VAT.

Small jurisdictions which exempt the mining of cryptocurrencies domestically but allow it to be zero rated when dealing with foreign customers, could offer substantial advantages, since the zero rate would allow the sellers to recover the input VAT. This may be a potential tax policy option for the UAE or Bahrain.

As Bitcoin reaches its capped supply, and there will be no more mining, its economics will alter. The incentives for various members in its ecosystem, such as miners and traders, will change. For example, miners may rely less on block rewards and more on transaction fees to earn revenue and profits for their operations. Those transaction fees might be regarded as taxable financial services in the UAE.

If it is considered that mining is in scope of VAT, which we are not advocating, unless it would be VAT exempt, the multitude of actors may still see different VAT regimes applicable, since some of the smaller miners may not reach the mandatory registration threshold.

Holding crypto

The holding of cryptocurrency as such should be equated to holding on to an asset. From a VAT point of view, since it is a transaction tax and holding it involves no transaction, there should be no impact. That holds true as well even if the currency appreciates or depreciates in value.

Selling and buying crypto

The main discussion therefore evolves around whether the sale and purchase of a crypto currency is a service (and therefore constitutes a barter transaction), or should be considered as the equivalent of using and purchasing money.

In the EU, to exempt financial services from VAT, and also money services, the VAT directive states that the EU Member States shall exempt “transactions, including negotiation, concerning currency, bank notes and coins used as legal tender” (article 135, 1, e Recast EU VAT Directive 2006/112/EC).

The European Court of Justice (C-264/14, Hedqvist) had judged that the exchange of legal tender against bitcoin, a cryptocurrency, is a service, and an exempt one at that. Bitcoins are treated as akin to fiat currencies (i.e. traditional currencies).

While the definitions in the GCC are different, and while above we had discussed that the GCC Agreement allows for much more tax policy room than the EU VAT Directive, the guidance clearly points towards the concepts in the EU. The ECJ ruling therefore does not constitute a source of law, but is definitely an authority on the matter.

The ruling is potentially subject to challenges, and not all authors would agree with the position taken. The ECJ only ruled on bitcoins, however the reasoning can be applied to similar cryptocurrencies which function in the same way.

Especially the comparison with legal tender in terms of its functionality can be flawed, as not all cryptocurrencies are accepted for payment purposes.

When considering the sale of cryptocurrency as in scope of VAT and exempt, small jurisdictions which allow the trading of cryptocurrencies to be zero rated when dealing with foreign customers, could offer substantial advantages, since the zero rate would allow the sellers to recover the input VAT.

In the authors’ modest opinion, for the sale and purchase of crypto itself, it can be broadly considered as the equivalent of fiat currency for the purpose of VAT treatment, and therefore should be considered as out of scope of VAT. 

Using crypto to acquire goods or services

Considering that the SVF Regulation of the Central Bank allows crypto-assets to be used as a stored value when purchasing other goods and services, it is an argument in favor that it could be regarded as an equivalent of using the fiat currencies, and therefore using it to acquire goods or services should not entail any VAT consequences, in the same way as one would use fiat currency to purchase a good or service.

The supply of goods and services, subject to VAT and remunerated by way of Bitcoin, for example, would for VAT purposes be treated in the same way as any other supply. VAT should therefore be levied on the value of the goods or services provided.

However, if UAE would consider that the buyer is rendering a service by paying with cryptocurrencies, the transaction will constitute a barter, and is therefore taxable because of the sale of the good or service, and is taxable on the value of the cryptocurrency handed over to the seller.

There are a number of technical complexities associated with such a barter, such as the valuation and the use of an exchange rate, but to avoid complexities it would be better to stay consistent with considering cryptocurrency like a traditional currency, considering that treating the use of crypto to acquire goods or services as bartering would lead to an awkward result.

Crypto brokerage and wallet providers

As for crypto intermediation services - services related to crypto exchange, brokerage, and wallet/custodial servicesproviders, the question is would it be qualified simply as services or would it fall under financial services.

As for the crypto exchanges and brokerages, even though the EU VAT Committee has taken a position that their services should be taxable, in practice EU countries (such as Germany, France and Italy) are exempting their services from VAT, following the ECJ decision in Heqvist. The same approach is taken in the UK where these services are exempt in line with the treatment of the financial services.

An argument to consider these services as financial services is that their activities are regulated by the SCA regulation and that they are specifically referred to as Financial activities in the Crypto Assets Regulations Explanatory Guide issued by the SCA.

However, given the GCC VAT specifics and the different structure of the fees charged to the customers, crypto exchanges might be exempt on the spreads/margins made while any flat fees/ fixed fees might be taxable, except if the customer is based abroad where such services would be zero rated with a possibility of a deduction. Finally as there are different types of traders and exchanges (centralized / decentralized, principal trading / brokerage trading) the analysis of their fees, agency arrangements and taxation should be further analysed and may be complex.

However, given the UAE’s goal to give a competitive advantage to the crypto businesses set up locally compared to other jurisdictions, it should be taken into account that VAT would be putting the consumers in UAE at a disadvantage compared to other consumers globally, who can buy and sell cryptocurrencies without VAT. Furthermore, it would harm the competitiveness of the local UAE based exchanges against the exchanges abroad.

Finally, the UAE should take into account that VAT exemption in other jurisdictions was also based on the fact that taxing each and every transaction would lead to disproportionate administrative burden given the volatility of crypto prices and the amount of trades and transactions concluded on a daily basis.

On the side of wallet / custodial services, there are different types of wallets and related services - the so called “hot” (software based) or “cold” (hardware based) wallets, or arranging for third party storage of private keys. Service providers might or might not charge a fee for the provision of such services, as these services might be provided standalone or related to other, main services (sale and purchase of cryptocurrency or trading services and similar). There are different approaches in taxing these fees comparatively, and some countries exempt those fees on the grounds that these services are closely linked to the main, exempt service or tax them as a separate - non financial service. In the UAE, the situation is much clearer and such wallet or custodial services are simply standard rates.

Other indirect taxes

While at first sight, there would be no other indirect taxes applicable, potentially real estate transfer taxes would come into sight with tokenisation of real estate - i.e. the asset backed tokens. Although set at a different level, and not a direct property right or a right in rem, anti-avoidance rules may trigger the application of transfer duties nonetheless.

Not subject to Personal Income Tax

Contrary to the discussions one may have in other jurisdictions as to the categorization of the gains of the sale of crypto for tax purposes, given the absence of personal income tax in the GCC, the discussion whether the gains constitute professional income, trading income, speculative income, income from capital or other taxable income, does not play.

However, one could imagine that tax authorities which have corporate tax systems may want to be tempted to consider the income as business income and tax it. 

Equally so, for the same reason, the creation or mining of cryptocurrency would not lead to taxation under personal income tax in the UAE, or the wider GCC.

As a comparison, reportedly in the US, the creation of bitcoins through mining needs to be included at the fair market value of the virtual currency in gross income at the date of receipt. If the taxpayer is conducting a trade or a business, the taxpayer is considered self-employed.

The planned introduction of Personal Income Tax for high earners in Oman in 2023 may see the first discussions around the topic.

Transfer pricing complexity and potential CIT treatment.

The UAE only has a fairly light transfer pricing (“TP”) framework, with no requirements for master files or local files, and only the requirement for an Ultimate Parent Entity to file a Country by Country Report (Cabinet Resolution No. 44 of 2020).

This may very soon change, with the implementation of BEPS 2.0, which may entail significant changes to the UAE’s tax regime, where we can potentially expect some form of Corporate Tax together with a Transfer Pricing regime.

Even though the UAE has a fairly light transfer pricing framework, it is by nature a very international jurisdiction, and therefore it is common for UAE businesses to have voluntarily adopted a transfer pricing framework applicable to the UAE.

Two interesting aspects of TP of the crypto universe are the intercompany transactions done in crypto and the intercompany transactions of the international groups involved in the crypto industry.

Given that some of the large investment funds and other companies are now investing in crypto as an asset or a hedging mechanism against inflation, and that the cryptocurrencies could facilitate cross border payments, it is reasonable to expect that, as the cryptocurrency adoption increases, multinational corporate groups could hold cryptocurrencies and transfer them within the group in exchange for fiat currencies or other goods and services.

How would the TP methodology apply to such types of transactions? The First option is to perform the analysis at the level of profitability of the involved entities based on their functional analysis and the Group’s value chain. Conversely, pure cryptocurrency transactions that cannot be justified with profit based methods would need to rely on CUPs (Comparable Uncontrolled Prices) where accurate valuation of the crypto assets at the moment of a transaction would be a key issue.

Given the volatility of the cryptocurrency prices (excluding the stablecoins), the traditional benchmarking ranges might not be precise enough. Yet, in case of a high volume of transactions, tracking each and every transaction and comparing the prices at the date of the transaction would lead to a significant administrative burden in documenting the intercompany transactions. Furthermore, such prices could not be compared directly with the market prices as they would have to be discounted or increased for various intermediary fees, to reflect the arm’s length conditions. This will present a challenge for Transfer pricing practitioners and benchmarking software providers as well as an opportunity to potentially solve this matter with some new software benchmarking solutions and adjustments that could allow for accurate CUP benchmarking.

Cryptocurrency related businesses such as crypto exchanges, traders, brokerages, crypto advisors, custody (wallet) providers, marketing and other ancillary services providers, which will be still be in between different growth stages from a start up to a larger multinational would have a different set of TP issues on their side. We can expect to see a value chain that combines the elements of a technology/IT based business, commodity trading business and typical back office and marketing support businesses. The value chains would largely revolve around key technologies employed, company branding and distinctive products/services offerings as the key high value adding drivers. Following the usual TP methodology, the key would be ensuring that these functions are appropriately remunerated with higher margins and/or appropriate residual profits. Given that many crypto businesses would enter the UAE market, we can expect their regional HQs to be subject to scrutiny on their transfer pricing arrangements in other jurisdictions in the region given the rapidly evolving TP landscape in the Middle East as well as the BEPS 2.0 developments that are targeting the large international businesses based in low tax jurisdictions.

Finally, if UAE indeed takes a leap into CIT as a consequence of the BEPS 2.0, it is important to note that CIT typically follows the accounting treatment. IFRS IC has classified holding cryptocurrencies as intangible assets (rejecting the qualification of financial assets or cash), unless they are held for sale in the ordinary course of business, in which case cryptocurrencies would be treated as inventories. In case of a longer holding period, the gains / losses realised should be treated as capital gains while in cases of shorter holding periods and therefore purchases and sales at the level of inventory, the gains/losses should be taxed as ordinary business income. Valuation of these assets is another matter that should be sorted by the IFRS or the separate guidance of the corporate income tax law.

A few other novel topics come to mind such as Permanent Establishment risks for overseas traders, Withholding tax implications for technology and financially based cross border transactions, but we can only expect that tax implications will largely lag behind the industry developments. It is fair to say that much can and still will be said, and that further technological developments will challenge the tax framework.

 

 

 

 

 

Milos Krstic - Head of Tax at Rain, the first Middle East crypto brokerage

Thomas Vanhee - Tax Partner, Aurifer

 

Picture by Vertigo 3d

Below we analyse in a comparative manner how the VAT regimes apply to the health care sector in the GCC Member States which have implemented VAT so far, which are the UAE, KSA, Bahrain and Oman. As for Qatar and Kuwait, we are still expecting further announcements from the governments there as regards to the timeline of the implementation. It is still expected they will implement at some point.

Medical Care

The principal supply within the healthcare sector is the direct medical care given to patients by medical practitioners. In today's world of modern medicine, this encompasses a long list of services and related products. This includes, for example, the basic doctor to patient care, specialist medical treatments within clinics or hospitals, dental or optician services, and physical and mental therapies.

Most VAT regimes around the world implement exemptions (with no recovery of VAT on associated costs) for healthcare, as a basic human need. The affected businesses are often partially state funded through grants and other mechanisms.

The GCC VAT regime has also considered this approach, however zero-ratings (which give deduction of VAT on associated costs) have mainly been favored across the region, in order to shield the sector during initial implementation from aspects such as price inflation and supply/demand economics. This has been different only for Oman.

VAT treatment for health care services

Article 29 of the GCC VAT Agreement gives Member States the option to apply an exemption or a zero rate to the healthcare sector. Therefore, the option to exempt, zero-rate or standard-rate some or all of the healthcare sector transactions (in goods and services) is at the discretion of each member state. While the GCC VAT Agreement discusses sectors, from a VAT point of view there is no such thing as a sector exemption. Only transactions can be exempt.

The UAE, as per article 45 of Federal Decree-Law No. 8/2017 on Value Added Tax, and Bahrain, as per article 53 of Bahrain Decree-Law No. 48/2018 on Value-Added Tax, have applied the zero-rating to preventative and basic healthcare services and related goods and services which are necessary for the treatment of a patient and are administered by licensed healthcare providers. This includes, for example, hospitals, mediclinics, doctors, nurses, dentists, and pharmacies.

Article 69 of Bahrain Resolution No. 12/2018 Issuing the Executive Regulations of the VAT Law provides further insights on the types of transactions falling within the zero-rating, such as treatment of mental illness, speech therapy and sight/hearing tests.

Similar to other global VAT regimes, article 41 of Cabinet Decision No. 52/2017 on the Executive Regulations of Federal Decree-Law No. 8/2017 on Value Added Tax in the UAE and article 69 of Bahrain Resolution No. 12/2018 specifically exclude elective cosmetic treatments from the zero-rating.

The KSA has applied the standard VAT rate of 5% (now 15% since 1 July 2020) on all private healthcare services, unless they are provided to Saudi nationals. For Saudi nationals, effectively, a zero rate has been implemented.

Public healthcare services are kept outside of the scope of VAT. This means that they also cannot recover any input VAT, unless they fall under the refund scheme for government entities.

In Oman, the legislator has settled on a policy to exempt health care services and related goods and services (article 47, 2 Omani VAT Law). This is much in line with EU VAT systems. Its implementation has an adverse impact on the input VAT recovery for businesses making such supplies (e.g. hospitals). Given the very recent implementation, with the application of VAT as of 16 April 2021, there is currently no guidance available in Oman.

• UAE
  • Scope healthcare services: Zero rate for preventive and basic health care
  • Definition: Made by healthcare body or institution, doctor, nurse, technician, dentist, or pharmacy, licensed by the MoH or by any other competent authority, and relate to the wellbeing of a human being
  • Inclusions: none
  • Exclusions: Elective treatment, Establishments constituting principally holiday or entertainment accomodation
• KSA
  • Scope healthcare services: OOS for government entities, refund for citizens when private institutions, otherwise 15%
  • Definition: none
  • Inclusions: none
  • Exclusions: none
• Bahrain
  • Scope healthcare services: Zero rate for preventive and basic health care
  • Definition: Qualifying medical Services provided by qualified medical professionals or qualified medical institutions
  • Inclusions: General medical health Services, Specialist medical health Services, including surgery, Dental Services, Services related to the treatment of mental illnesses, Occupational or surgical health Services, Speech therapy, Physiotherapy provided by a qualified medical professional, Sight and hearing tests, Nursing care (including care in a nursing home), Services relating to diagnosing an illness, including the analysis of any samples and x-rays, Vaccinations, Health testing and screening that is undertaken under a local law, documented policy or contractual obligation.
  • Exclusions: Services of a commercial or investment nature, Cosmetic procedures
  • Other: Qualified medical institutions are hospitals, physiotherapy centres, medical centres, private clinics, alternative medical centres and clinics for practicing any supporting medical professions licensed by the National Health Regulatory Authority, or under supervision of MoH. Qualified medical professionals are licensed as practitioners by the National Health Regulatory Authority or under any other Authorized medical body, such as: Medical practitioners, Midwives, Nurses, Mental health specialists, Dentists, Opticians, Radiologists, Pathologists, Paramedics, Pharmacists.
• Oman
  • Scope healthcare services: Exemption health care services and related goods and services
  • Definition: Services provided by Medical Professionals or Medical Institutions
  • Inclusions: General Medicine Services, Medical specialty services, Dental services and laboratory work, Psychiatric services, Physical therapy services, Nursing services in hospitals, nursing homes or similar licensed institutions, Legal midwifery services, Diagnosis and treatment of diseases and individuals, Service of surgical, reconstructive and cosmetic surgeries.
  • Exclusions: None

 

Ancillary services

Often when a patient requires medical care, they will need various types of diagnostics, tests, prescriptions, hospital or respite stays, products or devices, transportation, accommodation, and more to support their treatment. In other words, there may be many ancillary goods and services supplied. The ancillary services generally follow the treatment of the main supply (out of scope, exempt, zero rated, or standard rated).

From a VAT perspective, these ancillary services introduce an extra layer of complexity, as the VAT rules are applied on a transaction-by-transaction basis.

The VAT rules do however recognise that when various goods and/or services are supplied together, at times for one single consideration, there may be one principal supply and VAT treatment, with the other supplies ancillary in nature (i.e., a single composite supply). Alternatively, each good and service may be an individual supply in its own right, with an aim in itself and individual VAT treatments applicable (i.e. multiple supplies).

Given the presence of the various regimes in the GCC, taxpayers may resort to wanting to include as many items as possible in the applicable zero rates or exemptions (despite the input VAT deduction limitation for exemptions). To mitigate this risk, in KSA, ZATCA states that “Private Healthcare Providers should not seek to artificially value zero-rated medicines and medical goods supplies at a higher value than commercially appropriate, and should be able to provide support of the commercial pricing adopted upon request.” (ZATCA Healthcare Guideline , Section 4.2).

Some jurisdictions have specifically taken a position in regard to the VAT treatment applicable to ancillary services, when these are not considered to be part of a single composite supply.

 

United Arab Emirates

• Ancillary goods necessary for the supply of such healthcare services supplied in the course of supplying a Person with zero-rated healthcare services are also zero rated.
• Accommodation for patients: Other than holiday/entertainment accommodation, this is to be zero-rated as healthcare or residential accommodation.

 

Bahrain

• Ancillary goods and services are also zero rated when they are an integral part of the Healthcare Services and are provided together with the qualifying medical Services. These are for example:
  1. Drugs, medicines, bandages and other medical consumables administered or used during the course of performing qualifying medical Services,
  2. Laboratory Services performed by qualified persons,
  3. Transport Services for patients or those injured,
  4. Accommodation and catering Services provided by a qualified medical provider to its patients,
  5. Mortuary Services provided by qualified medical providers,
  6. Medical consultations provided remotely by means of electronic communications such as telephone or video link.
• Not considered as ancillary to the health care (and therefore subject to the standard rate) is the following:
  1. The Supply of food and beverages to any Person who is not a patient,
  2. Parking and valet Services,
  3. Telephone, internet and Electronic Services, including TV rental Services,
  4. Accommodation provided to any Person who is not a patient.

 

Oman

• Goods and Services related to Health Care Services shall not include the supply of Services of a commercial nature, such as, the supply of food and drink to visitors, the provision of parking lots for visitors, and all activities that are not included in the medical treatment, such as a TV rental fees or telephone calls allowances.

 

Subcontracting

There are often complex supply chains in the healthcare sector before the final services/goods can be provided to end consumers. Often, the medical practitioner dealing with the patient seeks external professionals for core healthcare services in specific areas of expertise. They are sometimes referred to as “consultants”. At times, these are engaged between two businesses within the healthcare sector.

It was generally expected that these supplies would similarly avail of the healthcare zero-rating regardless of the fact that the person contractually "receiving" them may not be the ultimate "beneficiary" - i.e. that the zero-rating applies throughout the full supply chain.

This is the case for example in Bahrain, where the zero rate is not limited to the B2C supply to the patient. When a hospital insources the services of a VAT registered medical practitioner for example, the VAT registered practitioner can apply VAT at a zero rate (Section 4.6 of the Bahraini VAT Health Care Guide).

However, in the UAE, the subcontracting of normally zero rated healthcare services is not subject to a zero rate, on the account of the fact that a business cannot be the person who receives the treatment (Public Clarification VATP016).

Pharmaceutical products and medical equipment

The UAE, KSA, Bahrain and Oman have implemented a zero-rating for certain pharmaceuticals and medical equipment, with lists of approved products available from the regulating health authority for each country. This zero rating was mandatory under article 31 of the GCC VAT Treaty.

As there are no references to the person supplying the products, the zero-rating will be applicable regardless of what stage in the supply chain the transaction takes place. This means they also apply on imports.

All other goods sold in to or within the healthcare sector, or imported, which do not fall within the prescribed list of pharmaceuticals and medical equipment, or other related goods, would be liable to VAT at the standard rate of 5% (or 15% in KSA).

It is not required that the ultimate recipient or user has a prescription or verified medical use for such commodities.

The Private Healthcare Providers in Saudi Arabia which are charging VAT on their services must identify the qualifying goods that are eligible for zero rating, which are provided to the patient as part of the therapeutic service. This does not apply to medicines or medical goods of a trivial value which are consumed or discarded during the provision of services.

Below, we have mentioned the requirements per jurisdiction.

• UAE: Pharmaceutical products or medical equipment (Determined by Cabinet Decision No. 56 of 2017 on medications and medical equipment subject to tax at a zero rate. The products need to be registered with the Ministry of Health and Prevention, or imported with its permission or approval).
• KSA: Qualifying medicines and medical goods listed by the SFDA (Human medecines: https://www.sfda.gov.sa/en/drug/search/pages/default.aspx; Vitamins: https://www.sfda.gov.sa/en/drug/search/pages/default.aspx?PageIndex=1&sm=vitamin; Medical appliances and equipment: https://mdma.sfda.gov.sa/ListedProducts.aspx.)
• Bahrain: Medicines and medical equipment (Determined by the National Health Regulatory Authority (https://www.nhra.bh). The lists however, are displayed on the website of the NBR, see https://www.nbr.gov.bh/VAT/vat_treatments_and_policies#FAQ60, and include medicines, medical devices and health products.)
• Oman: Medicine and medical equipment (Determined by Ministerial Decision No. 59 of 2021 determining the controls for the supply of medicine and medical equipment subject to VAT at the rate of zero percent.)

Government bodies

Public healthcare services will generally be outside the scope of VAT, when undertaken by government bodies empowered to engage in such activities in a sovereign capacity (i.e., they are not carried out in competition with the private sector), as per article 10 of the UAE VAT Law and article 9 of the Bahraini VAT Law. KSA stated that a Government body acting in its capacity as a public authority shall not be considered as conducting an economic activity (Article 9 VAT Implementing Regulations).

KSA has issued guidance in this respect and considers that income of government bodies are outside the scope when those entities carry out designated activities assigned to them by the State through the Law, Royal Decree or order establishing those bodies to carry out public functions (ZATCA VAT Guideline for government bodies in KSA, issued on 12 August 2021, version 1.0).

Supplies not carried out within a public capacity, are subject to normal VAT rules (e.g., certain car parking, gifts shops within hospitals, etc.), including registration requirements.

Special regimes, as allowed for in article 30 of the GCC VAT Agreement, are available for government bodies, which are not within the scope of the VAT regime, in order to allow them a refund of VAT on associated costs.

The KSA VAT regime for public hospitals is an anomaly, as the public hospitals enter into competition with the private sector.

For an overview of the VAT regime applicable to non taxable legal persons, you can read one of our previous articles here.

Insurance

The provision of health insurance, re-insurance and associated broker services are all subject to the standard VAT rate of 5% (or 15% in KSA) across the region to date.

This VAT may only be deducted when incurred by a VAT registered person, for business purposes, and if such VAT is not specifically blocked under the local VAT deduction rules - for example, where a business is obliged to provide health insurance to its employees under local employment law, the associated VAT would be deductible.

Where businesses in the health insurance industry pay VAT on supplies made by healthcare professionals to the insured, care should be taken when determining the business' VAT deduction entitlement, as only VAT on costs contracted for and incurred by the insurer are deductible.

e-Healthcare

The development of the digital economy has created challenges within global VAT regimes in terms of the treatment of goods and/or services previously supplied in physical form or face-to-face, and now rendered digitally. There are some instances, for example physical and digital books, which have seen alternative treatments in other regions.

However, generally speaking, the VAT treatment should not change, for the supply of healthcare goods and services, as a result of them being rendered or ordered digitally.

The treatment of any associated technology or digital services should be assessed under separate VAT rules.

Registration, compliance & penalties

With certain reliefs available from registration and invoicing for wholly zero-rated activities or transactions, as set out within article 13 of Federal Decree-Law No. 8/2017 in the UAE, article 32 of Bahrain Decree-Law No. 48/2018, and article 9 of Saudi Arabia Administrative Decision No. 3839/1438 on the Approval of the Implementing Regulation of the VAT Law, businesses should assess their registration and compliance obligations in the region, comply and/or avail of reliefs where available, in order to mitigate the risk of penalties.

Further evolution?

The VAT regime applicable to healthcare services is certain to further evolve, subject to positions adopted by the tax authorities, case law and policy decisions made after testing the initial adoption. In addition, the different health care authorities may influence the process, and are also empowered to change the VAT regime for certain items.

Keeping a finger on the pulse for the health care sector is therefore a requirement.