Here's good VAT news for GCC's oil and gas sector

Dubai - Exemption to be notably in relation to exploration, production activities

Some or all parts of the supply chain in the vital GCC oil and gas industry will be zero-rated for VAT purposes, according to the framework agreement signed by the six countries.
The tax exemption will be notably in relation to exploration and production activities in the oil and gas sector, according to VAT experts. A zero rate means that VAT will be charged at zero per cent on the provision of such supplies and VAT incurred in relation to making these supplies can be reclaimed in full, experts at PwC said.
A five per cent value-added tax, which is a tax on consumption and is levied at each stage in the chain of production, will be introduced in all GCC countries from 2018.
The oil and gas sector has a number of complexities - and the introduction of VAT across the GCC will doubtless add extra considerations for businesses across the supply chain, an industry expert said.
The VAT framework agreement states that the GCC countries are entitled to subject or exempt four vital sectors from imposing VAT on them. These sectors include education, health, real estate and local transportation.
All GCC countries had signed the much-delayed unified value added tax framework agreement. Bahrain was the last country among the GCC bloc to sign the common framework agreement.
The GCC common VAT framework will form the basis for the national value added tax legislation to be issued in each GCC country. The VAT framework only sets out key VAT principles and once ratified, it clears the way for each GCC member to release its own national VAT laws based on those principles.
The scope of oil and gas services is quite broad and may include drilling services, seismic surveying, pipeline installation and maintenance, leasing of ships, storing and handling services at installations, refinery and warehousing services and sale of feedstock. It will be important to determine the specific VAT treatment of each of these supplies. In accordance with VAT framework agreement, every GCC state may choose to apply the zero-rate to oil, oil derivatives and the gas sector but the exact conditions of the zero-rating and the definition of supplies covered by the provisions are left up to each state to determine, experts at Deloitte said.
Exports will be treated as zero-rated under the agreement, meaning no VAT charged on the supply, but VAT recoverable on costs, experts said. Most costs and imports are likely to be subject to VAT. Warehousing and temporary movements have special rules. Cash flow is impacted as VAT is charged on purchases but recovery from the authorities can take months and can affect working capital but this may be alleviated by zero-rating on purchases of oil, etc.
For the GCC, the need to reduce dependence on oil has become even more critical and structured reforms are essential to promote diversification and non-oil sector growth in order to create jobs for the growing workforce, economists said. The average VAT revenue, collected by businesses on behalf of the VAT administration, is expected to account for 1.4 per cent of the gross domestic product of the GCC states, but it is expected to generate $25 billion in annual tax revenue, according to an International Monetary Fund estimate.
Younis Haji Al Khoori, Undersecretary at the UAE Ministry of Finance, said the UAE stands to earn estimated VAT revenues of between Dh10 billion and Dh12 billion in the first year of its application even after exempting sectors such as healthcare and education in addition to several food items of the new tax.
For levying tax under VAT regime, products and services are divided into three broad categories - products with standard rates, zero rates and exempted supplies. The zero rates are generally applicable to basic food items, exports, medicines and medical equipment. Also, the common exempted categories are healthcare, education, domestic passenger transport and residential dwellings. Companies will have to be registered with the VAT administration, VAT experts said.
- issacjohn@khaleejtimes.com