Value Added Tax (VAT) is expected to be introduced in the six countries which make up the GCC in 2018, according to the UAE Minister of State for Financial Affairs, Obaid Humaid al-Tayer.  Although nothing is certain until such time that the necessary laws are passed, a number of countries are aiming to implement VAT by January 1 of that year. There are likely to be some who defer to later in the year.
The GCC VAT framework is expected to be finalised and agreed amongst all the six countries by the middle of 2016 when the details should be announced. The rate of tax is likely to be set at 5%.  There may be some areas, most likely in education, social services and healthcare, which will be subject to VAT at 0%. 
Contractors should consider the practical challenges around the introduction of VAT.  Surveys in the GCC have revealed that many businesses don’t have adequate accounting systems to deal with VAT.  Many businesses also lack the basic knowledge of how a VAT system operates; therefore considerable investment and training will be required and all of this will come at a cost.
Does your contract deal with the introduction of VAT?
Contractors should consider reviewing their contracts to see which party is responsible for paying VAT once it is introduced. For projects that are currently being tendered, contractors should review their terms at the bidding stage to see if VAT is mentioned and how this is dealt with once it is introduced. 
For existing projects, contractors should undertake a review of their contracts with their existing employer clients and also their supply chain. There may be additional costs to come if subcontractors or suppliers charge VAT on the supply of labour, plants and materials.  
The Conditions of Contract for Construction published by FIDIC is the most commonly used standard form contract in Qatar and the UAE.
Sub-Clause 13.7 deals with adjustments for changes in legislation and allows the contract price to be adjusted as a result of “a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws)…..which affect the Contractor in the performance of obligations under the Contract”. However, the change in law must affect the performance of the contractor’s obligations under the contract and it may well be that the introduction of VAT doesn’t affect the contractor’s ability to fulfil its obligations, rather it is seen as an additional cost. 
Frequently, contractors will have entered into contracts which contain tax gross up clauses.  In this case, the party who indemnifies the other is liable for further sums if such indemnified amount is subject to tax.  However, it is unlikely that this type of clause is sufficient to place an employer under an obligation to pay VAT in addition to the contract price.  
If the contract contains express wording to deal with what party is responsible for VAT, this creates certainty as to where the risk of increased costs is to lie e.g. is the contractor or the employer responsible for the payment of VAT or is this cost to be shared between the parties?  It is, therefore, advisable to seek amendments to the standard form contracts which do not leave the contractor solely liable for any increase in taxes and/or duties.  Contractors should ideally have a contract which contains direct wording stating that the employer is liable to pay VAT properly charged in addition to the contract price.  
Contractors should be very aware of the probability of the introduction of VAT within the GCC in the coming years and should consider this now so to ensure their projects remain financially viable and do not run at a loss. Further protection should be added by including suitable tax change clauses where appropriate. 

*Paul Prescott is a legal director of Pinsent Masons and specialises in construction and engineering law.