UNDERSTANDING TAXATION IN GCC COUNTRIES

By Zeeshan Qureshi - November 25, 2017

1. INTRODUCTION

1.1) Major changes are expected in near future with regards to taxation in GCC as per the instructions and advise of IMF.

1.2) The recent introduction of unified VAT in GCC countries is being seen as a major change in the expected economic growth and revenue generation. Although certain indirect taxes were already enforced in Bahrain and Oman focusing majorly on tourism, hoteling, and gasoline businesses e.t.c. however, recent implementation of VAT accross the GCC member countries may further widen the scope of the said law.

1.3) In this article we will go through an overview of tax statutes currently being followed by GCC member countries.

1.4) GULF COOPERATION COUNCIL (GCC)

1.5) Gulf Cooperation Council (GCC) basically is a geo political and economic alliance between the arab countries in the Persian Gulf excluding Iraq.

1.6) GCC consists of following member countries:

Saudi Arabia;
UAE;
Bahrain;
Oman;
Qatar; and
Kuwait

1.7) GCC maintains its Headquarters in Riyadh and has an estimated GDP of $1.8 trillion.

1.8) Monetary council developed on December 15, 2009 is responsible for introducing single currency in certain GCC countries and other economic policies of the region including tax reforms mutually agreed upon.

2. Tax laws of GCC - Overview

2.1) There are certain similarities in the tax laws of GCC member states some of which are being elaborated ahead.

Salaries and wages across GCC are non taxable either for national or non national.
Oman, Qatar and Saudi Arabia were believed to be implementing lowest tax rates on non nationals business individuals as compared to rest of the member countries.
Property taxes are generally not applicable in GCC.
Zakat is applicable on certain GCC countries on their nationals at 2.5%.
The taxes imposed on oil producing companies irrespective of nationality ranges from 15% to 85% across GCC. Whereas, for other companies belonging to non nationals taxes ranges upto 55%.
Oman taxes the corporates in general belonging either to nationals or non-nationals.

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Taxation in two of the major GCC countries i.e. KSA and Dubai are further elaborated in detail as below:

3. Kingdom of Saudi Arabia

3.1) The history of taxes in GCC dates back from 1950's when Kingdom of Saudi Arabia initially introduced personal income, capital gains, and corporate taxes on both nationals and non nationals. However, within six months non nationals were excluded from tax net due to existance of zakat and in 1970's expatriates salaries were also excluded from tax net due revenue already being generated from high oil prices and need to develop infrastructure by hiring expatriates.

Following are the highlights of existing tax system in Saudi Arabia:

3.1.1) Direct Taxes

3.1.2) Corporate Taxation - A corporation is considered to be a resident if it has been registered in accordance with the applicable rules and regulations of the Kingdom and is headquartered in the Kingdom of Saudi Arabia.

The tax base of a resident company is the share of income of 'Non Saudi' from any activity taxable in Kingdom less allowable expenses.

Whereas, the tax base of a non resident company operating its activities through a permanent establishment in Saudi Arabia shall be total income of such permanent establishment less any allowable expenses.

3.1.3) Individual Taxation - Any income of a non-saudi individual shall be taxable at rates specified (currently being 20%) whereas, incase of a Saudi the income shall be subject on to Zakat amounting to 2.5% and no other direct taxes shall be applicable on him.

3.1.4) Withholding Taxes - Certain types of withholding taxes are also applicable in the Kingdom of Saudi Arabia. These withholding tax are applicable on dividend @ 5% till now, interest @ 5% till now, and on royalties @ 15% up till now.

3.1.5) Capital Gain - As regards to capital gain taxation in the Kingdom of Saudi Arabia any income from sale of shares bought in a resident company after 2004 shall be subject to capital gain taxes currently being @ 20%.

3.1.6) Oil and Gas Sector - Corporations involved in exploitation of Oil and Gas sector shall be taxable from 30% to 85% (current rates in 2017) of its total taxable income.

3.2.1) Value Added Taxation

3.2.2) The new unified Value Added Taxation laws introduced across GCC are still in its initial stages as at 2017. The VAT will be applicable across GCC from January 01, 2018.

3.2.3) Certain key factors of this law are being elaborated as below:

Whilst the standard VAT registration threshold is SAR 375,000, businesses with annual turnover less than SAR 1,000,000 are initially exempt from the mandatory registration requirement until January 2019, giving the smallest businesses more time to become ready for new rules;
VAT reporting can be carried out on a ‘cash accounting’ basis for small businesses with turnover of less than SAR 5,000,000;
Real estate sector except for residential property on the other hand has been included in the definition of economic activity and is therefore considered to be taxable.
Wired and wireless telecommunication services being intangible in nature have also been included into the VAT
Financial services except for Life Insurance are also taxable under VAT.
Services provided to a non resident of a GCC is exempt from Tax under this law subject to certain conditions.
The international transport of goods and passengers is zero rated subject to certain conditions under this law.
The supply of a qualifying metal that is gold silver and Platinum is taxable at zero rate under this law.

4. United Arab Emirates

4.1) United Arab Emirates is a federation of seven emirates including AbuDhabi, Ajman, Dubai Fujairah, Ras al-Khaimah, Sharjah and Ummul Kuwain.

4.2) There is no Federal taxation system in United Arab Emirates. Instead taxes are introduced through official decree enacted separately by each emirate.

4.3) These decrees are limited/restricted to foreign banks and Oil Companies up to now. However, due to recent turmoil in GCC countries the Federation is seeking implementation of various other source of income through appropriate taxes.

4.4) Major source of revenue for U.A.E has been production and export of oil to other countries.

4.5) Following are the highlights of existing tax system in UAE:

4.1.1) Direct Taxes

4.1.2) Corporate Taxation

4.1.3) Majority of the companies established in UAE are considered to be having a residential status. Following are the conditions required by the official decree in order to consider a company as resident company:

Beneficial ownership of all the shares of the company is owned by the residents of UAE; or
Major portion of the income of the company is derived from trade or business other than investment business in UAE; and
Majority of the value of company property is used for the purpose of company's trade and business

4.1.4) Although income tax decrees for the purpose of taxability of corporation has already been issued by five emirates. However, only Oil/Gas and foreign banks are currently taxable.

4.1.5) Oil /Gas and certain petrochemical companies are subject to progressive rates of taxes ranging from 55% - 85% whereas the foreign banks are taxable on the basis of specific emirates level banking decrees.

4.1.6) Individual Taxation - There is no individual income taxes applicable in UAE so far.

4.1.7) Withholding taxes/Capital Gain Taxes - There are no such direct taxes applicable in UAE so far.

4.2.1) Value Added Taxation

4.2.2) Certain key factors of this law are being elaborated as below:

Applicable from January 1, 2018 at standard rate of 5%

Mandatory Registration threshold is AED 375,000, Volantarily Registration threshold is AED 187,500/-

Food products shall be subject to the standard rate of VAT, however each member state will have the right to apply zero rate on food as per the unified list of commodities (e.g. basic foods: bread, milk etc.).

VAT will be charged at 0% in respect of the following main categories of supplies:

Exports outside the GCC;
International transportation, and related supplies;
Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
Supply of certain education services, and supply of relevant goods and services;
Supply of certain Healthcare services, and supply of relevant goods and services.

Local transport is exempt

Real estate sector except for residential property taxable.

Wired and wireless telecommunication services.

Financial services except for Life Insurance.

Services provided to a non resident of a GCC is exempt from VAT subject to certain conditions.

In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.

In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC.

4.3.1 Excise Tax

4.3.2) The United Arab Emirates (UAE) has recently issued Fedral Decree Law No. 7 of 2017 on implication of Excise Taxes in the state applicable from October 01, 2017.
4.3.3) The Cabinet empowered thereon has therefore issued Cabinet Decisions No. (37) and (38) of 2017 detailing description of Excise Goods, Excise Tax Rates and the Method of Calculating the Excise Price.

4.3.4) These procedures confirm the information previously announced that excise tax will be applicable to carbonated drinks at a rate of 50%, and energy drinks and tobacco products at a rate of 100%. It also provides details of how to calculate the value on which excise tax should be calculated, and indicates that the Federal Tax Authority (FTA) is empowered to publish a standard price list specifying the value on which excise tax should be calculated for excise goods.

For further detail please click https://zeeshanqureshi.blogspot.com/2017/11/uae-levies-excise-tax-from-october-01.html