VAT Impact on Oil and Gas Industry

The oil and gas area remains a vital and significant part of each of the Gulf States. Businesses in the sector include large national oil companies and their associated entities, international oil companies with local operations (or trading in the area) – both in ‘upstream’ exploration and production activities and ‘downstream’ marketing activities, and service companies providing specialist resources and expertise to the sector. The introduction of VAT will have differing impacts for each type of industry participant.

The 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, an industry expert said.

The VAT framework agreement states that the GCC countries are entitled to subject or exempt four vital sectors from imposing VAT on them. These sectors include education, health, real estate and local transportation.

In most VAT jurisdictions, supplies of oil and gas are treated as taxable supplies for fiscal reasons. Ordinarily, VAT registered companies are allowed to recover the VAT incurred on their purchases by offsetting this against the VAT charged on their sales.

Due to the importance of the oil and gas sector in the region, some or all parts of the supply chain could be zero-rated for VAT purposes notably in relation to exploration and production activities. Zero-rate means that 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.

The scope of oil and gas services is quite broad and may include drilling services, seismic surveying, pipeline installation and maintenance, leasing of ships, storing and handling services at installations, refinery and warehousing services and sale of feedstock. It will be important to determine the specific VAT treatment of each of these supplies. In accordance with VAT framework agreement, every GCC state 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, stated by experts at Deloitte where it is also stated that Exports will be treated as zero-rated under the agreement, which means no VAT charged on the supply, but VAT recoverable on costs,Warehousing and temporary movements have special rules.There will be an impact on the Cash flow as VAT is charged on purchases but recovery from the authorities can take months.Thus it is imperative to take this and any upcoming significant capital expenditure into account in order to plan and manage the business’ cash flow.

For the GCC, the need to decrease reliance on oil has turned out to be considerably more basic and organizedreforms are essential to promote diversification and non-oil sector growth in order tocreate jobs for the growing workforce, economists said.

Younis Haji Al Khoori, Undersecretary at the UAE Ministry of Finance, said the UAE stands to earn evaluated VAT incomes of between Dh10 billion and Dh12 billion in the main (first) year of its applicationeven after exempting sectors such as healthcare and education in addition to several food items of the new tax.

It is essential that your staff is fully cognizant of VAT. It will be difficult to ‘systemize’ the VAT rules for all supplies made by you: nuances in the VAT law or slight changes in fact scenarios can lead to varying VAT outcomes, as described above. The oil and gas industry is currently undergoing an extremely difficult period and companies operating in this sector often face significant tax liabilities given the size of their operations. So the companies should prepare themselves before the implementation of VAT and they should consult tax experts for better understanding.