Oil and gas is a prominent sector which remains a significant part of UAE. Businesses in this sector include huge 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 influences for each type of industry participant. Professionals in the Oil and gas industry should have a good knowledge regarding VAT on Oil and gas sector.
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. VAT recoverable on costs, Warehousing and temporary movements have specific rules. VAT has also affected the Cash flow as VAT is charged on purchases but recovery from the authorities can take months. Thus it is essential to examine VAT on oil and gas and any future significant capital expense into account in order to plan and manage the business’ cash flow. Getting VAT Services for oil and gas sector from a reputed tax consultant is necessary in this situation.
Crude oil and natural gas: 0%
Other oil and gas products ,including petrol at petrol stations: 5%
Some countries apply a specific zero percent rate to sales of certain products in the oil and gas sector . For the supplier of zero-rated goods, this upholds their eligibility to claim an input tax credit for VAT incurred on their purchases, while no VAT needs be charged on sales. For this reason a zero rate is viewed as a supportive position for these suppliers.
VAT relief includes providing full exemption from VAT on oil and gas companies. Unlike the standard VAT exemption, which results in a restriction to VAT recovery, a full sector exemption as applied in some countries– allows oil and gas companies to not have VAT charged on their purchases. On a regular basis, oil and gas companies have to provide certificates to eligible suppliers to allow purchases without VAT. The certification process brings together additional administrative processes and tax authority scrutiny to the supply chain. Improper certification can impact on VAT treatment by suffering in the supply chain, despite a sector exemption applying in theory
As exports of products belong to a zero rated category, some O&G companies may likely be during a continuous net refund position of VAT input tax credits with the tax authorities. These companies must be aware that within the first 12 months after the introduction of VAT, the tax authorities may delay in paying refunds of VAT. Such delays will exert added pressure on O&G companies’ cash flow. Thus it’s crucial to account for this and any future significant capital expense to plan and manage the business’ cash flow by reducing the VAT impact
Most of the upstream sub-contractors only provide exploration and production services exclusively to O&G companies. Whether or not zero rating or exemption of VAT on oil and gas companies is also extended to include O&G subcontractors under the Product Sharing Contract(s) may have an inevitable impact on the industry.
There are lots of difficulties existed while determining the VAT classification on repair and maintenance services on ‘floating production and storage offloading facilities’ (FPSOF)
It is quite common practice for the downstream O&G players to sell Liquefied Petroleum Gas (LPG) in returnable containers. First time buyers pay a security deposit in the event that the container is returned. The VAT treatment of the security deposit has been a critical issue.
O&G companies frequently enter into ‘borrow and return’ or ‘swapping of crude oil’ arrangements based on demand of their corresponding customers. As these are treated as separate and distinct transactions, it requires the issuance of valid tax invoices documenting a valuation for each of the discrete transactions.
It's common practice for O&G companies to swap assets with third parties especially where both of them are short of cash. Determining the taxable value for these arrangements might be a vital consideration
Companies operating in the Oil and Gas sector often face major tax liabilities depending upon the volume of their operations. So the companies should determine themselves before the implementation of VAT and they should consult tax experts for better understanding and to get quality VAT services for oil and gas companies. CDA as a team of highly qualified professionals and experts can assist you with utmost accuracy in tax filing services and regular updating in the VAT treatment.
Under the GCC Agreement, the member states have the discretion to subject their oil, oil derivatives and gas sector to the zero rate according to the terms and limitations set by each member state. Therefore, it is up to each member state to define the scope of any zero rate that could apply to the oil sector. The UAE law includes a zero-rate for unrefined oil and gas and a broader reverse charge for B2B transactions in the sector
We confirm that, in conformity with international practice, our expectation is that gas and water will be treated as a supply of goods for VAT purposes.
Yes, the UAE has a number of free trade zones (FTZs). These FTZs confer a number of benefits to those that operate within them. It has yet to be confirmed how VAT will interact with these FTZs. There may be a difference in the application of VAT in the FTZs depending on the type of FTZs and the type of supply being provided. It has been the subject of considerable lobbying. The rules for free zones are expected to be finalized within a two- to three-month timescale.
VAT is calculated on the discounted price of the product. For example, if the price of an item is 110 AED and the seller gives a discount of 10 AED, then the VAT on the product is 5% of 100 AED. The total cost of the product would be 120 AED (100 AED purchase price + 20 AED of VAT).
The place of supply for goods that involve installation or assembly is the place where the installation or assembly takes place.
The place of supply for water or energy distribution is as follows: If a taxable person who is a resident in the UAE makes a supply of energy to another taxable person who is a resident in another GCC member state, then the place of supply is the location of the recipient. If a taxable person makes a supply of energy to a non-taxable person, the place of supply is the place of actual consumption.
It is quite common practice for O&G companies to enter into agreements with third parties to have their goods ‘transferred’ for processing and/or treated by the third party and then returned. Determining whether these arrangements relates to transfer of goods or merely the provision of services has always been a combative issue for the Oil and Gas sector under VAT
On many occasions, Oil and Gas companies may import significant capital equipment temporarily for use and then to be re-exported to the country of origin. For example, rent/ lease of oil rigs from non established suppliers into GCC waters. There will be a significant impact on cash flow of the company depending upon the method of VAT treatment on importation of the equipment.
Upstream sub-contractors can account for anywhere between 75%-90% of all supplies made to Oil and Gas companies during the exploration and production phase. Most of these sub-contractors only provide these services exclusively to Oil and Gas companies. Whether or not zero rating treatment is also extended to include O&G subcontractors under the Product Sharing Contracts (PSC) may have a major impact on the industry
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