GCC Taxation Framework : A Premier

Introduction
When we think about taxation, we think off the Gulf Co-operative Council (GCC) countries with one of the least complicated and demanding taxation regime in the world. The structure and compliance of tax laws in the 6 member countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE) of the (GCC) is not very complex in comparison with the rest of the world. As a result, it has been attractive jurisdiction for foreign investors.
Historically, the GCC countries are heavily dependent on oil-revenues. With changing times and increase volatility in oil prices, GCC countries are moving towards effective taxation system in order to boost their revenue from the sources other than oil. Taxation like corporate tax, Zakat, excise duty, Value Added Tax (VAT), custom duties, etc. are already in place in many GCC nations.

History of VAT in the GCC
With the oil and petroleum prices hitting its all time low in 2015, the GCC countries signed the Value Added Tax Treaty in the year 2016 as one of the instruments to finance their future growth and expansion. Many countries in the world are resorting to renewable green energy which again put more pressure on countries with their main source of income through export of oil. In the treaty, it was decided that VAT will be implemented at a rate of 5% on goods and services. Saudi Arabia and UAE were the only countries to meet the deadline and successfully implemented VAT laws in 2018.
In this article we will discuss more about VAT laws in different GCC nations along with the status of other tax laws.
Discussion on Country wise VAT laws status is as under: –

1. Saudi Arabia
Saudi Arabia implemented the VAT at the start of the year 2018 with the expectation to become one of the major source of non-oil revenue. In the beginning, the companies with the turnover of more than SAR 1 million were supposed to register under VAT law. In December 2018, the limit was changed to SAR 375,000 which is also in compliant with GCC Unified VAT Agreement. The step was taken in order to achieve non-oil based revenue stability and sustainability.
VAT revenues for the first year was SAR 45.6 billion exceeding the budget by almost 100% whereas the VAT revenue for 2019 was SAR 47 billion. The expected revenue for 2020 will be less than what is earned in 2019 due to the impact of COVID on world economy. As a measure to deal with this unexpected situation, Saudi revised its VAT rate by three times from 5% to 15% from 1st July 2020. This step is taken with the aim to reduce dependency on oil revenues and increase the sustainability of non-oil sector revenues. Due to sudden increase in VAT in the third quarter, the inflation shoot up to 6% which is now expected to reach around 3.70% for the FY 2020.
At present, VAT is applicable on most of the goods and services with some exceptions. Examples of such exceptions are given below: –
• Life Insurance – Exempt
• Public Healthcare – Zero Rated
• International Transport – Zero rated
Other Tax laws and regulations
a) Taxes on Corporate Income – Corporate rate tax in Saudi Arabia depends on the status of citizenship. For non-Saudi the tax rate is 20% of the net adjusted profits where as for Saudi nationals and GCC citizens, it is 2.50% of the net worth of the entity or Net adjusted profit of a Saudi or GCC national whichever is higher. If in a company, both Saudi/GCC national and non-Saudi national are partners then the respective tax rates will be applicable on their respective share of profits.
It should be noted that Income Tax rate is 20% but income from oil and hydrocarbon production is subject to tax rate ranging from 50-85% (depending on the capital investment done by the companies).
b) Custom Duty – Last year, Saudi has increased the custom duty on its various products. Few examples are as under:-
• Food and beverages – From 5% to a range between 5.5% – 15%.
• Chemicals – From 5% – 12% range to a range between 5.5% – 15%.
• Leather Products – From 12% to 15%.
• Straw, paper products – From 5% to a range between 8% – 10%.
• Carpets, clothes and shoes – From 5% – 12% range to 15%.
• The duty on other products can range from 7% – 25%
c) Excise Tax – Excise tax is applicable on three categories; tobacco products – 100%, energy drinks – 100% and soft drinks – 50%. Businesses subject to Excise Tax should register themselves with General Authority of Zakat and Tax (GAZT).
d) Real Estate transaction tax – 5% of the total real estate disposal value regardless of its condition, shape or use at the time of disposal.
e) Social security contribution – Social security contribution for non-Saudi is 2% done by the employer and 22% for Saudi national and it is paid by both the employer (12%) and employee (10%).
f) Withholding Tax – Payments made to non-resident parties are subject to Withholding tax in Saudi. The rate of withholding tax is 5% on dividends, 5% on interest, 15% on royalties, 20% on management fees and 5%-15% for other technical services.
g) Transfer pricing – Saudi has transfer pricing guidelines which applies to all the taxpayers and cover transactions between related persons or persons under the same control.
h) Country-by-country reporting – It is applicable to companies with Group consolidated revenue exceeding SAR 3.2 billion. The first filing obligation applies to companies with reporting fiscal year starting on or after 1st January 2018.

2. United Arab Emirates (UAE)
VAT came into force in UAE on the 1st of January 2018. The country’s Federal Tax Authority was charged with coordinating tax revenue collection across seven emirates. The rate of VAT is 5% and threshold limit to register under VAT is AED 375,000 and it has remain the same since VAT implementation. In the beginning of 2020, the total of 312,000 businesses were registered as an individual or as tax groups.
Since 2018, UAE has seen the rise in the collection of VAT revenue. In 2018, the UAE reported the total revenue of AED 27 billion which is 125% more than the budgeted figure. It even exceeded the budgeted figure of AED 20 billion for the year 2019. The total VAT collected was divided between Federal Government and 7 emirates in 30-70 proportion. Dubai total share in the revenue was 42% i.e. AED 11.34 billion where as Abu Dhabi and Sharjah received 18% (AED 4.85 billion) and 6% (AED 1.61 billion) respectively. Other emirates received remaining 4% (AED 1.1 billion) of the VAT revenue.
In comparison to last year, the total revenue in 2019 increased by 15% to AED 31 billion. Whereas in 2020, the revenue has decreased in comparison to last two years due to COVID-19 and slowdown in world economy. As of August 2020, the VAT revenue amounted to AED 11.6 billion.
Similar to Saudi Arabia, UAE also has standard 5% VAT on most of the items. However, healthcare services which are preventive or necessary for the treatment of humans, education services and international transport comes under 0% VAT category. Moreover in UAE, tourist are eligible for VAT refund subject to certain conditions.
Other Tax laws and regulations
a) Corporate Tax – UAE does not have a federal corporate tax regime. The decision to implement corporate tax depends on the government of individual Emirate.
Currently, the oil and gas companies are taxable based on the specific terms mentioned in the concession agreement or fiscal letter with the government. The terms of concession agreement or fiscal letter is specific and determine the tax base, tax rate, due dates and filing of returns. Tax rates for oil and gas companies can range upto 55% and royalty rates can be between 12-20% depending on the levels of production. Branches of foreign banks are also subject to corporate income tax at 20% flat rate.
In addition to it, each Free Zone has its own rule and generally companies operating in Free Zones are not liable to Corporate tax. Companies are given ‘Tax Holidays’ or exemption which ranges between 15-50 years and mostly renewable upon expiry.
b) Custom Duty – In UAE, the customs duties are fixed at 5% of the CIF value of most products. Other rates may apply to certain goods, such as alcohol and tobacco, and certain exemptions and reliefs may also be available.
c) Excise Tax – In 2017, the United Arab Emirates introduced an excise tax on tobacco and tobacco products, carbonated drinks, and energy drinks. On 1 December 2019, the United Arab Emirates expanded the scope of excise tax to include sweetened drinks, electronic smoking devices and tools, as well as liquids used in electronic smoking devices and tools.
The applicable tax rates are as follows:
• 100% on tobacco and tobacco products, electronic smoking devices and tools, liquids used in electronic smoking devices and tools, and energy drinks.
• 50% on carbonated drinks and sweetened drinks.
d) Municipality Tax / Municipality Fee – The rate of Municipality tax in Dubai is 5% and Abu Dhabi is 3% of the annual rent value.
e) Social Security contribution – It is only applicable to UAE and GCC nationals. Non-GCC nationals are not the part of this contribution. Most Emirates in Dubai has a contribution rate of 17.5% (12.5% payable by employer and 5% payable by employee). Abu Dhabi has a higher rate of 20% (15% payable by employer and 5% payable by employee). For other GCC nationals, the contribution depends on the social security regulation of their home country.
f) Country-by-country reporting – UAE recently introduced country-by-country reporting effective on financial years commencing on or after 1st January 2019. It will apply to companies with consolidated revenue of AED 3.15 billion.
g) Economic Substance Regulations (ESR) – In 2020, UAE issued regulations pertaining to ESR. UAE onshore and Free Zone entities that carry on the specific activities mentioned in the regulation has to meet ESR requirements. Failure to do so could trigger penalties.
h) Ultimate Beneficial Ownership (UBO) – It requires the entity to prepare and file a UBO register, Nominee Director register and Partners or Shareholder register with the relevant authority. All UAE companies (onshore and offshore- but excluding those registered in the Abu Dhabi Global Market and the Dubai International Financial Centre or directly or indirectly wholly owned by the federal or local government) must comply with their reporting obligations under the UBO Regulations.

3. Bahrain
VAT in Bahrain was implemented on 1st January 2019. Like Saudi Arabia and UAE, the general rate of VAT in Bahrain is also 5%. The mandatory registration threshold is 37,500 Bahraini dinar (BHD) for businesses resident in Bahrain. The National Bureau for Revenue (NBR) is the regulatory body that is responsible for overseeing and upholding the provisions of the Bahrain VAT Law and Regulations.
In Bahrain, basic food items, healthcare, education and local transport is under the 0% VAT category. For the year 2019, revenue from VAT was BHD 250 million which is 67% higher than the budgeted figure of BHD 100 million.
In 2020, to ease the compliance and filing process of filing VAT returns, Bahrain introduced new guidelines of annual returns for Micro Business. Businesses with meet the following conditions can apply: resident of Bahrain, revenue less than BHD 100,000 and not a part of VAT group. The NBR has a discretion as to whether accept or reject the application for annual filing.
Other Tax Laws and Regulations
a) Corporate Tax – There are no corporate taxes in Bahrain except on the companies which are in the oil and gas sector or derive profits from the extraction or refinement of fossil fuels (defined as hydrocarbons). Such companies are taxed at 46% on their net profits.
b) Custom Duty – The generate rate of custom duty is 5% on CIF value with the following exceptions:-
• Alcoholic beverages – 225%
• Cigarettes – 200%
• Certain categories of goods, such as paper and aluminum products, are subject to a 20% duty rate.
c) Excise Duty – 100% excise on Tobacco products and energy drinks and 50% on soft drinks.
d) Social Security contribution – 12% for Bahraini nationals and 3% for non-Bahraini nationals paid by the employer.
e) Municipality Taxes – 10% tax on the rental of residential and commercial property to expatriates.
f) Economic Substance Regulation (ESR) – The Economic Substance regulations were issued by the Ministry of Industry, Commerce and Tourism (MOICT) on 23 December 2018. Entities falling within ESR’s scope should satisfy certain economic substance requirements and to report within three months from their financial year end.
g) Ultimate Beneficiary Ownership (UBO) – In 2020, Bahrain passed the conditions and rules governing the disclosure of UBO. The scope applies to all natural and legal persons (includes branches of foreign companies) holding a Commercial Registration except for entities which are licensed by the Central Bank of Bahrain.
h) Country-by-country reporting – The rules and regulations pertaining to country-by-country reporting is expected to come in 2021.

4. Oman
Oman announced the implementation of Value Added Tax (‘VAT’) in October 2020 and the date of implementation of VAT in Oman is 16 April 2021. The Oman VAT Law is based on the principles laid down in the Unified GCC Agreement for VAT. The standard rate of VAT in Oman is 5% which is consistent with the GCC Unified Agreement, and there are provisions for zero rating and exemptions in the Oman VAT Law. Certain items like food products, healthcare services, education services, transport services, etc. will be under either 0% VAT rate or exempt from VAT. The mandatory registration limit is OMR 38,500.
Budgeted VAT revenue for the FY 2021 is expected to be OMR 300 million.
Other Tax Laws and Regulations
a) Corporate Tax – The tax rate is 15% for all the taxpayers other than Omani proprietorships (‘establishments’) and limited liability companies (LLCs) that fulfil the conditions of small and medium enterprises (SMEs). They are taxed at 3%. Special provision applies to petroleum companies in Oman and they are taxed at 55%.
b) Withholding Tax – Foreign companies who do not have Permanent Establishment in Oman are subject to 10% withholding tax of the gross income on the following categories; royalties, management fees, consideration for research and development and consideration for the use of or right to use computer software). Dividends and Interest are temporarily suspended for three years with effect from 6th May 2019.
c) Custom Duty – 5% custom duty is applicable on CIF value with some exemptions to food items, medical supplies, etc.
d) Excise Duty – 100% on Tobacco (including tobacco derivatives), pork products, alcoholic beverages, and energy drinks and 50% on sugar sweetened beverages.
e) Social Security contribution – 17.5% social security contribution applicable to Omani nationals. Out of 17.5%, employer contributes 10.5% and employee contributes 7%. Moreover, employer is also required to contribute 1% towards insurance of work-related injuries.
In addition to above contribution, employer and employee are required to contribute OMR 1 per OMR 100 of monthly salary towards job security.
f) Municipality Tax – 3% on property rents, 5% on hotel occupancy and 10% on leisure and cinema houses.
g) Transfer Pricing – At present, it is somewhat covered under the provisions of Income Tax law in which companies are required to disclose the transactions with related party. The pricing of related party transaction can be avoided for income tax purpose instead tax will be applicable on basis of independent pricing.
h) Country-by-Country reporting – It is applicable on all businesses that have a legal entity or branch in Oman and are members of a multinational enterprise (MNE) group with annual turnover above OMR300 million. The rules are applicable for fiscal year beginning on or before 1st January 2020.

5. Kuwait
VAT law is not yet implemented in Kuwait. In Kuwait, the GCC framework agreement is currently under discussion in the Parliament while the draft Law is under preparation by the government.
Other Tax Laws and Regulations
a) Corporate Tax – There is no corporate tax on companies wholly owned by Kuwait or GCC nationals. However, GCC companies with foreign ownership is subject to taxation to the extend of the foreign ownership share. The tax rate is 15%.
Zakat is imposed on all publicly traded and closed Kuwaiti shareholding companies at a rate of 1% of the companies’ net profits.
In addition to above, all Kuwait companies are required to pay 1% of their net profit after necessary adjustments to Kuwait Foundation for the Advancement of Sciences. Listed Kuwaiti companies are required to pay 2.5% of company’s net profit as employment tax.
b) Withholding tax – There is no withholding tax in Kuwait but the companies in Kuwait have to retain 5% amount from the invoices while making the payment. This amount is retained unless the beneficiary of the amount provides with Tax Clearance Certificate (TCC) and/or Non Objection Certificate issued by the Kuwait Tax Authority (KTA) authorizing the Kuwait company to release 5% retention amount.
c) Custom Duty – 5% custom duty is applicable on CIF value with some exemptions. Higher tariff is imposed on import of tobacco or related products.
d) Social Security contribution – Total of 19.5 % of monthly salary goes towards the social security contribution. 11.5% is contributed by the employer and 8% by the employee upto the maximum ceiling of Kuwaiti Dinar (KWD) 2,750. In addition to this, employee must also contribute 2.5% of their monthly salary with a upward ceiling of KWD 1,500 under the Social Security Law.

6. Qatar
Currently, Qatar has not Value Added Tax (Tax) but it is expected to be introduced in near future. The expected rate for VAT is 5% as per the common GCC framework.
Other Tax Laws and Regulations
a) Corporate Tax – Tax is applicable on entities which are either wholly or partly owned by non-GCC nationals. If the entity is partly owned by Qatari/GCC national and partly by foreign national then tax will be applied on foreign investor’s share. The tax rate is flat 10% with the following exceptions:-
• Oil and petroleum industry – 35%
• Contracts to which State is party to (prior to 1st January 2010) – rate specified in the contract or 35%
b) Withholding Tax (WHT) – Qatar implemented Withholding Tax with effect from 1st January 2020. It is applicable to all payments related to services carried out, utilized or benefited by the State of Qatar. WHT applies to payment made to non-residents or companies who do not have permanent establishment in Qatar. WHT applies to all services including interest, royalties commission, etc. Dividend payments are outside the scope of WHT.
Moreover, in some cases 3% of the contract value or final payment, whichever is higher, is retained if the beneficiary is temporary branch established in Qatar (Tax Card is not there). The amount can be released after presenting the Non-Objection certificate issued by the General Tax Authority (GTA).
c) Transfer Pricing – In 2021, GTA verbally confirmed that Transfer Pricing forms will be required starting from 1st January 2020 for all the Tax payers with total value of assets or revenue in excess of Qatari Riyal (QAR) 10 million. It should be filed along with Income Tax returns on the Qatar Online Tax Portal, Dhareeba.
d) Custom Duty – 5% custom duty is applicable on CIF value of the goods. There are certain goods which are taxed at higher rate and certain goods are exempt from custom duty.
e) Excise Duty – 100% for tobacco products, energy drinks, alcohol & pork items and 50% on carbonated drinks.
f) Country-by -Country reporting (CbCr) – CbCr reporting obligation and notification requirement is applicable to ultimate parent entities that are tax resident in Qatar and are part of multinational group of enterprises (MNE) with the consolidation revenue of atleast QAR 3 billion in the preceding year. However, the Qatari Tax Authorities suspended the CbCR notification and filing obligations, until further notice.

Conclusion
The GCC region is one of the most preferred investment regions by the foreign investors due to favorable tax rules. However, due to changes in world economy, globalization and urgent need to diversify their revenue sources due to decrease in Oil demand, GCC countries are trying hard to find the revenue sources other than Oil sector. As a result, individual GCC countries are coming up with their own tax reforms in order to support their economy and reduce the dependency of revenue from oil sector. One of the challenges which the government faces in GCC while implementing Tax reforms is the expectations and mindset of tax-free region by the investors. Little changes in taxes can create uneasiness among the foreign investors. But at the same time due to international forces and challenging economic conditions, the tax can no longer be avoided in GCC.
Still the taxation is new and it will take time to have a mature tax regime in GCC. Only half of the countries have implemented VAT and others will be implementing it soon. Governments requires sustainable and fixed source of revenue in order to develop their countries and secure the future of its citizens and residents. It will also be interesting to see the impact of coming EXPO on Dubai and GCC economy. With increase in taxation governance and compliance, the scope of professionals in this region will increase and they will able to contribute a lot in the development of tax regime in GCC region. Even though, the GCC countries are moving toward taxation, we have to wait and see what will be the future of taxation in GCC