The Supreme Court to overturn the practice in the trade between the GCC States?

Reference to a VAT Implementing State in the transitional period

1. The VAT Law and VAT Executive Regulation contain special treatment for intra-GCCCooperation Council for the Arab States of the Gulf comprising the UAE, KSA, Oman, Bahrain, Qatar, Kuwait.    supplies named as supplies in or from Implementing States. They hinge on the Common VAT Agreement of the GCC States.

The UAE, KSA, Oman and Bahrain have already implemented VAT. Qatar and Kuwait haven’t.

2. However, intra-GCC trade rules are for the future, at most, even for those four states, which have already implemented VAT. Article 70(15) of the VAT Executive Regulation sets forth a transitional rule that ‘a GCC State shall be treated as an Implementing State according to the provisions of the Decree-Law and this Decision if the following conditions are met:

• Where the GCC State treats the State similarly as an Implementing State in its published legislation.
• Full compliance with the provisions of the Common VAT Agreement of the States of the GCC’.

As per the FTA’s VAT Public Clarification VATP019 ‘currently, the UAE does not recognise any other state as an “Implementing State” for the purposes of VAT. Consequently, the first condition for zero-rating (i.e. that the recipient of services should not have a place of residence in an Implementing State) will be satisfied if the recipient does not have a place of residence in the UAE’.

The FTA has substantiated this approach with the following arguments:

• Article 1 of the VAT Law ‘defines “Implementing States” as “GCC States that are implementing a Tax law pursuant to an issued legislation”.
• Article 70(15) of the Executive Regulation states that a GCC State shall be treated as an Implementing State if the GCC State treats the UAE similarly as an Implementing State in its published legislation, and is in full compliance with the provisions of the Common VAT Agreement of the … GCC…’.

3. The Oman Tax Authority (OTA) shares this position. For example, in Sec. 2(i) of its Guide for VAT on Financial Services, the OTA defines a “GCC Member State” as ‘any other member state of the GCC .., provided this state has fully implemented the provisions of the Unified VAT Agreement ... At the time of issue, no states have yet fully implemented this Agreement. During this transitional period, all Gulf States should be treated as third country states’.

ZATCA sheds more light on this in Section 9.5 of its VAT General Guideline: ‘The Unified VAT Agreement lays down special rules for VAT to be applied to internal supplies between the countries of the GCC States, which are designed to harmonize the application of VAT on cross-border trade and ensure VAT is only payable once on each supply of goods and services. These rules are designed to work with all six states of the GCC having a domestic VAT law in place, and with an Electronic Service System to capture details of cross-border transactions in the GCC States.

Upon the introduction of VAT in the KSA on 1 January 2018, not all GCC states had a domestic VAT in place, and there was not an Electronic Service System in place on this date. Transitional provisions therefore apply to the supply of goods to and from KSA from all other GCC States, from the introduction of VAT in the KSA until the Electronic Service System is fully implemented. These rules apply regardless of whether other GCC States have a domestic VAT system in place.

The special rules apply until GAZT releases an Order to certify that the Electronic Service System is in place… Until this time, as a transitional measure: … Services provided to or from a resident of a GCC State will be considered to be provided to or from a non-GCC resident’.

4. The Bahrain National Bureau for Revenue in Section 19.4 of its VAT General Guide  Version 1.8, updated November 16, 2023

clarifies that ‘the status of Implementing State is given by the VAT Law to a GCC Member State that has implemented a national VAT legislation compliant with the Framework and that recognizes Bahrain as an Implementing State. In this respect, an announcement of the GCC Member States recognized by Bahrain as Implementing States for VAT purposes will be made by the NBR’.

The transitional rule included in the Preliminary remarks to this Guide sets forth ‘that Bahrain does not currently recognize any other GCC member states as Implementing States for the purpose of VAT. Until further notice, any transaction involving another GCC member state is treated, for VAT purposes, as a transaction involving a non-Implementing State’.

5. Hence, the rules referred to intra-GCC trade are generally put on hold. All GCC members treat each other as non-Implementing States. However, in the UAE, the reference to an Implementing State is not totally disabled in the Transitional Period. The definition of an Implementing State and the GCC states in the UAE includes the UAE itself.Article 1 of the VAT Executive Regulation.  

This allowed the FTA to conclude in VATP019 that ‘currently, … the first condition for zero-rating (i.e. that the recipient of services should not have a place of residence in an Implementing State) will be satisfied if the recipient does not have a place of residence in the UAE’. Bahrain’s NBR provides for the same treatment in Section 5.4.2 of its VAT General Guide (p. 33).

The UAE Federal Supreme Court’s Judgment

6. The position of the FTA and other Gulf tax authorities has recently been exposed to a different interpretation in the UAE Federal Supreme Court’s Judgement of 20 September 2023 on Appeal No. 1006 of 2022. In this case the Saudi appellant claimed for a VAT refund of tax paid in the UAE. As I may assume from the judgment, the reasoning of the claim had been based on:

Article 75 which allows the FTA to ‘return Tax paid for any supply received by  … a Non-Resident of the State or an Implementing State [that is] conducting Business and is not a Taxable Person’.

Article 67(1) of the UAE VAT Executive Regulation obliges the FTA to ‘implement a Businesses VAT Refund Scheme for Foreign Businesses to allow the repayment of Tax on expenses incurred in the State by a foreign entity which has no Place of Establishment or Fixed Establishment in the State or the Implementing State, and is not a Taxable Person’.  

If the position of the FTA applies, then a KSA resident is within the scope of this article and is in a position to request a refund. However, the Supreme Court decided this:

• ‘The appellant acknowledged in their lawsuit that they imported and introduced their equipment into the United Arab Emirates from the Kingdom of Saudi Arabia for the purpose of repair, and, consequently, they were charged with VAT for repair services from a local supplier in the UAE and for their purchase of certain goods.
• Therefore, the provision of Article 75 of the same law, which allows the authority to exempt a taxpayer from this tax if they are from a GCC country that does not implement this tax, does not apply to them. This is because, according to the Unified VAT Agreement for GCC countries and the appellant’s acknowledgment in their appeal … Saudi Arabia implements the VAT law, which is evidenced by Saudi Royal Decree M/113 dated 2/11/1438 H and amended by Royal Decree M/52 dated 28/4/1441 H and Royal Order No. A/638 dated 5/10/1441 H.
• Moreover, the non-applicability of Article 67 of the Executive Regulations of this law, issued by Cabinet Resolution No. 52 of 2017, … requires for the exemption eligibility that the supply should not have a place of supply in the state or belong to a GCC country that does not implement the VAT. Consequently, the appellant does not meet the legal conditions for exemption, making their second reason for appeal, regarding not considering Saudi Arabia as a country that does not implement the VAT law, irrelevant’.

There is no assessment of the FTA’s arguments in the Judgment. The most substantial among them is Art. 71(15) of the UAE Executive Regulation. Paragraph (a) thereof obstructs one from treating as an Implementing State a GCC State that doesn’t treat the UAE ‘similarly as an Implementing State in its published legislation’. However, ZATCA doesn’t treat the UAE in this way: ’Services provided to or from a resident of a GCC State will be considered to be provided to or from a non-GCC resident’ ‘until GAZT [i.e. now ZATCA] releases an Order to certify that the Electronic Service System is in place…’ (see above).

There is not much available information on the case. The Court mentions that the appellant recognized that the Kingdom has implemented VAT: ‘This is because, according to the Unified VAT Agreement for GCC countries and the appellant’s acknowledgment in their appeal … Saudi Arabia implements the Value Added Tax law’. Maybe this was a reason for leaving the above rationale of the FTA without assessment. Perhaps it was because the appeal for which the Judgment was issued is eventually dismissed by this judgment due to procedural issues.

Who knows? … However, it would definitely be helpful to know, at least, whether the FTA is keeping to the same position. In my opinion, it is, since as yet there is still no change in its Guides from September.     

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law.

See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have status of the author’s opinion only. Like any human job, it may contain inaccuracy and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.