by Willem Bam
The two largest economies in the GCC, Saudi Arabia and the UAE, implemented VAT on 1 January 2018. The other GCC countries are expected to follow over the next 12 months. It is now clearer than ever that we are entering a new tax era, but how will VAT impact the oil and gas industry?
The UAE has elected to zero-rate the supply of crude oil and natural gas. UAE producers should therefore consistently be in a VAT refund position, since they are not required to account for VAT on their supplies of crude oil and natural gas but can still claim the VAT incurred on local purchases and imports. Producers in Saudi Arabia who export oil and gas will also be in a VAT refund position since exports are generally zero-rated and the VAT incurred on local purchases and imports remains recoverable.
VAT and cash flow
Being in a VAT refund position is not necessarily a disadvantage if you are certain that the tax authority will refund your VAT promptly. In practice, however, VAT refunds are often delayed (without compensation) which can cause significant cash flow issues. For example, the VAT incurred on large-scale capital infrastructure could run into the millions or even billions of dollars. If VAT on expenditure can’t be promptly recovered, producers and other businesses may be forced to consider bridging loans and other costly finance options.
Other VAT challenges
Typically, VAT is accounted for at the earlier of making goods or services available, receiving payment, or issuing an invoice. Therefore, VAT may be payable to the tax authority long before payments are collected from customers, if supplies are made, or invoices issued far in advance of payment being received. Cash collection is likely to be key.
Adding complexity, the concept of place of supply – a key determining factor in the VAT charging decision process – can be technically challenging. This complexity is seen in other jurisdictions with similar VAT rules to the GCC – the UK, for example, has the 75-page North Sea Memorandum dedicated solely to the impact of VAT on the industry! A wide range of oil and gas stakeholders – including tax authorities, national oil companies, refiners, joint ventures, oil field service companies and others – will need to quickly recognise the differing VAT impacts of onshore versus offshore activity, services supplied in respect of specific pieces of land – such as for shooting seismic or rig engineering works – and what defines how VAT law applies to these concepts.
What should oil & gas businesses be doing now?
It is important for oil and gas businesses across the region – not just here in Bahrain – to understand the intricacies of VAT and the remedies available to lessen VAT’s burden. Strategic VAT planning, accompanied with robust controls to ensure VAT compliance, is essential.