value added tax in the gcc insights by industry | volume 3 vat complexities and practical...

Value Added Tax in the GCCInsights by industry | Volume 3

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.


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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