The oil and gas sector remains as a vital and significant part of each of the Gulf nations. Businesses in this sector include large national oil companies and their associated entities, international oil companies with local operations (or trading in the area) – in exploration and production activities and 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 members.
This is an overview prepared by www.PayMyVAT.com to provide an insight to businesses in understanding Value Added Tax (VAT) and its impact on Oil and Gas industry.
What impact will the introduction of VAT have on Oil and Gas companies?
The supplies of oil and gas companies are considered as taxable supplies under most VAT jurisdictions for financial reasons. Generally, the companies registered under VAT are allowed to recover the VAT incurred on their purchases by equipoising this against the VAT that is charged on their sales. But due to the significance of the oil and gas industry in the region, some or most parts of the supply chain may be considered as zero- rate or receive VAT relief in relation to their production activities. Zero rate means that VAT will be charged at zero percent on the supplies and VAT incurred in relation to making these supplies can be reclaimed in full.
What transactions under the oil and gas sector will attract VAT?
The Value Added Tax (VAT) in general is charged at a specific rate on the sale of products and services provided to oil companies. However, due to the international nature of the oil and gas sector, the extraction and sale of crude oil frequently result in VAT not being exerted under standard VAT rules.
What does Zero-rated supplies mean?
In some countries, a standard zero percent is applied on the sales of certain products in a sector. For a supplier of zero-rated goods, this translates into their admissibility to claim an input tax credit for the amount of VAT incurred on their purchases, while no VAT needs to be charged on their sales. Therefore, a zero rate is frequently seen as a favorable position for the suppliers. It is rare for a particular VAT relief to apply to the domestic consumption of oil and gas. A distinction may, therefore, exist to restrict the zero rate to certain products.
Will a sector-wide exemption apply to oil and gas companies?
A full exemption from VAT will be provided for the companies operating in the oil and gas industry. A full sector VAT exemption, unlike the standard exemption that leads to a restriction to VAT recovery; permits the companies under the oil and gas sector to not have VAT charged on their purchases. To sanction these purchases with VAT exemptions the oil and gas companies need to provide certificates to the eligible suppliers. This certification process further leads to additional administrative processes and a tax authority inspection to the supply chain.
Will the trade of international supply chains bring any complication to oil and gas sector?
The businesses operating in the Oil and Gas sector have usually faced challenges in understanding and managing the VAT obligations across International Supply Chains. The sale and purchase of crude and refined products by businesses often lead the businesses to have a VAT obligation in the country where the transactions take place. This in turn often results in an unanticipated VAT registration requirements or obligations to charge VAT when the products are purchased and sold in overseas jurisdictions. Organisations need to ensure that they understand the VAT landscape and obligations across the countries where they conduct business operations and transactions. Although the notion of a zero rate for exported goods generally reduces the VAT cost for the movement of goods internally, the exporter needs to collect and maintain commercial documentation to support zero-rating in the case of Tax authority scrutiny.
Registration under VAT.
Usually, in the oil and gas sector, the product lifecycle may involve a long exploration phase and large upfront investment until the product is in the production phase. The businesses that intend to make taxable supplies, regardless of the businesses not producing any actual taxable supplies currently can also get registered under VAT to claim the refunds of VAT incurred. Though companies that do not intend to make any taxable supplies within a 12 or 24-month duration may not be allowed registration by the VAT authorities. In such situations, the businesses may not recover the VAT incurred until they are registered under VAT. As such expenses and claims are usually limited to the input tax incurred only on the capital goods held at the time of registration a certain time limit is expected to be imposed in order to claim them back. Under certain VAT models, some supplies may be exempted from VAT. The businesses producing these exempted supplies, there will be no VAT charged on the production of the supplies and VAT incurred in relation to making these supplies will not be claimable.
Challenging situations for determining VAT treatment.
Mentioned below are a few common situations where deciding the correct VAT treatment can be a challenge:
- Transfer of goods between oil and gas companies – Most Oil and Gas companies usually get into agreement with a third party company to have their goods transferred for processing and/or treatment by the third party and then returned. Deciding whether this arrangement relates to transfer of goods or merely the delivery of services has always been a debatable issue for the Oil and Gas Swector under VAT.
- Suspension/Temporary Importation (TI) – Oil and Gas companies usually import crucial capital equipment for temporary use and then re-export the equipment back to the country of origin. How VAT will be charged on the imported equipment may impact the cash flow of the organization
- VAT treatment of repairs and maintenance – Complications for determining the correct VAT arrangement on the repair and maintenance services on floating production and storage offloading facilities where these facilities are located in national, GCC countries or international waters.
- Borrow and return or swapping of crude oil arrangements –Oil and Gas companies often enter into ‘borrow and return’ or ‘swapping of crude oil’ arrangements based on the demand and location of their customers. These are treated as separate and distinct transactions that require valid Tax invoice documentation that includes a valuation for each of the discrete transactions under VAT