Welcome to the latest edition of our Middle East and South Asia (MESA) Tax Update, bringing you the latest news in tax from the MESA region. As countries in the region look to reform their tax systems to attract foreign investment and become more globally competitive, keeping up with trends and developments is more important than ever.
Inside, you'll find briefings on key news, events and thought leadership contributed by tax professionals in KPMG member firms across the region.
The National Bureau for Revenue (‘NBR’) issued various guidelines and clarifications providing guidance to taxpayers in Bahrain, with an aim to streamline the VAT compliance and reporting. Bahrain has also been given a mandate by the OECD and more importantly, the G20 members who endorsed the fifteen BEPS final action plans that were developed in 2015, to implement four minimum anti-BEPS standards.
A brief summary of the various VAT related updates for Bahrain in Q2 2019 has been outlined below.
||Summary of Update
|1||Apportionment Methods for Input VAT on Motor Vehicles and Mobile phones||
For motor vehicles and mobile phones provided by taxable businesses to employees for both business as well as personal use, the NBR has prescribed the following alternate apportionment methods to calculate the input tax recoverability:
Actual use method - Apportionment should be calculated on a fair and reasonable basis, based on the actual usage of the motor vehicles and mobile phones.
Simplified fixed recovery method - The NBR has provided a fixed percentages for the input VAT recovery - 40% of all costs incurred on motor vehicles and 60% of all costs incurred on mobile phones.
|2||Clarification on VAT treatment for travel agents||With effect from 1st August 2019, where a travel agent provides ticketing services that are directly related to the international transportation of passengers, any commission charges, service charges or administration fees charged by the travel agent will be zero-rated.|
|3||Clarification on VAT treatment for Directors||
Remuneration received by board members/directors for carrying out their core duties (as defined under the Commercial Companies Law) will be outside the scope of VAT.
Where the functions are performed by board members in an independent way on behalf of the concerned entity which are not core duties, this may trigger an obligation for the board member to register and account for VAT.
|4||New VAT Guidelines published during Q2 2019||The following new guidelines have been published by the NBR in Q2 2019:
|5||GCC Funded Projects||
All imports made for the execution of identified GCC funded projects will be exempt from VAT. In case an import is made for any GCC funded projects and VAT is charged thereon by the Customs Affairs, it is the responsibility of the importer to bring it to the attention of the Customs Affairs for correction.
Supplies made by the main contractors identified for the GCC funded projects will be subject to VAT at 0%, regardless of the nature of supplies made towards the project.
In case of sub-contractors, they will be required to independently examine whether the supplies made by them qualify for zero rating in accordance with Bahrain VAT Law read in conjunction with the relevant VAT Executive Regulations.
For expediting refunds to contractors making supplies to GCC funded projects, the NBR has set up a dedicated team for auditing and processing the refunds for contractors making supplies to the GCC funded projects.
|6||Updates to existing VAT Guidelines in Q2 2019||Real Estate Guide
Introduction of ‘Economic Substance’ and ‘Country-by-Country Reporting’ in Bahrain
On 11th May 2018, the Kingdom of Bahrain (“Bahrain”) joined other 133 countries, the Organization for Economic Co-operation and Development (“OECD”) Inclusive Framework (“IF”) on Base Erosion and Profit Shifting (“BEPS”). As a result, Bahrain has been given a mandate by the OECD and more importantly, the G20 members who endorsed the fifteen BEPS final action plans that were developed in 2015, to implement four minimum anti-BEPS standards as follows:
Action 5: Harmful tax practices
Action 6: Prevention of tax treaty abuse
Action 13: Country-by-Country Reporting
Action 14: Mutual Agreement Procedure
While the progress of implementation of the abovementioned minimum standards has been plodding, there are couple of interesting developments in this regard in recent months that are worth noting in this article.
Since the start of the BEPS project in 2013, OECD formed Forum on Harmful Tax Practices (“FHTP”) to review jurisdictions with preferential regimes and to identify those that are harmful, recommend necessary changes to the domestic tax laws in respect of the preferential regimes as well as monitor implementation of those recommended changes.
In 2018, in addition to reviewing preferential regimes, the FHTP agreed on a new standard for substantial activities requirements within no or only nominal tax jurisdictions, ensuring a level playing field between those introducing substantial activities requirements in preferential regimes, with those offering a general zero or almost zero corporate tax rate. Prior to that, in 2016, European Union (“EU”)’s Code of Conduct Group (“COCG”) already began investigating the tax policies of non-EU countries against good tax governance standards, including tax transparency and fair taxation. The results of review by both bodies vary slightly but Bahrain have been identified as harmful in both results.
In response to the above, the Minister of the Ministry of Industry, Commerce and Tourism (“MOICT”) and the Governor of the Central Bank of Bahrain (“CBB”) issued a Ministerial Decision no. 106 on 27 December 2018 and a Directive on 22 November 2018 (hereinafter collectively referred to as “ES Rules”) respectively, both of which are concerning the economic substance requirements in Bahrain. The implementation rules are broadly similar with a couple of distinctions to the rules implemented in other no or only nominal tax jurisdictions identified as harmful such as Cayman Islands, Jersey and British Virgin Islands, to name a few, because they are based on the recommendations made by OECD’s FHTP and EU’s COCG.
A key distinction between Bahrain and other ES rules is that the rules apply to entities domiciled in Bahrain irrespective of the entities’ place of tax residence. In addition, unlike in other jurisdictions wherein ES Rules are administered by their respective tax authorities, the competent authorities that are mandated to administer ES rules in Bahrain are divided between CBB in respect of regulated financial activities and MOICT in respect of all other relevant activities.
As per the Directive issued by the CBB, effective from 1st January 2019, the following legal entities holding a license issued by the CBB in Bahrain will be required to locally maintain and report the economic substance to the CBB within 3 months of the end of each financial year:
Details on what constitutes core income generating activities for each business category have been set out in the CBB Directive.
The Directive further provides various general and specific requirements that all licensees must comply with, the failure of which may result in enforcement action being imposed by the CBB.
In addition to the entities listed above, the Ministerial Order provides the requirements to be adhered to by Traders in Bahrain carrying out the following relevant activities to satisfy the economic substance requirements, namely:
While the above Ministerial Order took effect on 1st January 2019 for traders applying for new commercial registrations or in relation to existing traders acquiring new intellectual property assets or newly carrying out one of the activities mentioned above, a transitional period of six months was granted for all other existing traders since prior to 1st January 2019.
The Order states that, failure to comply with the requirements listed out may result in enforcement measures such as suspension of the commercial registration of the trader, imposition of daily administrative fines to a maximum of BHD 50,000, imposition of a total administrative fine which can reach up to BHD 100,000 or even imprisonment, where the offence is believed to be criminal in nature.
It is vital to also note that ES Rules aims at promoting tax transparency as well. The competent tax authorities in their respective jurisdictions, through an automatic or spontaneous exchange of information protocol, could share a non-compliant entity details to the competent tax authority where the immediate parent entity, ultimate parent entity or beneficial owner of the entity is tax resident in accordance with the provisions of the Multilateral Convention of Mutual Administrative Assistance in Tax Matters or qualifying bilateral tax treaty.
Country-by-Country (“CbC”) Reporting
Action 13 of the Inclusive Framework with regard to CbC Reporting aims at addressing the tax risks associated with BEPS and enables high level risk assessment related to transfer pricing.
Under CbC Reporting, large multinational enterprises will be required to prepare and report their business information including their income, profits, taxes paid, and economic activity to the tax authorities in the countries where these enterprises have taxable presence.
The competent authorities in Bahrain will be required to update their regulatory framework by incorporating the CbC Reporting requirements to enable sharing of information between the various MNE’s in the tax jurisdiction as mandated through becoming a member of BEPS IF. At the moment, there has been no official announcement from the competent authorities on when the regulatory framework for implementing CbC Reporting in Bahrain will be issued, although we speculate that this may be introduced as early as 2020 and that the implementation rules would be broadly similar to the OECD’s recommendations.
Recently, Bahrain’s Cabinet session decided to take the necessary constitutional procedures to ratify the CbC Multilateral Competent Authority Agreement (“MCAA”) for facilitating the exchange of CbC Reports between Bahrain’s competent authority and the competent authority of one or more jurisdictions that have signed the CbC MCAA, which is the critical aspect of CbC Reporting.
The CbC MCAA is a subset of the broader Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“Convention”) which has been in force as of 1st September 2018 insofar as Bahrain is concerned. The Convention also comprises of the Common Reporting Standards (“CRS”) MCAA.
The previous VAT legislation has been replaced with the VAT and Supplementary Duty Act, 2012 (VAT Act 2012) from 1 July 2019. The VAT Act 2012 was enacted by the Parliament in 2012 but due to several administrative reasons and concerns raised by the business communities, its enforcement had been delayed. Eventually with the Finance Act 2019 the VAT Act 2012 has been made effective from 1 July 2019.
The new VAT legislation has been developed with a view to modernising the previous VAT legislation which had some major difficulties, limitations and deviations from the basic VAT principles. It introduces new concepts such as residency status and fair market price, provides clearer definitions, devises a streamlined and efficient VAT payment and credit mechanism, reduces the scope of withholding VAT significantly and eliminates concepts of package VAT, price declaration etc.
VAT Act 2012 in the context of difficulties and challenges in previous VAT Act
The VAT Act 2012 comes in the face of several limitations of the previous VAT Act such as:
The VAT Act 2012 addresses these complexities and provides a modern streamlined VAT system by introducing Input- Output Coefficient declaration in place of price declaration, removing the requirement of maintaining positive balance with VAT authority before any sale, providing a greater scope for obtaining input VAT credit or refund and reducing the scope of withholding VAT significantly.
Registration or Enlistment Requirements
VAT Act 2012 introduces a new guideline of Registration and Enlistment for the purposes of VAT and Turnover Tax respectively. Under the new requirements, business entities having turnover exceeding BDT 5,000,000 will be required to enlist for Turnover Tax and entities having turnover exceeding BDT 30,000,000 will be required to register for VAT.
Any person who will not be eligible for either Registration or Enlistment will be effectively exempted from VAT. However, such persons can voluntarily register for VAT.
VAT Act 2012 defines turnover as all money received or receivable against the supply of taxable goods or the rendering of taxable services by means of their economic activities.
For the purpose of assessing the eligibility for Registration and Enlistment, Turnover shall not include:
Coverage of VAT
Similar to the previous VAT Act 1991, VAT Act 2012 provides VAT exemption on certain goods and services through the First Schedule as well as specific exemptions through statutory orders.
The VAT Act 2012 provides VAT exemption on certain services which are broadly categorised as follows:
Supply of zero-rated goods
Deemed exports are supplies of ingredients of goods or services for consumption outside Bangladesh and supply of any goods or services within the territory of Bangladesh against foreign currency through an international tender or under local letter of credit.
Supply of zero-rated services
Type of VAT Rates
The standard VAT rate under VAT Act 2012 is 15%.
Input VAT credit can only be obtained against supplies of goods or services subject to 15% VAT.
Traders are subject to VAT at a rate of 5% on their supplies except traders of medicine and petroleum products for which reduced trade VAT of 2.4% and 2%, respectively, is applicable.
Goods and services subject to truncated VAT rate will not be eligible for input VAT credit.
Goods and services subject to trade VAT rate can choose to exercise standard VAT rate of 15% and input VAT credit against their purchase.
Importers are required to pay Advance Tax at 5% on taxable imports on the value determined for taxable imports. Such Advance Tax can be shown as decreasing adjustment with in the concerning VAT period or 2 succeeding VAT periods.
VAT Act 2012 prescribes VAT rates lower than the standard VAT rate of 15%, commonly known as Truncated VAT system, in the Third Schedule. Truncated VAT rates are as follows:
Goods and services subject to Truncated VAT rate will not be eligible for input VAT credit.
Business entities whose supplies are subject to Truncated VAT can choose to exercise the standard VAT rate of 15% and claim input VAT credit against their purchase.
Certain goods and services are subject to tariff value based VAT such as SIM cards, mild steel products, newsprint etc.
Since promising reforms at CEDRE conference, Lebanon parliament passed the 2019 budget law that amended some existing tax laws. The purpose of these amendments is to enact reforms that could stabilize Lebanon debt trajectory.
In addition, as part of transparency initiatives, the Lebanese Ministry of Finance issued recently a special form to declare the ultimate beneficial owners of any Lebanese entity.
The major tax amendments that were introduced by the Budget law 143 dated 31/7/2019 are the following:
Oman has implemented the Excise Tax Law with effect from 15 June 2019. Excise tax is imposed on importers, manufactures and warehouse keepers of excise goods in Oman. These tax payers are required to pay the excise tax due and file excise tax returns on a quarterly basis. In addition, as a one-time transitional compliance, excise tax was also imposed on all businesses holding inventory of excise goods as on 15 June 2019. Originally the transitional excise tax returns were to be filed by 30 June 2019, however, the due date was subsequently extended till 15 July 2019.
In June 2019, the Oman Ministry of Finance (‘MoF’) published Ministerial Decision No.112/2019 dated 2 June 2019 on the Determination of type, value and tax rate applicable to excisable goods (“Ministerial Decision”). According to the Ministerial Decision, excise tax is applicable on carbonated drinks at 50 percent and alcohol, energy drinks, pork products and tobacco products at 100 percent. The MoF has subsequently confirmed a temporary reduction in the rate of excise tax on alcohol to 50 percent by updating the standard list price of excise goods with the revised excise tax rates. However, the Ministerial Decision has not been amended to reflect the reduction.
The Executive Regulations to the Excise Tax Law are still awaited and will be published within six months from 15 June 2019.
In line with its commitment to adopt international best practices in tackling cross-border tax evasion and meeting the standards set by the European Union (EU) and the OECD, Oman is currently in the process of issuing regulations for automatic exchange of information (AEOI) through CRS.
In order to allow the exchange of information in 2020, banks and other financial institutions have already been mandated by the Central Bank of Oman to ensure collection of CRS-related information for new account holders effective from 1 July 2019. It is expected that financial institutions will also have to perform CRS due diligence on pre-existing account holders in due course.
The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) conducted a day-long workshop on 12 June 2019 to educate banks and financial institutions about CRS and its implementation. Earlier in April 2019, a visit from the Secretariat of the Global Forum launched an Induction Programme for Oman to participate in and benefit from international developments in tax transparency and exchange of information. The SGT is currently developing legislation so as to facilitate concerned entities to undertake filings. Based on discussions arising from the workshop, it is expected that entities will need to make their first filings (for data collected from 1 July 2019 till 31 December 2019) by May 2020, although it is advisable to reconfirm these dates after the legislation is published.
His Majesty Sultan Qaboos bin Said has issued a Royal Directive to give tax breaks to any new investor who wishes to establish a tourist project in Musandam. Investors will now be allowed exemption from customs duties covering building materials, tools and equipment that are essential during the construction phase of their tourism-related projects. Exemption has also been provided from the 4% tourism tax, the 5% municipal tax and the 15% corporate income tax, starting from the start of the project to its first 10 years of operations. The Royal Directive is expected to take effect from June 2019. We understand that the Ministry of Tourism in coordination with the Ministry of Finance/ SGT will issue a Ministerial Decision to provide further details and compliance related procedures.
As mentioned in our last newsletter, the Capital Market Authority had announced the suspension of withholding tax on interest and dividend with effect from 6 May 2019 for a period of three years, subject to extension if required. In continuation to this announcement, the SGT has now issued a letter to all accounting firms clarifying the same position. The letter states that this suspension has been issued for boosting and encouraging foreign investment in Oman.
A new FCIL was decreed (RD 50/2019) on 1 July 2019 and will be effective 6 months from 7 July 2019, the date it was published in the Official Gazette. Under the new FCIL, amongst other things, 100% foreign investment is allowed for activities to be specified in the Executive Regulations (ER), which are expected to be released by July 2020. Further, the ERs will also specify activities which will be prohibited for foreign investments. The ERs will also specify the investment projects that will enjoy exemption from taxes, custom and non-custom duties without prejudice to the provisions of the GCC Common Custom Law and the Income Tax Law. Until the new ERs are issued, the old ERs issued under the old law would continue to apply to the extent they are not inconsistent with the new FCIL.
A Privatisation Law was decreed (RD 51/2019) with a view to encourage and provide a framework for the private sector to take up management of some of the state-owned enterprises. The law includes procedures for launching and awarding of privatisation projects, privatisation of government facilities, use of privatisation revenues, and dealing with the status of Omani public servants working in projects affected by privatisation.
RD 52/2019 and RD 54/2019 approved the Partnership Law between Public and Private Sectors and establishment of the Public Authority for Privatisation and Partnership (Authority) respectively. The Authority is empowered as the body to control public-private partnership projects in consultation with other ministries. The objective is to improve operational efficiency, provide financing needs, encourage foreign investment and attract technical expertise.
Lastly, Bankruptcy law (RD 53/2019) was passed to provide a framework for bankruptcy and protect businessmen who go bankrupt while ensuring that any reported bankruptcy is genuine.
The above long awaited laws emphasise the Sultanate’s commitment to create a robust environment for businesses and the investor community and make the Sultanate an attractive investment market.
Fees paid to foreign directors for board meetings were already excluded from the withholding tax provisions. KPMG in Oman recently assisted a client in seeking confirmation from the Oman tax authorities that withholding tax is also not applicable on remuneration and sitting fees paid to foreign directors whose names appear in the commercial registration of the concerned entity.
Value Added Tax (VAT)
A bill to amend the VAT Act was presented to the Parliament on 20 August 2019.
Following are the synopsis from the VAT Bill
Also it should be noted that a Gazette Notification was issued on 01 June 2019 to increase the VAT rate to 7% on the services provided by hotels and the travel agents from 01 June 2019 to 31 March 2020. Previously the rate was reduced to 5% from 15%.
Nation Building Tax (NBT)
A bill to amend the NBT Act was presented to the Parliament on 20 August 2019.
As proposed in the Budget 2019, the exemption on importation and manufacture of cigarettes have been removed in the Bill.
Further a restriction have been imposed in claiming the exemption for the importation of gem stones for the purpose of re-export upon being cut and polished. According to Bill the said exemption is available only for the persons registered with the National Gems & Jewellery Authority.
Certain exemptions which were proposed in the budget 2019, such as services provided by the construction contractor, palm oil subjected to Special Commodity Levy and importation of Lucerne (alfalfa) meal and pellets has been included in the Bill.
Further an exemption has been provided for the services provided by a hotel, guest house, restaurant or other similar business registered with Ceylon Tourist Board, where the payment of such services is received in foreign currency through a bank in Sri Lanka.
Budget 2019 proposed NBT of 3.5% on foreign payments made via a credit card or a debit card in lieu of the Stamp Duty which is currently imposed on the Foreign Currency payments via a Credit Card. However the Finance Bill has introduced a new levy named “Levy on Foreign Commercial Transactions“. This will be imposed on any transaction which is completed by using a debit card or credit card outside Sri Lanka to purchase goods or services outside Sri Lanka.
Excise tax on sugar sweetened beverages and other tobacco products in the UAE
After Saudi Arabia, the United Arab Emirates (UAE) has announced its intention to extend the levy of excise tax to electrically heated cigarettes, electronic smoking devices and tools, liquids used in electronic smoking devices and tools, and sweetened drinks.
The Federal Tax Authority (FTA) has recently published Cabinet Decision No. 52 of 2019 on Excise Goods, Excise Tax Rates and the Methods of Calculating the Excise Price published on 4 September 2019 (Cabinet Decision No. 52/2019) in this regard. The Cabinet Decision No. 52/2019 can be accessed here.
Excise tax on the new category of excise goods is likely to come into effect before 1 January 2020. The date of implementation will be announced through a separate Ministerial Decision.
Our tax alert addresses frequently asked questions on the extension of excise tax to the new category of excise goods, the next steps for businesses to prepare for introduction and how KPMG can help.
You can access our tax alert here.
UAE - India DTAA - Synthesized text as affected by the MLI released
What is it?
“Synthesized text” is a document containing the consolidated text of the provisions of a Double Tax Avoidance Agreement (DTAA) and the Multilateral Instrument (MLI), as applicable to that DTAA.
This text has been issued by the Indian Government after joint consultation with the Government of the United Arab Emirates (UAE). It has been prepared pursuant to reservations and notifications regarding the MLI position submitted to the Organisation for Economic Co-operation and Development (OECD) depository by the UAE and India on 29 May 2019 and 25 June 2019 respectively, after completion of the ratification procedure by both countries.
What does it do?
The sole purpose of the synthesized text is to facilitate an understanding and consistent interpretation of the impact of MLI to the UAE – India DTAA.
It should however be noted that the text does not constitute a source of law, i.e. for legal purposes, the provisions of the MLI must be read alongside the DTAA.
Key amendments to the UAE – India DTAA pursuant to the MLI positions
Prevention of treaty abuse
Increased time limit for Mutual Agreement Procedure (MAP)
Corresponding adjustment relief
Among the changes to the DTAA, the most significant change is the inclusion of PPT. Consequently, every UAE-based entity should assess whether its principal purpose is aligned with its functional profile. This gains further significance in light of the recently introduced substance requirements as well as the Country-by-Country Reporting rules in the UAE. These developments, combined with changes to the DTAA, are part of UAE’s commitment to adhere to the minimum standards relating to Base Erosion and Profit Shifting issued by the OECD.