Impact of VAT on Oil and Gas Industry in GCC

Gulf Cooperation Council (GCC) is one the famous region for Oil and Gas Industry across the world as well as it holds major crude oil reserves. It is one of the largest exporters and producers of crude petroleum services. An oil and gas industry plays an important role in the GCC accounting for a large chunk of the government revenues. Due to Implementation of VAT in GCC from 1st July 2018, how it affect an oil and gas sector.

According to the framework agreement signed by the six countries of GCC, Some or all parts of the supply chain in Oil and Gas Industry in GCC will be zero- rated supplies for VAT purposes notably in relation to exploration and production activities.
According to the experts, PWC stated that Zero- rate means VAT will be charged at zero per cent on the provision of such supplies and VAT incurred in relation to making these supplies can be reclaimed in full.

Like VAT laws in other countries, supplies of Oil and Gas can be treated as taxable supplies for fiscal reasons. VAT registered companies and businesses are enabled to retrieve VAT incurred on their purchases by offsetting this against the VAT charged on their sales.

The scope of Oil and Gas Sector is widely classified and it may include seismic surveying, drilling services, leasing of ships, pipeline installation and maintenance, storing and handling services at installations, refinery and warehousing services and sale of feedstock. It will be essential to specific VAT treatment at each stage of supplies. Deloitte experts stated that each member of GCC may choose to apply the zero-rate to oil, oil derivatives, and the gas sector but the exact conditions of the zero-rating and the definition of supplies covered by the provisions are left up to each state to determine, experts at Deloitte said.

VAT on GCC’s oil and gas sector

VAT will be introduced from 1st July 2018 in all six GCC members, at the rate of 5%, it will be levied at each stage of a supply chain. Ultimately VAT will be incurred by an end- consumer.

An industry expert said that An oil and gas sector has a number of complexities – and the introduction of VAT across the GCC will doubtless add extra considerations for businesses across the supply chain.

The VAT framework agreement stated that the six member countries of GCC are eligible to subject four vital sectors from imposing VAT on them. These four sectors include health, real estate, education and local transportation.

All six member countries of GCC has mutually agreed and signed the unified value-added tax framework agreement. Value added tax common framework agreement lastly was signed by Bahrain.

Exports will be considered as zero -rated under the VAT framework agreement, it simply means that no VAT will be charged on the supplies whereas VAT will be recoverable on costs. Most Costs and imports are likely to be affected from VAT. Temporary movements and warehousing have some special rules. Cash flow is affected, as VAT will be charged on purchases but recovery from the authorities can take months and can affect working capital but this may be alleviated by zero-rating on purchases of oil

It is estimated that to earn revenues between Dh10 billion and Dh12 billion in the introduction year after the implementation of VAT in UAE. Health Care and education will be exempted from VAT. Younis Haji Al Khoori, Undersecretary at the UAE Ministry of Finance, said.

VAT experts stated that, for levying the tax under VAT Government, products and services are broadly classified into three categories i.e., Zero-Rated Supplies, Tax Exempted Supplies, and products with standard rates. Zero- rate supplies includes basic food items, medicines, medical equipment, and exports. Common Exempted supplies include education, domestic passenger transport, healthcare and residential homes. Companies will have to be registered with the VAT administration.

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