Testing the Waters: A Practical Guide on Value-Added Tax

Qatar has approved a draft law on Value-Added Tax (“VAT”) which is scheduled to be rolled out by the first quarter of 2018. This approved draft comes after the Member States of the Gulf Cooperation Council (“GCC”) signed the VAT Framework Treaty Agreement introducing a VAT system across all Member States. Although Qatar already has a tax regime in place on income derived from business activities pursuant to Law No. 21 of 2009, the VAT law will introduce additional considerations and implications for businesses and taxpayers in Qatar, likely requiring businesses to start planning their implementation strategy in advance of the roll-out date.

VAT has never been implemented in the GCC region and will involve extensive administration at government and corporate levels. From a legal point of view, a number of factors to consider are:

  1. For existing agreements and contracts – There is a need to determine the obligations and entitlements of each respective party in the application of this tax scheme. In essence, parties will be required to review their contractual obligations and ensure that customers, suppliers and any other external parties are compliant with VAT. Pursuant to Article 23 of the VAT Framework Treaty Agreement, this will include ensuring submission of tax by the due date which could be payable on the date of supply of a good or service or the date of issuance of a tax invoice. Furthermore, this will involve signing amendments to contracts to incorporate a VAT clause which sets out the VAT rate payable and by whom.
  2. For agreements and contracts signed after the issuance of the VAT law – Another significant matter to be taken into account is to draw the line between zero-rated and exempt products and transactions. If a business is supplying a VAT exempt product, or involved in a VAT exempt transaction, they will not be able to recover any input tax on those products or transactions, whereas VAT is recoverable in relation to zero-rated products transactions. Each Member State may exempt or apply the zero-rate to education, health, real estate and local transportation sector. Moreover, the VAT Framework Treaty Agreement provides the following exceptions:

(i) Mandatory zero-rate: Pursuant to Article 31 (II), 32 and 34 of the VAT Framework Treaty Agreement, Member States shall subject medicines, medical equipment, passenger transportation services, goods exported outside of the GCC and certain cross-border supplies of services to the zero-rate.

(ii) Discretionary zero-rate: Pursuant to Article 29, 31 (I) and 33 of the VAT Framework Treaty Agreement, Member States may apply the zero-rate on its oil, oil derivatives and gas sector as well as certain food items and supply of transportation for commercial purposes.

(iii) Mandatory exempt: Pursuant to Article 36 of the VAT Framework Treaty Agreement, financial services performed by banks and financial institutions licensed under the laws in force shall be exempt from VAT. Furthermore, importations of goods shall be exempt if they are exempted from VAT in the final destination country or subject to tax at a zero-rate (see Article 38 of the VAT Framework Treaty Agreement).

  1. Penalties on business for non-compliance. The penal mechanisms for violations of the VAT law shall be determined by the Member state. Procedural requirements shall be established such as the registration of companies for the VAT payment and the timeframe for compliance. Practically speaking, registration is necessary in order to apply for tax credits and to avoid being unnecessarily exposed the entire VAT because this tax shall be borne by the end consumers. Furthermore, it is expected that by introduction of this law, more punitive measures shall be in place to fully enforce it. Potential violations can include the failure to pay the tax itself, error in the filing of tax returns, exaggeration of tax deductions and refund claims, and the late filing of the tax returns. Some of these violations might result in penalties of up to double the tax due and can even lead to criminal prosecution in cases of tax evasion.

The imposition of VAT necessitates readiness on the part of business entities and the government. This will surely require technical expertise in the field of law and accounting, and businesses must be willing to learn the tax scheme now to prevent any statutory violations in the future.

To learn more, contact the authors:

Michael Earley

Gian Miranda