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VAT impact on oil and gas sector
August 2017
Impact of VAT on business functions: (GENERIC)1 Procurement
1.1 Ongoing contracts — identify value of work done up to 31 December 2017 to ensure vendor does not charge VAT on pre-VAT work done
1.2 Modify existing procurement process to ensure valid tax invoice is received in earliest time from date of issuance by vendor to account for deduction
1.3 Non-resident vendors — whether to account liability under reverse charge or vendor to register and issue a local tax invoice?
1.4 Policy to deal with non-registered vendors
1.5 Obtain change orders for existing contracts to enable payment over and above PO value to account for the impending inclusion of the VAT charge post 1.1.18
1.6 Budgets to include 5% VAT impact
2 Revenue
2.1 Ongoing contracts — identify value of work done up to 31 December 2017 to ensure VAT liability is ascertained on supplies made on or after 1 January 2018
2.2 Determining the “Time of supply” for different types of transactions
2.3 Adjustment of VAT liability for any future adjustments to tax invoice
2.4 Requirements of tax invoice (to be in Arabic and contain prescribed particulars)
2.5 Valuation for paying correct VAT on sale of used assets especially vehicles
2.6 Recognizing VAT liability irrespective of accounting treatment, such as deferred income will attract VAT on 100% income with some exceptions, e.g. in case of sale on installment basis
2.7 Supplies during transition, especially where advance payment was received prior to 1 January 2018
2.8 VAT to be charged on recharges to group companies on gross value, no netting off against existing inter-company balances
3 Human resources
3.1 Provision of facilities to employees against deduction from salary would attract VAT.
3.2 Gifts to employees shall attract VAT unless within prescribed threshold limits
3.3 Accommodation to employees shall be exempt supply for purpose of VAT. However, this would impact on eligibility to recover input tax deduction for goods and services commonly used by companies
3.4 Assessment to introduce VAT Function
3.5 The amount of allowances to be revisited in light of 5% VAT
4 IT system
4.1 Requires detailed study to analyze changes required in IT landscape/blueprint to enable business to be VAT ready by 1 January 2018
4.2 Billing
4.3 Processes & controls
4.4 Automation of VAT computations, recognition of liability considering time of supply, place of supply
4.5 Automation of input tax deductions and restrictions
4.6 Update of master databases including introducing new fields to capture necessary information from VAT perspective
4.7 Archiving and data retrieval
4.8 Transition planning, cut over plans
5 Finance
5.1 Registration and VAT Grouping decision
5.2 Cash flow planning — working capital requirements
5.3 Process controls
5.4 VAT policies, procedures and controls — especially for AP and AR functions
5.5 Statutory reporting capabilities
5.6 Accounting for VAT
5.7 Documentation for VAT
5.8 Tax manuals
VAT impact on oil and gas sector
Impact of VAT on oil and gas sector1 Procurement
1.1 VAT suspension on temporary importation of capital equipment
1.2 VAT treatment for import of capital goods (drilling rigs) on lease basis, valuation, time of supply
1.3 VAT treatment of royalty payments and production sharing/cost recovery arrangements
1.4 Status of tax clauses and fiscal stabilization provisions in exploration, production and sharing agreements, and joint venture agreements
2 Revenue
2.1 Zero rating of exports subject to timely submission of export documents
2.2 Determination of place of supply in case of activities outside territorial waters for offshore exploration and production activities
2.3 VAT treatment of royalty payments and production sharing/cost recovery arrangements
2.4 VAT treatment of “borrow and return”/”swapping arrangements”
2.5 VAT treatment on account of loss of goods in storage and transport
2.6 Transfer of goods for contract manufacturing/tolling activities
2.7 VAT treatment for take or pay contracts
2.8 Facilities sharing arrangements
2.9 VAT treatment in case of sales under tariff regulations
2.10 Stock transfers to branches/storage facilities in other GCC countries or outside GCC countries
2.11 Documentation in case of export to branches under a stock and sale model of distribution
2.12 Transactions with entities in free zones
2.13 VAT treatment on transactions with marketing companies, whether on principal agent relation (disclosed agents or undisclosed agents)
3 Finance
3.1 VAT Refund position, inherent leakage due to rejection during audit or scrutiny of refund claim
3.2 Transactions with marketing companies to attract KSA VAT whereas exports therefrom would be zero rated resulting in refund position
3.3 Impact of VAT on cash flow requirements especially for CAPEX characterized by long gestation period (initial phases of exploration projects)
3.4 VAT Grouping to optimize cash flow on inter group transactions
3.5 VAT treatment of revenue sharing between parties to joint ventures and cost sharing arrangements
3.6 Recognition of time of supply, place of supply and valuation for various types of revenue models
3.7 Compliance and reporting requirements for various types of revenue models
VAT impact on oil and gas sector
Key contactsEY contacts for VAT inquiries
Finbarr SextonMENA Indirect Tax Services Leader + 974 4457 4200 [email protected]
David StevensMENA VAT Implementation Leader + 971 4 312 9442 [email protected]
Asim J. SheikhKSA Tax Leader +966 11 2159 876 [email protected]
KSA VAT Services Leaders
Michael Hendroff +971 4 332 4000 [email protected]
Rolf Winand+966 12 221 8501 [email protected]
KSA VAT Coordination Desk
Mohammed Bilal Akram+966 11 215 9898 [email protected]
Ahmed A Hassanin+966 11 273 4740 [email protected]
Nazar Hussain Khan+966 11 215 9898 [email protected]
Sujit Narayanan+ 966 11 215 9898 [email protected]
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
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