Saudi Arabia and the United Arab Emirates (UAE) are to introduce value added tax (VAT) from 1 January 2018 at a rate of 5%. Their new VAT systems will be in line with the terms of the Gulf Cooperation Council (GCC) Unified VAT Agreement. Four other GCC member states – Bahrain, Kuwait, Oman and Qatar – are also committed to introducing a VAT system but their timetable for implementation is not yet clear.

Although VAT exemptions are consistent under the GCC Unified VAT Agreement each member state is permitted to implement its own particular rules when introducing the VAT, so there are some differences between the VAT systems of the member states.

The VAT will apply to a range of supplies including food and clothing, electronics, gasoline, telephone charges, electricity supplies, water and hotel reservations. Supplies of crude oil and natural gas are to be zero rated in the UAE but are subject to the 5% standard rate in Saudi Arabia. Although financial services are exempt in both Saudi Arabia and the UAE there is a difference because the UAE does not exempt these services if there is an explicit fee, discount, commission or rebate.

Other exemptions include rent, real estate sales, some medications, airline tickets and school tuition fees. Higher education fees and real estate brokerage charges for buyers and renters will be subject to VAT in the UAE.

For businesses established outside the territory of the GCC states there is no registration threshold for VAT, so foreign businesses may be required to register and account for VAT if they are making any sales in Saudi Arabia or the UAE.

It is not yet clear how long refunds will take to be processed. There may be a possibility of offsetting VAT liabilities and credits within a group to avoid having to file a claim for a refund. The tax authority in Saudi Arabia is working on a mechanism to return VAT to tourists when they leave provided that they submit an application with proof of VAT paid. This will not be available in the first months of 2018 as the details of the mechanism are not yet finalized. There is likely to be a minimum amount below which VAT will not be returned but this has not yet been finalized. The refund will not apply to expat tourists living in other GCC countries.

Saudi Arabia has set up a website with information to support businesses in their preparation for the implementation of VAT. This includes information on registration and a list of the goods and services subject to VAT.