Value Added Tax in the GCC Insights by industry | Volume 3...KSA, is a landmark document for the Gulf region. It sets out the framework of a VAT system between the six GCC countries

Value Added Tax in the GCCInsights by industry | Volume 3

Deloitte | Value added Tax in the GCC |

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Deloitte | Value added Tax in the GCC |Contents

Contents

04Introduction

06Chapter 1 A quick guideAnswering your VAT questions

12Chapter 2 Indirect tax client survey 2017Preparing for VAT in the GCC – AMalaysian benchmark to guideGCC businesses

16Chapter 3Family officesWhy are family offices relevantto the VAT conversation?

22Chapter 4 Importers, exporters and freezone entitiesWhere VAT complexities andpractical arrangements meet

28Chapter 5Technology, Media andTelecommunicationsWhy VAT and the digital economyare a challenging mix

Deloitte | Value added Tax in the GCC | Introduction

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Deloitte | Value added Tax in the GCC | Introduction

Value added tax (VAT) is due to beimplemented in the Middle East from2018. Clients with operations in the GulfCooperation Council (GCC) countriesincluding Bahrain, Kuwait, Oman, Qatar,Saudi Arabia (KSA) and United ArabEmirates (UAE) will be impacted; this is afundamental change to businessoperations in a region with little history oftaxation. Earlier in 2017, the regional VATAgreement was signed by all of the sixGCC countries. The next step will be theagreement of local implementation laws ineach country. At the time of issue, KSA andthe UAE have become the only countriesto publish a finalized domestic law.

To help businesses in the GCC understandthe potential impacts of theimplementation of, and operation under,VAT, Deloitte Middle East has been issuingshort papers in a number of volumesdesigned to provide a greaterunderstanding of the impacts of the taxon specific industry types. We try, wherepossible, to outline the scenarios whichare most likely, together with possibleresponses to them, in order to give a fullerflavor of the changes to be expected.

This third volume contains insight into thegeneral questions around VAT, the impactsof the indirect tax on telecommunicationsand internet businesses, exporters, familyoffices, and finally the outcome of our VATsurvey.

The second volume contained insight intothe impacts of VAT on the real estate andconstruction, tourism, and oil and gasindustries, and provided keyconsiderations for the appropriatestructure of a VAT function based on a European benchmark developed incollaboration with the specialist globalindirect tax recruiters Beament LeslieThomas (BLT). In addition, this volumediscussed technology considerations withthe aim to reduce the uncertainty forbusinesses and to highlight the key areasthat organizations should focus on as theyembark on their journey to VAT readiness.

The first volume provided an overview ofhow businesses should go about shiftingfrom thinking to implementing, andputting themselves in a position to submitaccurate, on-time VAT returns. Moreover, it looked at the retail, automotive, MICE(meetings, incentives, conferences andevents) and financial services industries.

ContactsShould you have any questions aboutthese papers or just want to speak to us,please feel free to contact anyone in ourVAT team. If you want us to consider yourparticular industry as part of our series,we would be pleased to take yoursuggestion.

Justin WhitehouseIndirect Tax LeaderTel +971 (0) 4 [email protected]

Introduction

Answering yourVAT questions

Chapter 1 – A quick guide

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Deloitte | Value added Tax in the GCC | A quick guide

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VAT timing “When will VAT be introduced?”, “When willthe GCC VAT Agreement be available?”,and “When will final versions of local VATlaws be available?” are all commonly askedquestions Deloitte receives on a frequentbasis. The final answers are not clear yetand we can only speculate usinginformation available to us. Although UAEand KSA have both publicly committed tointroduce VAT on 1 January 2018, thedates are not clear for the rest of the Gulfcountries. It is important to rememberthat they do not all have to implement VATat the same time. Deloitte hopes thatimplementation across the GCC willhappen soon as it will provide a muchneeded certainty and will help people plan ahead.

What is the GCC VAT Agreement?The GCC VAT Agreement, published in KSA, is a landmark document for the Gulfregion. It sets out the framework of a VATsystem between the six GCC countries –Bahrain, Kuwait, Oman, Qatar, KSA and the UAE.

The Agreement is also sometimes calledthe Framework Agreement, and it sets outthe “wire frame” for a collaborative VATsystem between the GCC countries.However, it is worth remembering that it isan agreement among the countries, and

not a law in itself. It is therefore not adocument that taxpayers can rely on perse – one must look to local implementinglaws to work out the precise mechanics ofthe VAT in each country. As of today, VATlaws are only available in the UAE and KSA,but these give some insights as to how adomestic framework will look in a GCCcontext, and how other GCC countriesmight outline their domestic rules.

The Agreement sets out what one mightcall a “normal” VAT system, as it containsall the usual provisions one might find in a common international VAT system,including the input tax credit system, placeof supply and time of supply provisions.

Therefore, anybody who is familiar with other VAT systems should have areasonable working understanding of thecore mechanics of how VAT will apply inthe GCC.

Is the GCC VAT system based on theEU model?People have inquired whether the GCCVAT system is based on the EuropeanUnion (EU) model or the more modernsystems found in the newer VATimplementing countries (e.g. Singapore or New Zealand). As a comparison, the

The GCC VAT Agreementsets out the framework ofa VAT system between thesix Gulf CooperationCouncil countries –Bahrain, Kuwait, Oman,Qatar, KSA and the UAE.


The agreement is not a document thattaxpayers can rely on per se – one mustlook to local implementing laws to workout the precise mechanics of the VAT ineach country.

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only multi-country VAT system within aCustoms union is the EU. So, for thatreason, it has many similarities to the EUsystem. These include the intra-GCCmovement of goods (and some services)between businesses (B2B) as well as toprivate consumers. Distance sellingprovisions apply so that someonesupplying goods valued over the annualVAT registration threshold to anothercountry must register there. If you arefamiliar with the EU VAT system, then the ability to make B2B supplies to VATregistered customers in other GCCcountries without charging a local VATelement will be very familiar.

However, the GCC VAT system has alsoadopted many strong policy attributesfrom more modern VAT systems. Firstly,taxation applies at a low rate but across abroad base: there are a relatively limitednumber of exemptions and zero-rates,and a very low standard rate of 5%.Possible exemptions and zero-rates aregenerally limited to a few specificcategories of goods and services, and thesystem is therefore relatively simple andbroad based. As a result, it is likely theGCC countries will be able to sustain lowrates of VAT for the foreseeable future.There are some unusual rules concerningthe collection and distribution of importVAT for goods which are transitedthroughout the GCC; these are intendedto accrue VAT revenues to the place offinal consumption.

What might be VAT exempt orzero-rated?Zero-rating for international transport ofpassengers and goods (including betweentwo GCC countries) is a mandatoryrequirement of the Agreement. This is notoptional. However, countries have thechoice between exemption, standardrating and zero-rating for domesticpassenger transport.

Similar choices are available for realestate, education, and healthcare. In thesecases, the countries may choose betweentaxation, exemption, and zero-rating. Inthe healthcare field the Agreementrequires countries to zero-rate certainpharmaceutical and medical devices, butthis is based on a list that remains to beagreed on and is, therefore, unavailable at this time.

The food and oil and gas sectors are alsoareas where the countries are given achoice, albeit more limited – they mayeither zero-rate or standard rate theproducts. In the case of food, there is a“list” of just under 100 items, composedprimarily of commodity foods and notprepared foods, but which has not beenmade public. Even if a country opts for thistreatment they may only zero-rate thespecific food items included on the list.

Other provisions in the Agreement allowfor the zero-rating of means of transport(e.g. airplanes for passengers) and thecompulsory zero-rating of exports ofgoods and services. These are expectedreliefs in a normal VAT system.

What are the UAE and KSA doing? Following the Agreement framework, theUAE and KSA have specified how they willtreat international and local transport, andmeans of transport; real estate, educationand healthcare; food, and oil and gas; andexport of goods and services. There aresome similarities in how the UAE and KSAwill treat these industries. The table on thenext page indicates the rates at which theUAE and KSA will apply VAT to theseindustries.

VAT flexibility The Agreement illustrates that countriesmay have different domestic priorities andpolicy, and will not always agree on thesame rules. Tax is ultimately a domestic

matter, and the Agreement allows forquite a lot of flexibility for countries to vary the local rules. There is also someconsiderable flexibility given to countrieson the treatment of some other importantsectors – government entities, eventhosting companies (under internationalagreements) and farmers and fishermenwho are unregistered for VAT, as well ascitizens building their homes.

For these groups the countries haveflexibility over how they apply VAT to them– they may either refund the VAT to themor they may exclude them from paying taxon the supplies made to them. It is notclear what most GCC countries will do, but there is a possibility of differentialtreatment of supplies to these entitiesbased entirely on the status of therecipient – this is potentially quitecomplex.

Financial servicesThe countries will have flexibility ondetermining whether financial servicesmay be exempt or treated in another way,and defining what exact offerings may beconsidered as financial services for VATpurposes.


The UAE has confirmed itwill only allow refunds inthe case of specifiedgovernment bodies,qualifying event hostingcompanies and citizensbuilding their own homes.

VAT groupingThere are some other choices available to GCC countries surrounding importantadministrative aspects of the VAT system.Each country may choose to allow VATgrouping (fiscal consolidation of relatedcompanies) as well as margin schemes for second-hand goods. The Agreementalso provides for transitional provisions on the introduction of VAT, but does not particularly concern itself withgrandfathering rules in respect of pre-existing contracts – so each country hasflexibility in this area.

Is the VAT rate here to stay?One of the issues that comes up fromtime to time is that the VAT rate is low. Buthow long can it stay low? The answer isprobably quite a while. There are two main reasons for this, practicality andeconomics.

The first main reason is practicality. TheGCC VAT system has achieved somethingthe EU has not – a unified VAT rate. Set at5% it is one of the lowest in the world, and the fact that the six GCC countriesmanaged to agree on this is somewhat of a political achievement. The EU VATsystem does not have this level ofharmonization: individual countries like

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Although there isuncertainty, it isimportant to rememberthat VAT is VAT, and weexpect the Agreement to set out a relatively“normal” VAT system and the core underlyingprocesses will be thesame.

Sector KSA UAE

International transport ofpassengers and goods, andrelated goods, including intra-GCC transport

Zero-rate Zero-rate

Local transport Standard rate Exempt

Food items All standard rate All standard rate

Real estate Residential rental: exemptAll other real estate: standard rate

Residential rental: exemptBare land: exemptNew housing: zero-rateAll other real estate: standard rate

Education Standard ratePublic education: not expected to be subject to VAT

Specified services: zero–rate

Health Qualifying medicines and medical goods: zero-ratePublic health: not expected to be subject to VAT

Specified services: zero–rate

Oil and gas Standard rate Zero-rate

Means of transport (e.g.airplanes for passengers)

Zero-rate Zero-rate

Export of goods and services Zero-rate Zero-rate

Sector KSA UAE

Government entities Supplies to these entities will be taxed under the normal rules and VAT will be due.

Refunds may be granted on VAT paid on supplies if not conducting acommercial business.

Only allow refunds and only in thecase of qualifying companies.

Supplies to these entities will betaxed under the normal VAT rulesand VAT will be due.

Event hosting companies(under internationalagreements)

Supplies to these entities will be taxed under the normal rules and VAT will be due.

Only allow refunds and only in thecase of qualifying companies.


Unregistered entities Supplies to these entities will be taxed under the normal rules and VAT will be due.

Refunds may be granted to selectedentities (e.g. foreign governments andinternational organizations), taxablepersons in another GCC member stateand taxable persons outside the GCC.

Only allow refunds and only in thecase of citizens building their ownhomes.


Financial services Fee-based services: standard rate Margin-based services: exempt

Fee-based services: standard rateMargin-based services: exempt.

Investment metals Gold, silver and platinum at purity level no less than 99%: zero-rate

Gold, silver and platinum at puritylevel no less than 99%: zero-rate.

VAT treatment by industry

VAT rules for other important sectors and unregistered entities

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to control their own economies and one of the levers to do this is tax rates.However, for any one of the GCC countriesto move the VAT rate, they would nowhave to achieve a unified agreement tomove the rate; this is because the VAT rateis hard coded into the Agreement. So theonly way to change it is to either breachthe Agreement or to agree to change it,which requires all six countries to agree.

The second main reason the VAT rate willnot necessarily go up any time soon isthere is likely to be a lack of economicpressure to do so. This lack of pressure iscaused by the broad base of the VATsystem, which is notably lacking in reliefsand special rules. Whilst there is room fordifferences between the countries, in themain, each country will end up with veryfew things not subject to VAT. For thisreason, the broad base will allow VATrevenues raised to be relatively highdespite the low rate. This gives the GCC a massive design advantage over EUsystems, as the many special rates andreliefs typically found in an EU systemrequire a higher headline rate to sustainthe revenues required by the government.

How long will it take my business toget ready? This is one extremely important questionthat you must ask yourself. If the deadlineis 1 January 2018 (as we know it is for theUAE and KSA), would my business beready?

If the answer is no, would your businessbe ready by 1 February 2018, or 1 March?Do a few months really make a difference?What if you needed to be ready by 1 June2018? Or is the reality that you are hoping

the deadline gets extended? This may well happen, as governments recognizebusinesses need to be prepared. On theother hand, they understandably havelittle patience with those that don’t doanything. It is important to note that inMalaysia, when the Goods and ServicesTax (GST), which is the same as VAT, wasintroduced, it was about eight or ninemonths in advance that the law was firstexposed. Likewise, look at Egypt, whereVAT is in place, but the executiveregulations have not been made available.We do not expect any GCC country to dothis, but it illustrates the benefit of beingprepared for the worst and also showsthere is still time for 1 January 2018 to be a reality in some countries.

Do you actually know how long it wouldtake to get ready? If you have not spentany time thinking about this, what isstopping you?

What are you waiting for?Many businesses have, in the past,advised us they are waiting for theAgreement or the local law to be releasedbefore getting ready (remember theAgreement which sets out a broadframework and then local VAT laws withthe detail). The release of final laws in theUAE and KSA have now provided thisclarity: and for other countries – theAgreement in itself provides sufficientclarity on the workings of the VAT systemto start preparations. Although there maybe uncertainty in specific sectors,remember that VAT is VAT, and theAgreement sets out a relatively “normal”VAT system and the core underlyingprocesses are the same: collect invoices,claim VAT back, issue invoices, pay VAT.

The parts that will be different areimportant, but not always that complex.For example the VAT rates or reliefsapplying to specific products and servicesmay be different; albeit the systemchanges required to accomodate both are straightforward to make.

Firstly, not every business is exposed tothese reliefs and secondly it does not takethat long to take advice and work out theVAT liability of a food product. It does,however, take a long time to make sureyour electronic point of sale system (EPOS)has the functionality to distinguishbetween them and report it, and rectifythis if it does not. Likewise, it does not take long to work out the VAT liability offinancial services (mostly), but it does take time to tell six enterprise resourceplanning (ERP) systems to apply thatliability and collate them to file a VATreturn consistently. Deloitte’s experienceis that we know the answers to mostquestions, from the law released to dateand from basic principles. Waiting forsomething which may not give you theclarity you desire (and may come too lateto give you sufficient time) is risky – what is the harm in understanding what youneed to do now?


It takes a long time to make sure yourelectronic point of sale system (EPOS)has the functionality.

Preparing for VAT in the GCC – A Malaysianbenchmark to guide GCC businesses

Chapter 2 – Indirect tax client survey 2017

Deloitte | Value added Tax in the GCC | Indirect tax client survey 2017

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Deloitte is conducting a regular pulsesurvey – Preparing for VAT in the GCC, inorder to gauge business’ attitudes towardsthe introduction of VAT. Surveys are auseful tool to provide us with a snapshotof market attitudes at a particular point intime, and in this case the results arerepresentative of the messages we arehearing from businesses in the marketplace every day. Over 150 respondentsparticipated, ranging from localbusinesses operating within one GCCstate, to multinationals with operationsacross the GCC. The overall messagesfrom the evolving results of the April, Mayand July survey runs indicate much of whatwe already understood about currentbusiness attitudes, as many areconcerned about the introduction of VAT.There has been a growing sense ofcertainty that VAT is coming to the Gulfand businesses also seem to havebecome more informed about the indirecttax throughout the past year.

In order to give some context to thesurvey findings, a parallel client survey was launched by the Malaysian TaxPractice – Journey to Malaysian GST – which asked clients to look back on theirimplementation experience and offer their views on whether, with hindsight,they would have approached theirimplementation projects differently. Thishindsight from businesses which haverecently been through the exact processnow being faced by GCC-basedenterprises is invaluable, and the over-arching theme arising from that surveywas that businesses would have started to prepare for GST earlier had theyunderstood the scale and complexity of the projects which were facing them.

Three key messages can be taken from thesurvey findings. Firstly, there is concernamongst businesses about how the VATregime across the GCC will look, althoughbusinesses have come to trust the abilityof the tax authorities now more than theydid earlier this year. Based on our Julysurvey, 48% of businesses have concernsabout the ability of the authorities to

administer VAT compared to 70% in theMay survey. Secondly, the expectationamongst businesses as to how long it willtake them to go through the preparationprocess may be underestimating the scaleof the work involved, based on experiencefrom Malaysia. Thirdly, the single largestarea for concern is the effort involved inadapting and configuring business’ IT andaccounting systems to deal with VAT.These messages all seem to fall within theoverarching theme of preparedness – howprepared a business will be on the VAT go-live date will be driven by that business’response to these challenges.

The majority of businesses areconcerned, but are yet to take actionA theme is emerging amongst thebusiness population that whilst manyexpress concern about the introduction of VAT, only half of businesses have takendecisive action to begin preparing for thissignificant change to the regulatoryenvironment. In all three surveys, morethan 75% of respondents expressedconcern about the introduction of VAT inthe GCC states, whilst just half (increasingfrom 31.25% in the April survey) hadundertaken contingency planning (such as setting aside a budget) for a VATimplementation project, although thereadiness rate has been increasing. Thismay be due to the relative unfamiliaritywith taxation in general across the region,coupled with the delay in the formalpublication of the agreement anddomestic legislation in some of the GCCstates.

Three-quarters of our first surveyrespondents (75%) cited internal factorsas their main area of concern in ensuring

their business is ready for the introductionof VAT, e.g. lack of knowledge regardingVAT rules, programming systems toaccount for VAT, resource constraints andthe need to train or recruit specialists.Such concerns mirror those felt inMalaysia at the outset of the GSTimplementation, according to therespondents to the Journey to MalaysianGST survey. In that case, lack of knowledgeof the GST rules (35%) and ensuring the ITsystems could accommodate GST (27%)were the main areas causing concern asbusinesses began their GSTimplementation projects. In both cases,the majority of issues highlighted wereinternal to the business – the availability ofinformation from the government beingthe only external factor. This emphasizesthat whilst certainty over the detail of theVAT law is helpful, there are many otherissues facing businesses on the brink of aVAT or GST implementation.

There is much that businesses can planfor now, regardless of whether they haveaccess to the domestic legislation in theirGCC state of operation(s); the ability to be able to raise a VAT invoice is a featurecommon to all VAT systems globally forexample, as is the ability to identify everytransaction within the accounting systemand assign a VAT treatment to it. An ITproject will need to be planned, with timeset aside and a budget allocated, staff willneed to be trained, contracts reviewedand customers communicated with, all in advance of the launch of the tax.Businesses are aware of their ownchallenges now and should begin to planthe time to address these challenges,recognizing the costs involved, to ensurethey are able to be VAT-compliant fromday one.

GCC businesses expect preparationsto take around six months, butexperience from Malaysia wouldsuggest longerOver two-thirds of survey respondents(69%) estimated that it would take sixmonths or more to review their businessoperations and make the changes


The single largest area for concern is the effortinvolved in adapting andconfiguring business’ ITand accounting systemsto deal with VAT.

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necessary to prepare the business to be VAT-compliant. The remaining 31%consider this work would be achievable inless than six months, however experiencefrom Malaysia would suggest this is anambitious estimate – of those surveyed,only 10% responded that it took them lessthan six months to adequately prepare forthe introduction of GST. In fact, over half(54%) of respondents to the Journey toMalaysian GST survey stated that withhindsight, they would have started theirGST implementation process earlier,knowing what they now know about theextent of work involved.

Given the anticipated VAT go-live dateacross the GCC of 1 January 2018, it isbecoming increasingly important thatbusinesses raise VAT on the boardroomagenda and secure buy-in for managingthe change project. The extent andduration of the project will differ frombusiness to business depending uponoperational complexity, IT capability andthe intricacy of the VAT rules applicable tothe industry or industries in which thebusiness operates. Add to this fact thatbest practice would usually involveallowing a ‘buffer’ at the end of the projectof around a month prior to the officiallaunch of VAT in order to allow forunforeseen issues, and the windowavailable for businesses to adequatelyprepare is closing fast.

IT system changes are a common areaof concern and most likely to causebudget overrunsIn the case of respondents to the Journeyto Malaysian GST survey who stated thattheir implementation project hadexceeded the initial budget allocation,almost 70% confirmed that the overrunwas overwhelmingly as a result of issueswith the IT system. Underestimating thescale of work involved in adapting thecurrent IT system to deal with the new taxis costly and time consuming. Failing toproperly understand the work involvedand planning sufficient resources to dealwith any issues which arise could be thedownfall of a project. Even where ERP

systems have built-in tax capability,consideration needs to be given to thecost of adapting and customizing the taxcapability to deal with the tax rules in thecountry of operation.

The Preparing for VAT in the GCC surveyindicates the expectation amongstrespondents that the cost of configuringor adapting IT systems could besignificant. Almost a third of respondents(29.73%) estimate that the cost of systemchanges alone could reach betweenUS$25-100,000 with a further 24.32%believing this cost would exceedUS$100,000. In the event that a business’current IT system is not able to beadapted to deal with VAT, costs could beeven greater again. Ignoring other projectcosts involved in a VAT implementation(contract negotiations, commercial pricingdecisions, consultant’s fees etc.), the riskof underestimating the scale of workinvolved in the IT configuration aspect of a project could have grave results forproject budgets, not to mention theultimate impact on VAT compliance.

Whilst the broad principles of the GCCAgreement will apply across all six GCCstates, certain rules are expected to differsubtly from country to country. Wherebusiness operations cross more than onetax jurisdiction, the accounting systemsneed to be configured to properly capturewhere the transactions take place andapply the correct tax treatment. The GSTimplementation in Malaysia concernedonly one country, whilst in the GCC we aredealing with six different countries and sixsets of domestic legislation. The potentialfor IT-related issues is therefore greaterwhere GCC VAT implementation isconcerned, particularly for multi-jurisdiction businesses.

VAT implementation is a whole-business process – time is becomingcriticalThe implementation of VAT is not a matterwhich will affect only the finance functionof a business – it affects businessoperations across the board. Processes

need to be re-designed, transactionmappings need to be re-assessed, staff need to be trained adequately,consideration needs to be given to pricing strategy, contracts need to berenegotiated, procurement decisions need to be taken – the list goes on.

As we have seen, much can be learnedfrom the experience of businessesoperating in jurisdictions which haverecently been through this process, andgiven that the GCC implementationinvolves six countries rather than one,businesses should take care to ensurethat they take on the lessons learned fromrecent experience internationally in orderto avoid running in to issues. After all,failing to prepare is preparing to fail.

We have reached a critical point forbusinesses to react to the quickly evolvingtax environment. There is a great deal tobe done for every business to ensure itcan be compliant on day one. Thosebusinesses which have yet to take decisiveaction to assess their current positionshould ensure VAT implementation isplaced on the priority list – VAT is comingto the GCC and preparing for its arrival isunlikely to be as straightforward as onemight think.


We are reaching a criticalpoint in time forbusinesses to react to thequickly evolving taxenvironment. There is agreat deal to be done forevery business to ensureit can be compliant onday one.

Why are familyoffices relevant to the VATconversation?

Chapter 3 – Family offices

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Deloitte | Value added Tax in the GCC | Family offices

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Reaching a consensus on the definition of a family office is something the wealthmanagement industry and familiesthemselves are unlikely ever to achieve. It is, however, widely accepted that “onceyou have seen one family office, you haveseen one family office”1 and so with this in mind, we will consider some of the morecommon attributes of family offices in the GCC and how their activities will beaffected by the implementation of VAT.

Many family offices help administer thepersonal finances of the family members,liaising with bankers, lawyers and trusteeson their behalf. In other family offices thedepth of the financial services provided ismuch more akin to a commercial assetmanager, with analysts and researchersemployed to manage the family’s wealth.

There is also often an element ofconcierge/PA type services providedwhereby the team will assist the familywith travel arrangements, including visas,sourcing specific items or services, orbooking tickets for various events.Administrative functions often include billpayments, coordinating calls, documentmanagement etc.

Family offices often get involved in themanagement of luxury assets and realestate, either directly or indirectly. Theyare often the first port of call for advisersand service providers and act as agatekeeper for their principal/s.

One of the critical functions of the familyoffice is to liaise with the family business,particularly when it comes to cash flow ortreasury management. This provides theteam with a unique perspective over all ofthe family’s interests.

Funding invariably comes from thepatriarch, or the founder. In some morestructured families, the family office iseffectively a filter between the family andthe business, allowing it to withhold funds

from dividend payments received from thebusiness before distributing to familymembers accordingly. This ensures thatcontributions to the family office runningcosts are shared amongst the membersmaking use of the team’s services, andalso enables the family office to fundsome of the family fundamentals, e.g.health insurance, education, philanthropicendeavors as mandated by the founder.

Why are family offices relevant to theVAT conversation?As described above, the variety andbreadth of services that family offices canand do provide mean that it is difficult togeneralise; the extent of exposure to VATof each family office will of course dependon the particular facts of each structure.

However, every family office operating inthe GCC will be affected by VAT becauseanything purchased in the GCC (e.g.computers, mobile phones etc.) is likely to be subject to VAT. Unless they are able to reclaim the VAT on these items(“inputs”), then the family office will seetheir costs rise.

In order to be able to recover the VAT onthe inputs, then the family office mustregister for VAT in the same way as tradingbusinesses must register for VAT and theymay have to charge VAT on any “outputs”(i.e. services provided). The time andfinancial cost implications associated withbeing VAT-registered may, in someinstances, outweigh the advantages ofbeing so registered. Furthermore, asexplained further below, the option ofregistering for VAT may not even beavailable to the family office.

Irrespective of their registration status,family offices will inevitably be dealing withVAT-registered businesses as suppliers, oradvisers to the family, and they will needto ensure that the VAT is treated correctlyhere too.

Every family officeoperating in the GCC will be affected by VATbecause anythingpurchased in the GCC islikely to be subject to VAT.


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The family office VAT paradoxMany family offices appear to be run as businesses. They may be established as a separate legal entity with familyshareholders, often with a full board,robust governance, employees and bankaccounts separate from those of thefamily or family business. Other familyoffices may be less formally constitutedand have evolved from within the financefunction of the family business, but are stillrun along commercial lines, with ledgersand budgets prepared regularly.

Both types of family offices are likely to befunded by the family, either directly, orindirectly via the family business. Beforedistributing dividends to the family, thefamily office may deduct an amount fortheir costs, or for providing services tothem; a percentage of investment returnsmay be paid to the family office, or familymembers may transfer funds directly fromtheir own personal accounts.

Irrespective of the funding or structuralarrangements, it would be unlikely that asingle family office would be run with aview to realizing profits. Consequently,family offices are notoriously difficult toclassify in a VAT context.

In comparison to trading businesses, theincidence of family offices is relatively low.This is true of the GCC as well as otherjurisdictions that already have a VATsystem in place. Being a niche ‘industry’there is often no specific statutoryguidance for family offices, and so they areoften dealt with by the local tax authoritieson a case-by-case basis. The GCCcountries have not yet indicated how theyintend to treat family offices; whether theywill recognize the paradox and allow familyoffices to register, or whether they willapply the business test as a pre-requisite.Only once they have had an opportunityto analyze several family offices on thefacts can we expect more specificguidance on how family offices should be treated for VAT purposes.

Implications for a family office whichis not registered for VATAs an unregistered entity, the family officewill be treated in the same way as anindividual consumer. When they buygoods or services which are subject to VAT(and reflected in the price), the net cost tothem will always be the VAT inclusiveamount. This is because beingunregistered means that they are unableto reclaim the VAT charged. Running costswill therefore inevitably rise.

On the other hand, the unregisteredfamily office will not be required to issueVAT invoices and charge VAT on anyservices provided to the family. There willalso be no requirement to reporttransactions to the tax authority.

Having an unregistered entity as part ofthe family structure can create difficultiesfor the family business. This is because thetrading business will be at risk of penaltiesif they inadvertently reclaim the VAT on asupply of goods or services which areused wholly or partly by the family office.

This can become an issue if the familybusiness and family office share the samebank account (for then administratively itis difficult to establish where theexpenditure should be allocated).

Another example is if the family office andthe family business share office space,where one entity is registered and theother is not. For example, if the rent onthe office space is subject to VAT, the VATregistered entity (the family business) willwish to reclaim the VAT paid. However, ifpart of the office is used by the familyoffice, because they are not a businessand cannot reclaim VAT on inputs, the VATon their share of the rent cannot bereclaimed. Likewise with shared

photocopiers, coffee machines, furniturein staff rest areas etc., the VAT on theseitems would normally be reclaimed in fullby a registered business, but where thereis also use by a non-registered entity, thecalculation becomes problematic. And asfor stationery supplies, will the familybusiness wish, or even be able, to restrictaccess to pens, notebooks, calculators etc.to non-family office staff to enable them toreclaim the VAT in full?

Implications for a family office whichis registered for VATIn this instance, a VAT-registered familyoffice can share office space, coffeemachines and stationery supplies with thefamily business with little adverse impacton the family business.

Having an unregistered entity as part of the family structure can createdifficulties for the family business. Thisis because the trading business will beat risk of penalties if they inadvertentlyreclaim the VAT on a supply of goods orservices which are used wholly or partlyby the family office.


When buying new computers, mobilephones or other office supplies, as a‘business’ the family office can reclaim theVAT incurred in full. This means that even if they have to pay VAT, providing that theequipment is used for business purposes,VAT can be reclaimed, so it does notdirectly impact their running costs.

The trade-off of being a business andbeing able to reclaim input tax is arequirement to charge VAT on outputs, i.e. services provided to the family. Clearly,this will increase the cost to the familymember since they, as individualconsumers, cannot reclaim or offset theVAT on the services provided.

The family office has an obligation tocollect the VAT charged and pay it over to the tax authorities in a timely manner,and so if there is a delay in familymembers settling their invoices, there is a cash flow impact for the family office.Ensuring that the invoices are correctlyissued, that the VAT return is accurate andup to date is an additional administrativetask with an associated time and financialcost. The family office is also exposed tothe VAT risk in case of errors or omissionson the return.

Where some of the family members areresident in a different jurisdiction, anddifferent types of services are provided tothem, then the reporting becomes a littlecomplicated and the ‘place of supply’ ruleshave to be considered. Usually the placeof supply (and therefore the VAT rules thatmust be applied) is the place where theservice is provided, but in some cases itcan be where your customer belongs. Thefinance team associated with or part ofthe family office will need to be verycareful that the VAT invoices issuedcorrectly reflect the appropriate VAT ruleswhen dealing with cross-bordertransactions.

Liaising with the family businessIn the family business context it is notunusual to see a blurring between assetsacquired for the company and assetsacquired for the family. Sometimes thereis also both personal and business use ofthe assets. From a VAT perspective, thismeans that the amount that can bereclaimed is restricted. Businesses musttherefore be careful that they do not over-claim VAT on items which have a duality ofpurpose (i.e. are used for business andpersonal activities).

For example, consider a family memberwho decides he would like a new desk foruse in the office. The business pays forthis new desk and submits a VAT reclaimfor the VAT incurred. The desk is deliveredto the office two weeks later, and theindividual decides that he would ratherhave it in his home office where in theevenings he deals with work emails, butalso where he deals with his personalinvestment and residential propertyportfolios, family matters etc. The familyoffice arranges for the desk to betransported to his home. It is possible thatthe finance team of the family businesswould not be immediately aware that thedesk had been installed in his home andso may not qualify fully for a VAT refund.

Luxury goodsPrivate jets and yachtsThe administration of high value luxuryassets like jets and yachts is very oftendelegated to a specialist service providerwho can also provide engineeringmaintenance, specialist storage and staff.However, the family office will invariably be the main point of contact for theservice provider and will often liaise with them to arrange flights or to bookcharters, organize funding, or arrangetransportation of the family’s personalbelongings, etc.

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Ensuring that theinvoices are correctlyissued, that the VATreturn is accurate and upto date is an additionaladministrative task withan associated time andfinancial cost. The familyoffice is also exposed tothe VAT risk in case oferrors or omissions onthe return.


The VAT cost of private jet charters is acomplex area, which is outside the scopeof this white paper. However, family officeexecutives charged with administering thisaspect of the family’s travel arrangementsshould be trained on the high level issuesinvolved, and know who to go to forprofessional advice if a new situationarises. Private jets that are not designedfor commercial passenger transport arelikely to be subject to VAT – but will thisVAT be recoverable? This will depend onthe extent of business use. We know forexample that the KSA only intends toextend zero-rating to a means of transportwhich is not adapted for private use.

The acquisition of jets and planes willrequire specialist VAT advice, particularlywhen the usage will involve travel acrossborders.

Objets d’art etc.Where VAT has been charged on antiques,jewelry, paintings etc. acquired outside theGCC, the family office is probably used todealing with the VAT reclaim (under theexport rules) for the GCC residentpurchaser. The processes and proceduresfor dealing with such purchases will needto be updated to take account of the GCCVAT legislation.

The family office team, in conjunction withthe family business finance team, shouldtry to limit (or preferably avoid) suchtransactions being undertaken by thebusiness for and on behalf of the family inthe interest of keeping non-businesspurchases very distinct from businesstransactions.

Sporting activitiesThe extent to which family offices areinvolved in matters associated with racehorses, camels and falcons etc. will differfrom family to family. Where they areinvolved in providing funding for stabling,

feed, vets bills, farm fees, transportationcosts, etc., they will need to budget for theincreased costs associated with the VATrise. Since such ventures are, by and large,not run as a business, the VAT on thesecosts will not be available to reclaim. Anyprizes (cash, cars, holidays etc.) will alsothen be outside the scope of VAT.

In some jurisdictions, the authorities havetaken steps to allow owners to register forVAT, which allows them to reclaim the VATon the expenses. As this is a reasonablyniche area compared to the widereconomy, we do not anticipate any specificscheme along these lines in the earlyyears of VAT, but this may change overtime.

Again it is imperative that the familybusiness does not get financially involvedin any of these transactions as there isunlikely to be a business purpose. Anycommercial sponsorship by the familybusiness of the animal(s), jockeys ortrainers should be carefully dealt with and advice should be sought as to thedeductibility of any VAT incurred.

How should a family office prepare forthe onset of VAT?The importance of segregating family andbusiness expenditure to avoid difficultieswith VAT has been emphasized in thiswhite paper. However, such segregation isgood practice in any event (for corporategovernance, family governance andsuccession planning reasons), but theadvent of VAT makes this exercise evenmore important to mitigate the risk ofexcess reclaims and under reporting ofVAT, as well as to simplify the process forthe finance team in the business.

A thorough review of the family office’sprocesses and procedures should becarried out. Such processes should beclassified between those relating to the

family and those relating to the businessso that appropriate restructuring andsegregation of staff, entities or bankaccounts, etc. can be arranged.

A review of the expenditure of the familyoffice should also be undertaken, with a view to identifying any non-familyexpenditure (i.e. business expenditure)and calculating the additional costs thatVAT will represent for the family office.Conversations with the CFO of the familybusiness and family members should alsobe started sooner rather than later toagree on how the family office and thefamily members will deal with theincreased costs. The family office mayeven want to reconsider the way it isfunded and carries out business – carefulrestructuring may give a better ‘VAToutcome’.

If the family business has appointedadvisers to assist them with theimplementation of VAT, then the familyoffice should ensure that their role is fullyunderstood and their requirements takeninto consideration, since they will play akey role in ensuring a smooth transitionfor the family.

References1. Attributed to Patricia M Soldano, Chair ofGenSpring Family Offices' Western region, in thefollowing Forbes article:www.forbes.com/sites/toddganos/2013/08/13/what-is-a-family-office/.

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Where VAT complexitiesand practicalarrangements meet

Chapter 4 – Importers, exporters and free zone entities

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Deloitte | Value added Tax in the GCC | Importers, exporters and free zone entities

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IntroductionIn a region with little history of taxation,local customs authorities provide afoundation for revenue enforcement andcompliance across the six GCC memberstates. Dubai Customs, for example, is oneof the earliest government departments in the region, with a history spanning overa century. More recently governmentsacross the region committed to theCommon Customs Law, which came intoforce in 2002 and established one of thekey pillars of the GCC Customs Union, towhich the VAT Agreement is geographicallyaligned.

As with the expectation for VAT, thelegislative approach to customs mattersacross the GCC is consistent withinternational best practice. All GCCmember states are members of the WorldTrade Organization, and are contractingparties to the World CustomsOrganization’s (WCO) Revised KyotoConvention, the primary agreement inrespect of global customs administrationand procedures. It therefore creates ameaningful lens through which we canview the introduction of VAT.

At a practical level, VAT will interact withcustoms duty and customs authorities atnational borders. Import VAT should bepayable on the customs duty inclusivevalue of taxable goods introduced into theGCC from third (non-GCC) countries. VATreporting and invoicing requirements willlikely be triggered on intra-GCCmovements of goods between memberstates, which will provide a level oftransparency around practices at theborders as well as oversight of thesemovements at a federal and regional level.

ImportsLocal requirementsWithin GCC countries, there are multiplerestrictions on who can act as an importerof record, and usually this role is limited toentities with a local presence. This affords

local control and accountability over whoand what can be imported into the region.

Consistent with the WCO standards, thedeclarant of import should generally bethe party which has the right to dispose ofthe goods. This may, however, vary inpractice. Duties, fees and charges onimport must be paid prior to the clearanceof the goods, forming a primarymechanism of control.

With the introduction of VAT, it is likely thatpractical arrangements for the clearanceof goods may either become moreadministratively challenging or create anadditional cost. For example, where theimporter of record does not use theimported goods in its business activities(as it does not own them), it may not havean entitlement to deduct the import VATincurred from its VAT liabilities.

Another area of potential challenge withthe implementation of VAT is in respect of local documentation requirements forimport. Where there is a chain oftransactions between the export of thegoods from a third country and the importinto the GCC, the exporter invoice may notmeet local clearance requirements or maynot declare the final transaction valueprior to import. Where commercialdocuments are used in lieu of invoices forcustoms purposes, these may not meetthe requirements for import VAT recovery.

Cash flowImport VAT will be payable at the firstcountry of import into the GCC, consistentwith the payment of customs duties in theunion. Each GCC member state mayintroduce ways to relieve the cash flowcost on import for VAT-registeredimporters. A GCC member state mayestablish an import VAT deferral regime, or reverse charge mechanism, forexample, to defer the payment of importVAT to a later date.

VAT reporting andinvoicing requirementswill likely be triggered onintra-GCC movements ofgoods between memberstates, which will providea level of transparencyaround practices at theborders as well asoversight of thesemovements at a federaland regional level.


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However, for importers who move goodsfrom the first country of import directly toanother GCC member state, the situationis more complex. In this instance theimport VAT will be payable at the time andplace of import, and recoverable in thedestination GCC member state. Thisarrangement is further complicated wherethe import VAT was initially recovered inthe country of first import, and the goodswere subsequently moved to another GCCmember state by the importer. In thisscenario it is likely that the import VATwould need to be repaid at the country of first import, and recovered in thedestination country.

Preferential ratesWhere preferential duty rates are claimedon import, the transaction may still besubject to import VAT. The rate of importVAT applied is based on the nature of thegoods, regardless of preferential duty rate,country of origin or free trade agreementswhich may be in place. However, where apreferential duty rate applies, it will resultin a lower value on which the VAT is to beapplied, as import VAT is expected to beapplied on the customs duty inclusivevalue of the goods being imported.

ExportsAs VAT is a tax on local consumption, inline with international best practice it isexpected that VAT will not be payable onexported goods in the country of export.However, it is expected that the place ofsupply (the mechanism for determining inwhich country VAT is payable) will remainthe country of export. This means thateven though the transaction may beconsidered as a taxable supply in thecountry of export, it would be taxable at azero-rate of VAT. If the requirements forzero-rating are not met, or evidence ofsuch is not retained, the transaction wouldbe subject to the standard rate of VAT.

The most common requirements for thezero-rating of exports are:

1. The supplier has removed the goodsfrom the country of export; and

2. The time limits for export have been met.

Evidence must be retained by exportersthat the two criteria above have been met. VAT audits commonly target thereconciliation of export supplies to exportdocumentation. Where there are gaps, aVAT assessment and penalty may result, as the supply would be considered astaxable, subject to the standard rate of VAT.

Internationally, the standarddocumentation required to evidenceexport varies. Examples of exportdocumentation may be a combination of: export clearance documentation,shipping documentation, contractualterms, Incoterms, and customer residency.It is expected that each of the GCCmember states will indicate what evidenceit will consider appropriate, and this willneed to be retained in line with thenational retention period.

Obtaining evidence to support the zero-rating of an export becomes morechallenging when there are several partiesin the chain or where the supplier is not

Where preferential duty rates areclaimed on import, the transaction maystill be subject to import VAT. The rate of import VAT applied is based on thenature of the goods, regardless ofpreferential duty rate, country of originor free trade agreements which may be in place.


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responsible for the shipment (commonlyreferred to as an indirect export).

The challenges around chain transactionsare highlighted in the example of back-to-back on-board sales. The zero-rating forexport (or alternatively the treatment ofgoods as outside the scope of VAT prior to import) may be challenged when thetransactions occur after clearance forexport (or conversely, prior to import) buttitle transfers within territorial waters.There are many international examples ofambiguity on this point. Where uncertaintyexists, it only takes one party in the chainto consider the supply taxable to createadditional, potentially irrecoverable, costsfor the other parties in the chain.

Indirect exports may occur where thesupplier sells using an 'ex works' Incoterm, yet treats the supply as an export for VAT purposes, where its customer isresponsible for the collection andexportation of the product. Zero-rating for export on these types of transactionsmay be limited to supplies to non-residents. The difficulty arises in thesupplier’s ability to request copies of theexport documentation when it is not thecontracting party, and control over theprocess with regards to ensuring the timelimits for export are met. Where it cannotevidence the goods have left the countrywithin the required period, the supply may revert to being taxable at thestandard rate.

Finally, many countries have implementedtiming requirements for exported goods.Commonly this is between 60 and 90days. The clock typically starts at the taxpoint, which may be the earlier of invoice

issuance, or any receipt of consideration.This may be a particular issue wheregoods require dismantling prior to export,or where manufactured goods are paid forin advance.

Free zonesAs VAT should not be a tax on business,but a cost to the final consumer, thereshould be some mechanism of VAT relief for businesses operating within free zone areas.

How this relief will operate in practiceremains to be seen. The UAE VAT law hasprovisions allowing for the specification ofspecial areas – “Designated Zones” whichare treated as outside the territory of theUAE. By extension therefore supplieswithin those zones may not be taxed.Right now it is not clear what thelimitations on this relief will be – currentlythe UAE law allows for limitations butleaves the details for ExecutiveRegulations. It could be assumedtherefore that some element of taxationmay remain for free zones even when theyare designated zones. Furthermore at thisstage it is not clear which areas wouldqualify, but it is clear the DesignatedZones are envisaged as areas, suggestingphysical free zones may well be on the list.

Free zone entities should be aware thattheir ‘on-shore’ costs across the regionmay increase if they do not have anentitlement for VAT registration in thelocation the VAT is incurred (similar tonon-free zone entities). In addition, wherefree zone entities provide marketing,training, or promotional services throughthe region (for example to support theirlocal distributors), there may be additional

VAT compliance requirements, dependingon the nature and value of these services.

Practical next stepsImporters, exporters and free zoneentities should review their regional supply chains closely to understand at an operational level how movements are undertaken, and identify the partiesinvolved. In addition, activities in theregion must be clarified, including on-shore activities, asset ownership, costsrecharges and revenue streams tounderstand the potential VAT impact.

Finally, many businesses in the region,both locally established and free zoneentities, rely heavily on third party customs brokers to manage compliance in respect of imports and exports. Clearand documented procedures whichincorporate relevant delegations andcontrols are required prior to VATimplementation to mitigate the potentialadditional cost of irrecoverable VAT,assessments or penalties.

ConclusionIt is likely that there will be a heavyreliance on customs authorities toestablish processes to assist with theimplementation of VAT at the border: VAT on imports, intra-GCC reporting andthe monitoring of VAT compliance onexports. Although this may allowimporters and exporters to rely on existing processes and controls in thisarea, it may create complexities wherepractical arrangements do not meet VATrequirements, or result in additionalcompliance or cash flow costs. Althoughthe delegation of authority between thetax authorities and customs authorities isnot clear at this stage, it is expected thatthe two will work closely on overlappingresponsibilities going forward. The key forboth importers and exporters at this stageof implementation is to obtain clearoversight over transaction flows in theregion, from an operational, contractualand practical perspective.

It is likely that there will be a heavyreliance on customs authorities toestablish processes to assist with theimplementation of VAT at the border.


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Why VAT andthe digitaleconomy are achallenging mix

Chapter 5 – Technology, Media and Telecommunications

Deloitte | Value added Tax in the GCC | Technology, Media and Telecommunications

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In essence VAT is a tax based onconsumption, meaning that in line withinternational principles the VAT should bedue in the country where it is consumedand ultimately borne by the end-consumer. This used to be a relativelystraightforward concept; where the VATwas due could be determined based onthe movement of the goods. However, dueto globalization and innovation, and themove away from consumption of goods toconsumption of services, this is becomingincreasingly hard to track – people movearound the world accessing networks, Wi-Fi, and so on extensively.

Nowadays, we live in a digital world. Weare surrounded by technology andapplications (apps), are always connected,and would not know how to live withoutthis scenario. Whether we are aware of itor not, every aspect of our life is affectedby technology: either by using apps on ourphone, accessing the internet, or by otherentities such as a retailer or advertisementcompany who use technology tounderstand our shopping behavior andpreferences. Even regular activities suchas grocery shopping and electricityconsumption use an internet connectionand sophisticated technology. And withthe introduction of VAT, and moretechnologies like block chain and artificialintelligence around the corner, thequestion arises as to how we can preparefor the day of tomorrow?

One of the core VAT issues with thesetypes of services is the place of supply, i.e.knowing in which country the VAT is due.This is a recurring problem around theworld, and the GCC will be no different. Inthis whitepaper we walk you through theplace of supply rules in the GCCAgreement, the VAT definitions forTechnology, Media andTelecommunications (TMT) services, andthe expected challenges before and afterthe VAT implementation.

Place of supply As previously mentioned, the coreattribute of TMT services is their placewithin the international VAT framework.Globally there is a trend that governmentsseek to incorporate specific rules targetingtelecommunication and electronicallyprovided services (hereafter e-services)and the consumption of end-customers.

For example, the EU introduced anti-avoidance rules for non-EU establishedservices providers which providetelecommunication and/or e-services toprivate individuals. Later, in 2015, the EUintroduced more specific place of supplyrules with respect to telecommunication,media and e-services provided by EUsuppliers to private individuals in order tocapture the VAT in the country ofconsumption of the end-customer. Basedon the 2015 rules, the place of supply forTMT services is deemed to be where theprivate individual has their usualresidence. The introduction was followedby the VAT implementing regulation andfurther guidance from the EuropeanCommission on how these rules should beinterpreted. These included the usage ofpresumptions on where the serviceswould be deemed to be consumed.

Likewise, other countries, such as Japanand Australia, have introduced orannounced similar rules. As of October2015, Japan introduced the rule thatdigital supplies made by foreign providersto Japanese customers would be subjectto Japanese consumption tax ( JCT). TheJCT makes a distinction in the treatmentbetween B2B and B2C supplies of digitalservices, which is merely based on thenature and the terms of the contract ofthe digital services rather than the statusof the customer. More recently, Australiaannounced plans to introduce a new lawin order to apply GST to the supply ofdigital products to Australian customers.

Globally there is a trendthat governments seek to incorporate specificrules targetingtelecommunication andelectronically providedservices and theconsumption of end-customers.


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These global changes for TMT services arein line with the international principle thatVAT should be due in the country ofconsumption and create a level playingfield between domestic and foreignservice providers. The GCC VAT system isbased on international VAT principles andthe place of supply rules in this regard.Article 20 of the GCC Agreement includesa special place of supply rule fortelecommunication and electronicallysupplied services as follows:

“The place of supply for wired and wirelesstelecommunication Services andelectronically supplied Services shall be theplace of actual use of or benefit from theseServices”

This will mean that VAT is due in thecountry where the recipient is using andenjoying the services irrespective of thecontractual and payment arrangements.

As of now, the GCC Agreement does notprovide any further guidance on theinterpretation of the place of supply rule,leaving this to each of the GCC memberstates to implement in their laws andregulations. It remains to be seen how theactual use and benefit will be interpretedby each country and how it needs to beestablished and proved by the taxpayer.

In order to be able to establish and provewhere the use and enjoyment of anyservices takes place, it is likely thatbusinesses will be required to keeprecords of the actual use and enjoymentof each service. The GCC Agreement doesnot set out any evidence requirements.

In the EU the following evidence can beused to prove the place of use andenjoyment (but is not limited to):- IP address of the device used by thecustomer - Billing address of the customer

- Customer bank details- Country code of the SIM card used- The location of the fixed land linethrough which the service is supplied- Other commercially relevant information(for example, product coding informationwhich electronically links the sale to aparticular jurisdiction).

The EU has also introduced presumptionsin order to ease the burden of proof.Under the presumptions, a business isallowed to assume that the place ofresidence of the customer is where theuse and enjoyment of its customer takesplace, and less supportive evidence isrequired to substantiate the place ofresidence. Depending on the type ofservice a different assumption can betaken, in which case no further evidence isrequired. This could be the place of thelandline for services provided through afixed landline, or the country of the mobilecountry code for services providedthrough the mobile phone network. Forservices which are not part of thepresumptions list, two pieces of (non-contradicting) evidence should becollected.

As the GCC Agreement has not introducedany guidance on evidence it will be up toeach of the GCC member states tointroduce their own requirements for the

use and enjoyment, i.e. the information tobe gathered, pre-assumptions (if any) andwhat/how evidence should be retained.

Businesses within the TMT industry willneed to make sure that their processes,procedures and IT systems are able tocapture the use and enjoyment, andrelated requirements.

B2B vs B2CIt is important to note that article 20 of theGCC Agreement does not make anyreference to or distinction between B2Cand B2B customers. This could complicatethe treatment of the supply of the servicescross border, as it is not clear if and howthe use and enjoyment place of supplyrule would apply.

It will be interesting to see what approachthe GCC member states will take. They willalso need to consider the internationalagreements for cross border services. TheInternational Telecommunications Union(in particular the Melbourne agreement)provides a framework for internationaltelecommunication services, including themeasures to avoid double taxation oninternational telecommunication services.Based on this agreement, countries arefree to levy taxes on the services; however,international double taxation should beavoided. As most of the GCC memberstates are a signatory to the Agreement,we expect that the GCC countries willneed to take this into account with respectto the treatment of international charges;however, it will be interesting to see howthey will meet this requirement.

DefinitionsWhat exactly are TMT services? It isdifficult to define the terminology for the TMT industry as it is in continuousdevelopment, embracing newtechnologies and creating new productsand/or services. The industry requires

Businesses within theTMT industry will need to make sure that theirprocesses, proceduresand IT systems are able to capture the use andenjoyment, and relatedrequirements.


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flexible and broad definitions in order to be able to capture the different servicesand the services of tomorrow.

There is no definition for TMT services laiddown in the GCC Agreement, and as suchwe will need to rely on the local laws. Theonly reference in the Agreement is inArticle 20 where it mentions wired andwireless telecommunication services andelectronically supplied services withoutany further clarification. This creates theopportunity for each of the GCC memberstates to develop and introduce their own definitions in their own law andregulations. Based on internationalprinciples, we expect that in the GCC TMT services will be defined perhapsalong the following lines:

Telecommunication services such asservices relating to the transmission,emission or reception of signals, words,images and sounds or information of anynature by wire, radio, optical or otherelectromagnetic systems, including relatedtransfer or assignment of the right to usecapacity for such transmission, emissionor reception.

Media services such as broadcastingservices including television, video andadvertisement. In most cases mediaservices use a (telecommunication,satellite or electronic) network to transmitthe content.

Electronically supplied services arelikely to be regarded as services which are delivered over the internet or anelectronic network and the nature ofwhich renders their supply essentiallyautomated and involving minimal humanintervention, and impossible to provide inthe absence of information technology.

From an international perspective thesetypes of services are often already unclearand dependent on the peculiarities of thecase at hand (e.g. qualification differencesbetween distance learning, online classroom training and recorded training),providing uncertainty that will need to be addressed during the design phase of the VAT implementation process. A complicating factor for the GCC is that

the definitions will most likely be laid downin the regulations of each GCC memberstate. This could potentially lead todifferences in definitions between thecountries and hence differences in thetreatment of similar supplies in particularfor cross-border supplies of theseservices. As such, companies within theTMT industry need to carefully review theirbusiness transactions, and how they fitwithin the expected VAT law of each of theGCC member states.

During previous VAT implementations in,for example, Malaysia, we have seen thatsome of the regulations and published

guidance provided by the tax authoritiesmay not be clear or available before theimplementation date. As such, businessesshould consider whether to approach taxauthorities to obtain necessary clarity.Additionally, it is important to touch baseand communicate with customers andvendors the expected treatment of thesupplies.

More challenges aheadIn many VAT jurisdictions, TMT companiesare facing specific attention points for VATapart from those mentioned above. Thesemay be the same in the GCC, and couldpotentially include amongst others:

Supply chain The supply chain within the TMT sector iscomplex. Take, for example, a regular app,for which several parties are involved:content supplier, network provider,platform, telecommunication provider,payment intermediary, etc. However froman end-user perspective, there is onlyonce service recognized: the app. Inaddition, the contractual, financial andoperational relationships between allparties involved make it difficult todetermine who is liable for VAT, for whatpart and where the VAT should beaccounted.

VAT recognizes different partnershipstructures, such as commissionaire and(disclosed) agents, and it treats each ofthem differently. Difficulties arise as not allof the parties involved have access to thesame customer information, and as suchmight not be able to identify who theircustomer is and whether to charge VAT, etc.

VouchersBusinesses should review the impact ofVAT on vouchers and cards. As anexample, there are different treatmentsexpected for pre-paid and post-paid cardsand plans. Vouchers can differ intreatment based on their type (e.g. multi-

VAT recognizes different partnershipstructures, such as commissionaire and(disclosed) agents, and it treats each ofthem differently. Difficulties arise as notall of the parties involved have access tothe same customer information.


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purpose vs. single purpose), their billing(tax point on redemption vs. tax point onsale) and pricing (exclusive vs. inclusive ofVAT). Specific considerations are requiredfor the transitional period, in particular forcards and vouchers already on the market.

Fixed establishment The GCC Agreement also introduced thedefinition of a fixed establishment in itsarticle 1:

Any fixed location for a business otherthan the Place of Business (i.e. place ofestablishment) in which the business iscarried out and is distinguished by thepermanent presence of human andtechnical resources in such a way toenable the Person to supply or receivegoods or services.

Considering the global trends within VATand corporate tax/transfer pricing, and thefact that the GCC is basing their system onthese global principles, companies shouldcarefully review their presence in each ofthe GCC member states. For example, thepresence of servers (and personnel) couldtrigger a fixed establishment and relatedVAT obligations based on a recentjudgment of the European Court of Justice.

Barter transactions Barters are common in the industry. From a VAT perspective, it is importantthat all transactions are recognized andaccounted for. Where at present theremay not be a requirement to legalize,document and invoice the bartertransactions, this will be required goingforward.

Volume discountsIn many cases it is common practice thatthe value of the supply is dependent ontargets or volumes, e.g. a price is agreedbased on the amount of clicks on orviewers of an advertisement. This couldresult in volume-based discounts whichare provided at the end of a period oryear. For these volume discounts theappropriate documents and referenceshould be issued and kept.

The day of tomorrow As mentioned, the TMT industry isrecognized for new concepts, productsand services. From a VAT perspective, itwill be key to understand what is provided,what are the roles of the parties involved,and where is the place of supply. As theGCC Agreement only provides for aspecific place of supply rule fortelecommunication services and e-services, further guidance from each ofthe GCC member states will be awaited.

Potentially, each of the GCC memberstates will introduce its own rules for thedetermination of the use and enjoyment,differences between B2B and B2C, andthe evidence required.

With the international standards in mindand the pace of the developments in theindustry, how then should businessesprepare for the day of tomorrow?Considering that at this point in time nodetailed guidance from any of the GCCmember states has been provided,preparation for the VAT implementationbecomes even more challenging. As such,when designing the future state for theimplementation of VAT, companies withinthe TMT industry should keep in mindflexibility and adaptability combined with a vision of the future.

Considering the global trends within VATand corporate tax/transfer pricing, andthe fact that the GCC is basing theirsystem on these global principles,companies should carefully review theirpresence in each of the GCC memberstates.


This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particularcircumstances involved and we recommend that you obtain professional advice before actingor refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.)would be pleased to advise readers on how to apply the principles set out in this publication totheir specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for anyloss occasioned to any person acting or refraining from action as a result of any material in thispublication.

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Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterruptedpresence since 1926. DTME’s presence in the Middle East region is established through itsaffiliated independent legal entities which are licensed to operate and to provide servicesunder the applicable laws and regulations of the relevant country. DTME’s affiliates and relatedentities cannot oblige each other and/or DTME, and when providing services, each affiliate andrelated entity engages directly and independently with its own clients and shall only be liableonly for its own acts or omissions and not those of any other affiliate.

Deloitte provides audit, tax, consulting, and financial advisory services through 25 offices in 14 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has also received numerous awards in the last few years which include best Advisory andConsultancy Firm of the Year 2016 in the CFO Middle East awards, best employer in the MiddleEast, the Middle East Training & Development Excellence Award by the Institute of CharteredAccountants in England and Wales (ICAEW), as well as the best CSR integrated organization.

© 2017 Deloitte & Touche (M.E.). All rights reserved.

Documents

Value Added Tax in the GCC Insights by industry | Volume 3...KSA, is a landmark document for the Gulf region. It sets out the framework of a VAT system between the six GCC countries