This guide was last updated in January 2019
Gulf VAT is a new challenge for these healthcare industries, with different VAT treatments across those Gulf states that have implemented VAT to date, those being the United Arab Emirates (UAE), The Kingdom of Saudi Arabia (KSA) and Bahrain. There are ambiguities as to the scope of zero-ratings. Businesses should tread carefully, looking at the issues on a transaction-by-transaction basis and seeking clarity, where required, to mitigate risk in this self-assessment exercise.
Although most VAT regimes make healthcare services exempt so that VAT cannot be recovered, most GCC regimes have adopted zero-rating treatment, which gives deduction of VAT on associated costs, in order to shield the sector during initial implementation from price inflation and supply/demand economics.
The KSA charges VAT at the standard 5% rate on basic healthcare and related services. There will be differences in interpretation and application by businesses and tax authorities. Supplies of listed pharmaceuticals/medical equipment are all zero rated. Related goods and services may also be zero rated but health insurance will be standard rated.
The principal supply within the healthcare sector is the direct medical care given to patients by medical practitioners. In modern medicine this encompasses a long list of services and related products – for example, the basic doctor-to-patient care; specialist medical treatments within clinics or hospitals; dental or optician services; physical and mental therapies, and many other kinds of treatment.
Most VAT regimes implement exemptions, with no recovery of VAT on associated costs, for healthcare as a basic human need. The affected businesses are often partially state funded through grants and other mechanisms in order to mitigate the risk of the VAT cost being reflected in the price to the end consumer.
The GCC VAT regime has also considered this approach, however zero-ratings, which give deduction of VAT on associated costs, have mainly been favoured across the region, in order to shield the sector during initial implementation from factors such as price inflation and supply/demand economics.
The UAE and Bahrain have applied zero-rating to preventative and basic healthcare services and related goods and services which are necessary for the treatment of a patient and are administered by licenced healthcare providers – for example, hospitals, medi-clinics, doctors, nurses, dentists and pharmacies.
The Bahrain legislation provides further insights on the types of transactions falling within the zero-rating. For example treatment of mental illness, speech therapy and sight and hearing tests would all be viewed as zero-rated healthcare.
We should expect that there will be differences in interpretation and application by businesses and tax authorities. If businesses don't find tax authorities' views clear they should seek clarification to mitigate risk.
Like other global VAT regimes the UAE and Bahrain specifically exclude elective cosmetic treatments from the zero-rating.
The KSA has applied the standard VAT rate of 5% on all basic healthcare services.
There are often complex supply chains behind the scene before the final goods and services can be provided to consumers. The healthcare sector is no different in providing care to patients.
Often the medical practitioner dealing with the patient seeks external professionals for core healthcare services in specific areas of expertise. At times, these are engaged between two businesses within the healthcare sector. It is expected, although not publicly confirmed, that these supplies would also qualify for healthcare zero-rating regardless of the fact that the person contractually 'receiving' them may not be the ultimate 'beneficiary'. This would mean that zero-rating applies throughout the full supply chain.
In the UAE, medical transportation and catering for patients are not specifically dealt with. They may be viewed as 'necessary' services for the treatment of the patient and zero-rated. Accommodation for patients, other than holiday or entertainment accommodation, is likely to be zero-rated as healthcare or residential accommodation.
In Bahrain, medical transportation, catering and accommodation for patients are specifically listed as services 'associated' with a supply of healthcare and zero-rated.
The KSA applies the standard VAT rate of 5% to related services as well as to basic healthcare services.
Pharmaceutical products and medical equipment
The UAE, KSA and Bahrain have implemented a zero-rating for certain pharmaceuticals and medical equipment, with lists of approved products available from the regulating health authority for each region. As there are no references to the person supplying the products, the zero-rating will be applicable regardless of what stage in the supply chain the transaction takes place.
Other related goods, supplied in the course of supplying healthcare services and necessary for the supply of such services, may also qualify for zero-rating, It is expected these would include items such as bandages, syringes and other medical consumables.
All other goods sold in to or within the healthcare sector, which do not fall within the prescribed list of pharmaceuticals and medical equipment or other related goods, would be liable to VAT at the standard rate of 5%.
As the regime evolves, we may see differences in treatment of individual products across the region.
Public healthcare services will generally be outside the scope of VAT when undertaken by government bodies empowered to engage in such activities in a sovereign capacity and not carried out in competition with the private sector.
Supplies not carried out within a public capacity such as certain car parking and gifts shops within hospitals, are subject to normal VAT rules, including registration requirements.
Special regimes are available for government bodies, which are not within the scope of the VAT regime, in order to allow them a refund of VAT on associated costs.
The provision of health insurance, re-insurance and associated broker services are all subject to the standard VAT rate of 5% across the region to date.
This VAT may only be deducted when incurred by a VAT registered person, for business purposes, and such VAT is not specifically blocked under the local VAT deduction rules. For example, where a business is obliged to provide basic health insurance to its employees under local employment law, the associated VAT would be deductible.
Where businesses in the health insurance industry pay VAT on supplies made by healthcare professionals to the insured, care should be taken when determining the business's VAT deduction entitlement, as only VAT on costs contracted for and incurred by the insurer are deductible.
Supplies of mixed goods and services
Often when a patient requires medical care, they will need various types of diagnostics, tests, prescriptions, surgery, hospital or respite stays, products or devices, transportation, accommodation and more to support their treatment.
From a VAT perspective this introduces an extra layer of complexity, as the VAT rules are generally applied on a transaction-by-transaction basis.
The VAT rules do, however, recognise that when various goods or services are supplied together, at times for one consideration, there may be one principal supply and VAT treatment, with the other supplies ancillary in nature, making a single composite supply. Alternatively, each good and service may be an individual supply in its own right, with an aim in itself and individual VAT treatments applicable, which are called multiple supplies.
Given the presence of zero-ratings within the healthcare sector, together with a variety of goods and services which can have differing VAT rules, businesses should identify all mixed supplies within their supply chain and analyse and categorise each within their tax systems to ensure compliance with the VAT rules in each region.
The development of the digital economy has created challenges within global VAT regimes in terms of the treatment of goods or services, previously supplied in physical form or face to face, and now rendered digitally. There are some instances, for example physical and digital books, which have seen alternative treatments in other regions.
However, generally speaking, the VAT treatment should not change, for the supply of healthcare goods and services, as a result of them being rendered or ordered digitally.
The treatment of any associated technology or digital services should be assessed under separate VAT rules.
Registration, compliance and penalties
With certain reliefs available from registration and invoicing for wholly zero-rated activities and transactions, businesses should assess their registration and compliance obligations in the region, comply and avail of reliefs where available, in order to mitigate the risk of penalties.
Joanne Clarke is a Middle East VAT expert at Pinsent Masons, the law firm behind Out-law.com