Teething problems greet introduction of VAT in Saudi Arabia and the UAE

Published in GSN, 11 January 2018

Saudi Arabia and the UAE went ahead with the introduction of a value-added tax (VAT) as planned on 1 January, with some teething problems quickly becoming evident. The other Gulf Co-operation Council (GCC) members have opted for a wait-and-see approach, although all are still signed up to the principal of introducing VAT eventually.

The approaches vary between the two countries at the forefront of the new tax. In the UAE, private education has been given a 0% VAT rate, while in Saudi Arabia it merits a 5% levy. Similarly, residential sales in the UAE have either attracted a 0% levy or are deemed exempt, while in Saudi Arabia they now carry a 5% mark-up.

Adding to the complexity, King Salman Bin Abdelaziz issued a royal order on 6 January to say the Saudi state will pick up the VAT costs of private education and healthcare for its citizens, as well as the first SR850,000 ($226,700) of VAT charged on the purchase price of any citizen’s first home – meaning first-time buyers will get full VAT relief on homes costing up to $4.5m.

In the build-up to the start of the VAT era, there were fears that many smaller businesses would not have put systems in place to collect the tax in time. It is not clear how many failed to register by 1 January with the relevant authorities – in the UAE the Federal Tax Authority, in Saudi Arabia the General Authority for Zakat and Tax (GAZT). Some companies in the UAE were still notifying partners of their VAT tax registration number – or TRN – a week into the new year.

There have been some problems for importers in the UAE, whose Customs Department has reportedly been unable to verify some TRNs, leading to goods being stuck at the border.

The authorities have not looked to be fully prepared. According to consultancy firm Deloitte, most of the rules for the UAE are contained in its VAT decree-law and executive regulations, but some details still need to be confirmed by the cabinet. These include which government entities, charitable bodies and designated zones will be subject to special VAT rules, and confirmation of the pharmaceutical products and medical equipment subject to the 0% rate. Neither is it clear if the decisions will be retrospective when they are eventually made.

There was one clarification when on 7 January the UAE cabinet decided that 70% of the revenues raised from the new tax will go to local governments. Emirates News Agency (WAM) quoted Vice President, prime minister and Dubai Ruler Sheikh Mohammed Bin Rashid Al-Maktoum as saying that in 2018 – chosen to be the ‘Year of Zayed’ – the distribution of VAT revenues to local governments would “achieve better local services, greater community development and wider support for our citizens”.

Saudi Arabia’s GAZT has yet to publish its VAT guidelines for a number of sectors, including transport, healthcare, financial services and the digital economy.

There have already been signs of businesses taking advantage of the new tax for dubious purposes. On 4 January, Abu Dhabi’s Department of Economic Development (DED) said it was investigating five complaints made by consumers about allegedly unjustified price increases. DED has said shops can round up their prices by up to 20 fils, even if the 5% levy would imply a smaller mark-up, to get around any problems caused by a shortage of 5 and 10 fil coins. Central Bank of the UAE has insisted sufficient small denomination coins are in circulation.

It remains unclear when the other GCC states might implement VAT themselves. Bahrain’s Ministry of Finance has said it is committed to introducing the tax sometime this year. The Kuwaiti National Assembly agreed in mid-December to refer a draft law on VAT to its financial and economic affairs committee.

Delays in implementing the tax could provide a small boost to the local economies in these other countries, particularly if Saudi and Emirati buyers close to the border see an arbitrage opportunity – as happened when Saudi Arabia introduced excise duty on tobacco products and sugary drinks in mid-2017. According to one Bahraini local, the sharp price difference in the cost of goods between the two kingdoms encouraged Saudis to stock up when they crossed the King Fahd causeway.