Franchising in the Middle East: VAT set to be rolled out across the Gulf States

Following the signature of a regional framework agreement last year between the nations of the Gulf Cooperation Council, Saudi Arabia has recently confirmed that it will introduce a value added tax on certain good and services with effect from 1 January 2018. This is relevant to any foreign brand doing business in the GCC, as the new tax will apply to a number of consumer facing good and services and consequently it will impact upon a business' bottom line.

Earlier this month, the Saudi Arabian Government approved the Unified Agreement for Value Added Tax ("Unified Agreement").

The Unified Agreement is an overarching agreement that will be concluded by all six nations in the Gulf Cooperation Council ("GCC").

The purpose of the Unified Agreement is to ensure that VAT will be introduced across the GCC nations in a consistent and coordinated manner, although it does not mean that each jurisdiction will have an identical law to govern the application and collection of VAT.

A five-per cent levy will apply to certain goods, including consumer goods, as agreed by the Unified Agreement last June.

The absence of VAT in the GCC nations has been an anomaly given that VAT is applied in more than 150 countries around the world. The move is in line with an International Monetary Fund recommendation for Gulf states to impose revenue-raising measures including excise and value added taxes to help their adjustment to lower crude oil prices which have slowed regional growth and seen national deficits reach unsustainable levels.

This news is relevant to any foreign brand which operates in the GCC. Foreign investment restrictions mean that most brands have to use a franchising or distribution model in the GCC, and the imposition of VAT may well impact on the level of fees which are paid by the local operator to the franchisor/principal, particularly where the commercial model includes an ongoing percentage of turnover or profit.

If you would like more information on this matter, please contact Gordon Drakes.