The treaty is also sometimes called the Framework Agreement,
and this is a good name – it sets out the 'wire frame'
for a collaborative VAT system among the GCC countries.
However, it is worth remembering that it is a treaty, and not a
law, and therefore at its heart it is an agreement among the
countries. It is not a document that taxpayers can rely on
per se – one must look to local implementing
laws to work out the precise mechanics of the VAT in each
country. At the time of writing, only the Saudi draft VAT law
is available (which itself is mainly a framework document with
no detail on what will be zero-rated or exempt beyond that in
the treaty) but details are beginning to emerge. In the
meantime, the treaty provides vital clues about how we can
expect the VAT system to work.
First, the treaty sets out what one might call a 'normal'
VAT system. That is, it contains all the normal provisions one
might find in a traditional VAT system – the input tax
credit system, and place of supply and time of supply
provisions. So anyone that knows about VAT can predict the core
mechanics of the system, and it is likely that they will be
A commonly asked question is whether the GCC VAT system is
based on the European Union model or the more modern systems
found in the newer VAT-implementing countries (e.g. Singapore
or New Zealand). Well, it has to start by looking at
comparators, and the only comparator with a multi-country VAT
system is the EU. So, for that reason, it has similarities with
the EU VAT system. Similarities to the EU are principally
around the intra-GCC movement of goods (and some services)
between businesses (B2B) as well as to private consumers.
Distance selling provisions apply so that someone supplying
goods over the VAT registration threshold to another country
must register there. If you are familiar with the EU VAT
system, then the ability to not charge VAT on many B2B supplies
where your customer is VAT registered in another GCC country
will be very familiar.
After this, the GCC VAT system ceases to resemble the EU VAT
system (except mechanically in the way all VAT systems are
similar) and begins to look more like more modern VAT systems.
This primarily manifests itself in the limited number of
exemptions and zero-rates, and the very low standard rate of
5%. The GCC, in fact, has achieved something the EU has
singularly failed to do and has also controlled itself so that
there are only two rates of VAT – 5% for most goods
and services and 0% for very specific situations. Exemptions
are, in general, limited, and the system is therefore
moderately simple and broad based. As a result, it is likely
the GCC countries will be able to sustain low rates of VAT for
the foreseeable future. There are also some exceptionally
unusual and unique rules around the import of goods into the
GCC. Specifically, due to the GCC rules around paying customs
at the first point of entry into the GCC, VAT is also collected
in this way.
All of the above said, the treaty illustrates that countries
cannot always agree on the same rules. Therefore, it does allow
for quite a lot of flexibility for countries to vary the local
rules. In some cases, this is merely through the absence of
comment, but, in many cases, this flexibility is explicit.
Zero-rating for the international transport of passengers
and along with the international transport of goods is
specifically required. This includes intra-GCC transport, and
is not optional. However, countries have the choice between
exemption, standard rating, and zero-rating for domestic
passenger transport (the UAE has confirmed it will elect for
exemption but other countries have not commented on this at the
time of writing).
Similar choices are available for real estate, education,
and healthcare. In these cases, the countries may choose
between taxation, exemption, and zero-rating. Again, at the
time of writing, we really only know what the UAE plans in this
regard (zero-rating for most healthcare and education, with a
mix of zero-rating and exemption in respect of residential
property and taxation in respect of commercial buildings). In
the healthcare field, the treaty requires countries to
zero-rate certain pharmaceutical and medical devices, but this
is based on a list that remains to be agreed and is, therefore,
unavailable at this time.
The food and oil and gas sectors are also areas where the
countries are given a choice, albeit more limited –
they may either zero-rate or standard rate the products. In the
case of food, there is a list (which is not public) of just
under 100 items that are primarily commodity foods, not
prepared foods. If a country opts for this treatment, it may
only do so for those products on the list. Again, the UAE has
confirmed VAT will be due on fuel at the pump, and also that it
will not zero-rate food. The other countries have not confirmed
There is also some considerable flexibility given to
countries on the treatment of some other important sectors
– government entities, event hosting companies (under
international agreements), farmers and fishermen who are
unregistered for VAT, as well as citizens building their homes.
The countries have flexibility over how they apply VAT to these
groups – they may either refund the VAT to them or
they may exclude them from paying tax on the supplies made to
them. The UAE has confirmed it will only allow refunds, and
only in the case of specified government bodies, qualifying
event hosting companies, and citizens building their own homes.
However, the supplies to these entities, in the UAE, will be
taxed under the normal VAT rules and VAT will be due. It is not
clear what the other countries will do but there is a
possibility of differential treatment of supplies to these
entities based entirely on the status of the recipient
– this is potentially quite complex.
The countries will have flexibility regarding whether to
exempt or tax financial services. Again, in the UAE we know the
exemption will only apply to margin-based products (such as
interest, etc.). In a similar vein, there is a zero rate for
investment gold, silver, and platinum.
Finally, on the subject of VAT liability, other provisions
allow for the zero-rating of means of transport (e.g. airplanes
for passengers) and the compulsory zero-rating of exports of
goods and services. These are expected reliefs in a normal VAT
There are some other choices available to the GCC countries
around quite important aspects of the VAT system. Each country
may choose to allow VAT grouping (fiscal consolidation of
related companies) and margin schemes for second hand goods.
Again, we know the UAE and also Saudi plans to allow VAT groups
for domestic businesses as well as the use of the second hand
scheme. The treaty also provides for transitional provisions on
the introduction of VAT, but does not particularly concern
itself with grandfathering rules in respect of pre-existing
contracts – so each country has flexibility in this
area. We know the UAE will have some grandfathering rules
allowing VAT to be charged in situations where the customer can
deduct the VAT, but we don't know what the other countries
So, the treaty sets out the ground rules for business, and
as a result they may commence quite detailed planning even
though the domestic laws and implementing regulations might not
be available. We know the countries can move quickly when they
have the political will to do so, so businesses should be ready
to react and they can begin the planning process now. We would
recommend they do so.