The Legal Mechanism for VAT Implementation in GCC Countries

In financial taxation, a tax is not imposed without a fact that justifies its imposition. In the net income tax, the fact of making a profit according to the annual financial statements is the fact on which the income tax is imposed. The justification behind the income tax is that the income fact proves the success of the project in light of the environment that the state provides for the project, and for this the state has the right to obtain a percentage of the profits in the form of an income tax.

While for the value-added tax, the fact that the tax is imposed is not an operation of capital or the achievement of a specific financial achievement, but rather a mere fact of consumption of goods and services, no matter how simple the consumption.

This means that the justification for imposing a value-added tax is a person’s ability to consume, which reflects his good financial ability under the conditions provided by the state, and for this the state imposes a tax on his consumption that is calculated at an additional rate on the value of the goods or services consumed.

Accordingly, the facts that impose tax in accordance with the Gulf Agreement for Value Added Tax are:

First: The supply of goods

  • Conventional Supply Chain (Article/5): It means the transferring of ownership of the commodity so that it can be used or earned legally by an owner. The supply in accordance with the agreement includes:
    • Transfer of possession of the goods with an agreement to set a later date for the transfer of ownership of the goods, provided that the maximum date of transfer of ownership is the date of the complete payment; Such as the installment sale in which the possession of the goods is transferred to the buyer before the ownership of the goods is transferred to him in full.
    • Granting rights in rem over real estate, giving rise to the right to use it; Such as transferring the usufruct right from a real estate to another person while maintaining the ownership of the title of the real estate property.
    • The forced transfer of ownership of goods; As if the subject of the transfer of ownership was a court case in which the judgment was final, and was forcibly executed against the defendant seller.

It is clearly noted that the Gulf legislator has largely avoided mentioning the element “remuneration” based on which supply chain operations take place, with the aim of not allowing for tax evasion through the merchant’s insistence that he did not received a consideration in exchange for transferring possession of goods or granting rights in rem.

Although the value-added tax does not focus on the merchant at the end, but on the consumer, but the merchant has an interest in tax evasion, which is the supply of his products at prices lower than the prices of the products bearing the tax burden, and this increases his profits and increases the demand for his products.

But in fact, there is an excessive legislative oversight in the Gulf agreement, as the merchant who carries out traditional supply chain operations must have received a return for it, since it is not reasonable for him to supply the goods for free.

Therefore, it was preferable for the legislator to mention the element of consideration in the traditional supply in order to distinguish it from duty-free supply, provided that any supply made by the merchant is considered to have been made in return until proven otherwise.

  • Deemed Supply: The aforementioned agreement stated – fearing of tax evasion the occurrence of a supply event that justifies imposing tax in the following cases (Article 8):
  • Disposing of goods that form part of the assets of the taxpayer, in the following cases:
    • Assignment of goods even for purposes other than economic activity, even without any charge; Such as a company buying a set of goods to use during its business, and then deciding to distribute it in the form of rewards to its employees.
    • Supplying goods free of charge; In this case, a company supplies the goods without any charge in the first place.

However, Member States may exempt such supply from tax, if is in accordance with the laws of each country, or it is in the course of business as samples and gifts of insignificant value

In the Kingdom of Saudi Arabia, for example, this value has been determined not to exceed 200 riyals, and not to exceed 50,000 riyals as an annual value on the basis of the fair market value.

  • Changing the use of goods from a taxable activity to a non-taxable activity; Such as a company buying cars to transport its employees, and then giving some of them as gifts for competitions for special clients
  • Keeping goods even after suspension of business activity; it is the only case where the tax is imposed on the mere retention of the commodity even after the tax de-registration.

For example; if the owners of the suspended project keep the goods after canceling the project’s license and tax registration, this shows their intention to continue the activity outside the framework of the suspended project, otherwise they would have sold the goods during the company’s liquidation and dissolution procedures.

  • The use of goods that form part of the assets of the taxpayer for purposes other than business activity; As if the company is specialized in contracting, and instead of using construction machinery in the company’s projects, the chairman of the company’s board of directors uses them to build a house of private ownership for him.
  • The supply of services without charge; for example, the telecom company provides free mobile lines as a bonus to employees.

Therefore, the taxable supplier is obliged to hand over to the tax administration the amount of value added tax calculated on the basis of the fair market value (Article 26-4), even if the process was not actually carried out for his business activity.

In fact, it seems that the subjection of deemed supplies is exaggerated within the framework of combating tax evasion, as the cases of deemed supply have shown bad faith in the merchant and his desire to cover commercial supplies in a non-commercial manner or to separate them from their business activity for the purpose of tax evasion.

The imposition of the tax for the taxpayers, even on the non-business activities that they carry out or that take place without compensation, is excessive strictness, and it places obstacles in the way of the Gulf companies’ implementation of their social responsibilities, knowing that the Gulf agreement did not directly exempt charitable projects from tax, but rather left the issue to the estimation of each member state (Article/30).

Such a tax policy brings an abundant resource to the public treasury, but in return it reflects an unpromising business environment and an atmosphere of mistrust between the merchant and the state.

It was sufficient to stipulate the establishment of a committee from the Ministry of Finance whose duty is to inspect and research the merchant’s operations that take place free of charge or outside the scope of business activity and similar operations.

Second: The Movement of goods from one place to another (Article/6)

VAT is imposed on the mere transport of goods from one Gulf country to another, even if no actual supply process is proven of taking place.

This rule guarantees prevention against any tax evasion from happening, but it contains the following exceptions:

  • Temporary use subject to the Customs Law; It is a use that does not involve a transfer of ownership and therefore may not be subject to taxation.
  • Transport of goods as part of other taxable supplies in the country to which the tax is transferred. In this case, it is not permissible to impose value-added tax on the mere transport process, so as not to create a case of double taxation.

And if we want to evaluate this rule, we find that it implants obstacles in the way of relocating workplaces from one country to another. Companies may have changes in their operational activity that force them to relocate their warehouses from one country to another due to high rents, for example, or due to restrictions in the time of Corona, or for the purpose of taking advantage of some of the privileges that are granted by a specific country or for other reasons.

In this case, the merchant may have moved his goods from his warehouses in one Gulf country to another without making any supply, yet this process is subject to tax, which may make the merchant back off from changing the location of his stores, and this constitutes an environment that is neither flexible nor conducive to investment.

Third: Supplying Services (Article /7)

Any supplying process that does not involve a supply of goods is spontaneously considered as a supply of services and is directly subject to VAT.

Fourth: Import (Article /42)

It is the process in which goods are imported from outside the countries of the Gulf Cooperation Council, so that the importer is obligated to pay the tax in accordance with the unified customs law.