Coronavirus: GCC tax planning and mitigation

Many businesses have already felt the impact of this crisis, operating with significantly reduced revenues and having made some difficult decisions in terms of staff dismissals and some location closures.

There are, and will continue to be, many difficult decisions for businesses to make in order to be able to manage the financial and commercial challenges they are facing. Some strategic and prompt tax planning and impact mitigation by tax managers and finance directors will also be a smart investment of time for a business in operational 'survival mode'.

State tax reliefs (all GCC)

It goes without saying that every business operating across the GCC should investigate the tax reliefs implemented within the countries relevant to their business, and should ensure to take the necessary steps if any are required in order to avail of these promptly. The situation should be monitored so that businesses can take advantage of any further reliefs that may be implemented in the coming weeks.

VAT refunds from tax authorities (UAE, KSA and Bahrain)

Many businesses across the GCC region have allowed VAT refunds to build up on their account with the tax authorities, on the basis that they could deduct these from future VAT liabilities and possibly to avoid the burden of potentially triggering a tax audit from the tax authorities.

The tax authorities across the region have continued to promote the claiming of tax refunds. For example, the KSA tax authority has advertised on its website that all VAT refunds should be paid within a 30 business day window. In addition, most government bodies across the region will be under more strict instructions to release payments to businesses as promptly as possible in order to relieve financial pressures caused by the pandemic.

Although businesses should be prepared in the event of queries or an official audit being triggered, now may be as good a time as any to submit VAT refund requests to the relevant tax authorities in order to improve cash flow into the business.

VAT Bad Debt Relief (UAE and Bahrain)

VAT Bad Debt Relief is available where a business registered for VAT purposes in the GCC has charged VAT to a customer, reported such VAT on its periodic VAT returns and settled any outstanding liabilities, but remains unpaid in part or in full by the customer.

This relief allows the supplier to claim the amount of VAT associated with unpaid amounts from customers as a credit in the current period, in order to reduce its VAT liability for that period. If the customer subsequently pays, the supplier would again adjust its VAT liability to the authorities in its periodic VAT return in the period that the payment is received.

This relief is likely to become more relevant to businesses during the pandemic, as payments from customers may be delayed more than usual and the delays may continue into the coming weeks and months. If applicable, and claimed, Bad Debt Relief would free up cash flow within the business by reducing any VAT due in the current period.

Of course, in the event of non-payment to vendors, similar bad debt relief may be triggered requiring the business to adjust VAT previously deducted on purchases, increasing the current period VAT liability.

These positive and negative adjustments should be planned and managed in an effective way by the business for optimal cash flow.

This may also become relevant in the KSA after its three month period of the VAT return and liability deferment initiative.

VAT on commercial contracts (UAE, KSA and Bahrain)

No doubt a number of challenges and disputes are being faced across the region in respect of long-term and high value contracts. These challenges may bring with them reductions to originally agreed pricing, suspension of payment due dates, claims for penalties for breach of contract where one party can no longer deliver, and other changes that may impact the overall VAT liability and timing of liabilities for these contracts.

Issues which may arise include:

• returned deposits – if a deposit paid at the start of a contract was a 'payment on account' for a future supply of taxable goods or services, then any agreed refund of this deposit due to the commercial circumstances of Covid-19 would result in the reversal of the associated VAT previously invoiced and reported by means of a tax credit note by the supplier. This credit note will reduce the supplier's VAT liability to the tax authorities in the current period. Note, however, that not all deposits are liable to VAT;
• reduced consideration – similar to the return of a payment on account deposit, any agreed reduction in the overall consideration for a supply under a commercial contract which is liable to VAT may trigger a current period tax credit note, which would reduce the current period VAT liability of the supplier;
• continuous supplies – with any long-term contracts for the continuous supply of services subject to a periodic payments schedule, any suspension or postponement of payments as a result of Covid-19 should also suspend or postpone the VAT liability as long as the issuance of the associated tax invoice is scheduled to align with the new payment plan. However, in the UAE, a tax point must trigger after each 12-month period at a minimum. Therefore, businesses should ensure that a tax invoice is issued and the associated VAT is remitted to the tax authority within 14 days of the end of the first 12 months of the contract in order to avoid the risk of penalties;
• penalties – penalties, damages or similar charges for breach of contract may become due on certain commercial contracts. Generally, a penalty resulting solely from non-delivery under the contract would not be liable for VAT. However, each payment should always be assessed in terms of why it is being paid and what for, to ensure that it could not be viewed as being a payment for a supply - for example, the toleration of a situation in return for a payment could be viewed as a supply of services. If a third party seeks to charge VAT on these types of charges, it is important to ensure that the amounts are correctly liable to VAT, as any incorrectly charged VAT will not be reclaimable from the tax authorities;

Employment taxes (Bahrain)

The impact of any government contribution to private sector salaries should also be considered from a social security perspective and any ambiguity on treatment clarified. This will ensure that costs are mitigated for both employer and employee as much as possible, as well as mitigating any risk of penalties for non-compliance.

Corporate restructuring (all GCC)

Corporate groups across the GCC region may wish to reconsider their corporate structure in response to economic constraints caused by Covid-19. This exercise could include scaling back on certain divisions, merging businesses within fewer legal entities or even liquidating certain entities.

It will be important to consider the tax impacts of any mergers or liquidations as part of this process, together with the correct timing for these actions in order to optimise the tax position or mitigate costs. See our Out-Law Guide: VAT and corporate structuring in GCC countries

Some initial considerations might include:

• tax impact of share sales, business transfers and liquidations;
• retention or loss of carry forward provisions for tax losses, or refunds to net against future profits or liabilities;
• continued or new use of group tax provisions allowing one entity's tax losses and refunds to be netted against another entity's tax profits or liabilities;
• triggering capital asset gains, losses or scheme adjustments;
• timing of any tax deregistration – for example, to not compromise the carry forward of losses and refunds but to meet required deregistration timelines in order to avoid penalty.