December 16, 2017

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Exports between Saudi, UAE to carry 5% VAT

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Exporters based in Saudi Arabia and the UAE will be required to pay value-added tax (VAT) on goods transported between the two Gulf neighbours from next year, with the tax collected in the country where the products are exported to, according to taxation experts and business executives.

All six Gulf Cooperation Council (GCC) countries, including Saudi Arabia, the UAE, Kuwait, Oman, Qatar, and Bahrain, agreed last year to introduce a five percent VAT on an array of goods and services, in a bid to diversify revenue sources in the wake of the low oil price.

Saudi Arabia and the UAE, the Middle East’s two biggest economies, have both said they will impose VAT starting from January 1, 2018. According to the VAT laws introduced in both markets, only exports to the non-implementing GCC states will be eligible for the zero rating applied to exports, which will allow businesses to reclaim VAT paid on input costs. Other exports delivered within the GCC’s VAT-implementing states will be subject to VAT at its standard rate.

“If a UAE company sells or exports goods to a Saudi company.… from January 2018, VAT will be charged in Saudi Arabia, the destination country,” Rakesh Pardasani, partner at RSM consultancy firm, told Zawya in an interview on the sidelines of a VAT seminar held by RSM in Dubai in late September.

“But if a UAE company sells goods and/or services to a non-implementing GCC country, it will be treated as if it is exporting goods and services to a foreign country. So Kuwait will be considered the same as the UK [United Kingdom] in that case,” he added.

According to recent data posted on Trade Map – a trade statistics site developed by the International Trade Centre – Saudi Arabia’s exports to the UAE stood at $6.57bn, while the UAE’s exports to Saudi Arabia amounted to $4.76bn last year.

Haitham El-Khouly, exporting manager at Plasco – a Saudi factory that produces plastic products and exports to several countries, including the UAE – said VAT could have a negative impact on the trade between the two neighbours. Saudi Arabia’s exports of plastic and related products to the UAE last year was the second-biggest trade category, according to Trade Map, totalling $823.3mn.

“If I found out that VAT will be imposed on me as an exporter in a country outside the one I am in, I will certainly look out for countries that have free tax and custom duties’ agreements with my country,” said El-Khouly, whose company is part of Saudi’s famous Saleh Abdulaziz Al Rajhi and Partners group, which includes investment, manufacturing and real estate companies.

“The country that add(s) the least cost on the product will be the one that everyone will go to export to,” El-Khouly added, speaking to Zawya in an interview on the sidelines of the Big 5 construction trade show in Dubai.

Jewellery and construction materials

Precious metals, and semi-precious stones, and construction materials topped the list of the UAE’s exports to Saudi Arabia in 2016, according to Trade Map. The UAE’s diamond and gold officials have urged the state’s authorities to apply a zero rate VAT on gold and diamonds.

The GCC framework agreement stated that only precious metals used for investment purposes will be subject to VAT at a zero rate. Saeda Al Qayoumi, a consultant working for the UAE’s Federal Tax Authority, confirmed in a press conference in Dubai earlier this month that VAT “will be applied on jewellery items”.

Karim Merchant, the CEO and managing director of Pure Gold Jewellers, a Dubai-based jewellery retailer which has stores in several Middle Eastern countries, including Saudi Arabia, said he does not expect VAT to have a major impact on the jewellery industry, or on trading between the UAE and Saudi Arabia.

“I believe the application of VAT will not significantly impact the rate of trade or the size of exports in precious stones and metals between the two countries,” Merchant told Zawya. “I don’t feel the impact will be significant, as five percent VAT is still the lowest in the world.”

Other major UAE exports to Saudi Arabia include electric machines, mechanical appliances, cocoa, coffee, pharmaceutical products, among others.

Bharat Bhatia, CEO of Conares, the UAE’s second-biggest private steel manufacturer that exports to several international countries including the United States, European countries, Egypt and Saudi Arabia, said he also does not expect the introduction of VAT to have a significant negative impact on the market for construction materials traded between Saudi Arabia and the UAE.

“In 2018, we don’t see any slowdown in the demand side,” Bhatia said. “Everybody will get used to it (VAT). It is a matter of time for when people start accepting it. Construction cannot stop and people will not stop their businesses.”

GCC trade rules

According to Pardasani, other GCC trade rules will not change. “There won’t be any impact on any other rules that exist within the GCC with regard to custom tariffs or any other (import/export-related) laws,” he said. According to the new VAT laws in Saudi Arabia and the UAE, VAT will be applied on top of any other customs duties charges.

All six GCC states are members of the GCC’s customs union and follow the general guidelines set by the GCC’s Common Customs Law that was implemented in the six Gulf Arab states in 2002/03. However, each GCC country has its own list of goods exempted from entry tariffs.

El-Khouly expects the new tax to increase the overall cost of living and make it harder for businesses in general to inject fresh capital into their investments. He said: “The five percent will be imposed on the entire supply chain…Unfortunately VAT and other similar things highly increase the individuals’ cost of living and make the cost of living higher in the country that it will implement it.”

He added: “VAT should have been introduced in stages. VAT coming all of the sudden in January1, 2018, without any previous taxes, will make people opt to keep their money as no-one knows what will happen to the prices.”

Saudi Arabia issued its VAT law on July 28 and approved the final version of the tax’s implementing regulations on September 22.

The UAE’s President, Sheikh Khalifa bin Zayed Al Nahyan, approved the VAT law on August 27 and the law’s executive regulation was issued on Tuesday, November 28.

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