This year-end tax report for the Gulf Cooperation Council (GCC) provides an overview of the most significant tax developments in the region under the following three categories:
- Indirect Taxes (VAT and Excise Tax);
- Tax and Economic Substance reporting obligations; and
- Double Tax Treaty developments.
Whilst the below partly describes already introduced changes, this report is particularly helpful for businesses in the GCC seeking to prepare for 2020.
Although we focus mainly on the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE), the below developments will also be relevant for international businesses operating in Bahrain, Kuwait, Oman and Qatar.
Indirect Tax
VAT in negotiations and contracts
GCC businesses have been coming to grips with the challenging but successful introduction of GCC VAT in the KSA and the UAE per 1 January 2018 and in Bahrain per 1 January 2019. It is expected that the remaining three GCC Member States will follow shortly, possibly in 2020 or 2021.
Although it is unknown exactly when the entire GCC will have an effective VAT regime in place, the future application of VAT in the remaining GCC Member States should be taken into consideration when reviewing and (re)negotiating contracts concerning supplies (of goods or services) within the region. Contracts should contain appropriate tax clauses (ideally not only relating to VAT but also to other taxes such as withholding tax, depending on the circumstances) and they should reflect the (economic) reality.
For more observations and tips around the introduction of VAT, please read our alert regarding the VAT introduction in Bahrain.
VAT compliance
The year-end input tax adjustment provides the opportune time to reflect on the VAT position of VAT registered entities and branches. This reflection could revolve around (i) an analysis of the applied apportionment method (upon request, tax authorities of Bahrain, UAE and KSA allow for alternative methods), (ii) ensuring administrative obligations are met (e.g. compliant invoices) and (iii) potential VAT grouping (which would reduce the VAT compliance burden, among others).
Action may also be warranted for currently non-VAT registered persons. Bahrain is entering the final phase of the transitional period with the further (and last) application of its mandatory registration threshold as per 1 January 2020. As in the UAE and the KSA, persons making taxable supplies should continue to monitor whether they are exceeding (or expected to exceed) the mandatory registration threshold. Depending on facts and circumstances, a voluntary registration may be recommendable.
Excise Tax
Excise Tax was already introduced in the region as per 2017. In accordance with the GCC Excise Tax Agreement, the tax is imposed on goods that are harmful to human health and to the environment as well as on luxury goods. At present, the goods taxed are tobacco products, soft drinks and energy drinks (in Oman also alcohol and pork). Both the KSA and the UAE recently expanded the scope of their Excise Tax to also include sugary/sweetened drinks and electronic smoking devices as well as liquids to be used in such devices.
Businesses dealing with any of the above mentioned products should assess whether these goods are within the scope of the applicable Excise Tax. Note that the Excise Tax application is not limited to importers and producers of excisable goods, but may also apply (in certain cases) to so-called 'stockpilers' and/or warehouse keepers. Businesses involved in the supply chain of excisable goods are advised to closely consider the recent changes, as they may need to register for Excise Tax, file Excise Tax returns and/or obtain so-called tax stamps (which can be paper tax stamps or digital codes).
Tax and Economic Substance reporting
Economic substance regulations
The UAE introduced Economic Substance regulations as per 30 April 2019. These regulations prescribe mandatory levels of substance for UAE licensed entities, including companies, branches and rep offices which perform geographically mobile activities (such as banking, holding, finance, headquarter and IP related activities, among others). UAE entities need to submit the first notifications related to the Economic Substance Regulations to the Regulatory Authorities with effect from 1 January 2020. Depending on the entity's activities and place of establishment, the Regulatory Authority can either be one of the Free Zone Authorities or one of the relevant (onshore) government institutions such as the UAE Central Bank or Ministry of Economy.
At present, Bahrain is the only other GCC Member State that has introduced Economic Substance requirements. For more information on the UAE substance regulations, please see our previous October and June tax alerts.
Country-by-country reporting
Parallel to the introduction of Economic Substance regulations, the UAE also introduced Country-by-Country Reporting (CbCR) compliance rules. After the KSA and Qatar, the UAE is the third GCC Member State to implement CbCR obligations.
The UAE CbCR rules are effective for financial years commencing on or after 1 January 2019 and shall apply to multinational entity (MNE) groups with consolidated revenues of at least AED 3.15 billion (approximately USD 858 million) in the financial year immediately preceding the reporting period. As a result of the CbCR rules, UAE parented MNE groups are now required to file their CbC Reports in the UAE. Moreover, UAE constituent entities of qualifying MNE groups will need to file a CbCR notification with the Ministry of Finance. With the CbCR rules coming into effect for financial years commencing on or after 1 January 2019, the first CbC Reports are due on 31 December 2020 whilst the first notifications are due on 31 December 2019.
Transfer pricing (KSA)
The KSA introduced Transfer Pricing (TP) rules for related party transactions earlier this year. The TP rules cover cross border and domestic transactions and apply to KSA taxable persons from reporting years ending 31 December 2018. An exception is made for natural persons as well as for small businesses which are party to 'controlled transactions' that are less than SAR 6 million during any 12 month period.
While the KSA tax legislation already included the at arm's length principle for related party transactions, the introduction of the TP rules demonstrates the government's increased focus on tax collection and its continuing efforts to broaden the KSA tax base. In general, international businesses with activities or operations in the KSA should expect more scrutiny from the tax authorities on transfer pricing policies and intercompany transactions. For more information on the KSA TP rules, please see our previous tax alert.
Double Tax Treaty developments
UAE-KSA Double Tax Treaty
As of 1 January 2020, the Double Tax Treaty (DTT) between the UAE and the KSA is set to come into force. This is the first of its kind between two GCC Member States and provides some interesting tax advantages for businesses with investments, operations and/or contracts in either country.
Compared to the current situation, the UAE-KSA DTT provides the following benefits:
- Withholding tax on interest: domestic (KSA) withholding tax rate reduced under the treaty;
- Permanent Establishment (PE): better defined thresholds for (unintended) creation of taxable presence in the KSA and (virtual) services PE;
- Technical services fees and 'similar income': better protection against KSA withholding taxes;
- Royalties: domestic (KSA) withholding tax rate reduced under the treaty;
- Dispute resolution: mutual agreement procedure (between states) formalised.
It should be noted that the UAE-KSA DTT does not provide improvements with respect to KSA dividend withholding tax on cross border distributions (i.e. the domestic (KSA) tax rate is not reduced), or with respect to the KSA capital gains tax on the sale of shares in KSA companies.
UAE DTT network
With well over 100 DTT's in force or in various stages of ratification and negotiation, the UAE continues its rise to becoming one of the most favourable holding platform jurisdictions in the world, comparable to jurisdictions such as the UK and the Netherlands. For a list of all UAE DTT's currently in force, please contact us.
The UAE DTT network is particularly relevant for businesses with investments, operations and/or contracts in African countries. In this respect, please see our previous article on various tax considerations when doing business in Africa.
Multilateral Instrument
The Multilateral Instrument (MLI) is an initiative from the Organization of Economic Cooperation and Development (OECD) to which more than 90 jurisdictions have signed up. The effect of the MLI is that a jurisdiction's DTT network will be updated, without any bilateral treaty (re)negotiation, to include the minimum standards against harmful (tax) Base Erosion and Profit Shifting (BEPS). One of the features of the MLI is the Principal Purpose Test (PPT) which aims to deny DTT benefits to a taxpayer where one of the principal purposes for entering into the transaction, arrangement or structure was to obtain that (tax) benefit. Effectively, the PPT entails that when the wide UAE DTT network is utilised for structuring outbound investments, commercial business reasons and economic substance should also be considered for successful DTT application.
For more information on the application of the MLI to UAE DTTs, please see our previous article.
For the application of the MLI to KSA DTTs, please see our 2018 article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
