Indirect tax - Saudi Arabia

The Saudi cabinet, chaired by King Salman bin Abdulaziz, approved the merging of the General Authority of Zakat and Tax (GAZT) with the General Authority of Customs to form the Zakat, Tax, and Customs Authority (ZATCA) on 4 May 2021. 

Value-added tax (VAT) is the main type of indirect taxation in the Kingdom of Saudi Arabia. It was introduced on 1/1/2018 and is the result of a common agreement among all Gulf countries (KSA, UAE, Oman, Qatar, Bahrain, Kuwait) to introduce VAT as the main indirect tax in the region.

The VAT framework, the Common VAT Agreement of the States of the Gulf Cooperation Council, sets the principles of VAT taxation in the region. KSA issued the Value Added Tax Law and the Value Added Tax—Implementing Regulations, setting the legal framework of VAT in the Country. VAT in KSA has a much larger base with limited zero-rated and exempt items.

VAT consumption of goods and services is applied throughout the supply chain, starting from the point when a manufacturer purchases raw materials until a retailer sells the end-product to the consumer. Although it burdens the final consumer, VAT is collected and paid to ZATCA by VAT-registered businesses.

VAT-registered businesses will charge VAT (output VAT) on its taxable sales and incur VAT (input VAT) on its taxable purchases (including any VAT paid during the import of goods). The difference between the output VAT and the deductible input VAT in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input VAT exceeds the output VAT, it can be carried forward to the next VAT period, or a refund can be claimed.

In KSA, VAT applies to goods and services at two rates: the standard rate of 15% and the zero rate. Certain goods and services are also exempt from VAT.

Businesses that make exempt supplies cannot claim all of the VAT input they incur.

Most goods imported into the KSA are subject to VAT. The VAT must be paid by the importer at the time of importation and is calculated at the CIF price plus customs duties. VAT-registered importers can opt to pay import VAT through their VAT return, subject to approval by the tax authorities. Presently, VAT is temporarily deferred on Imports of goods as part of measures introduced during the pandemic.

According to The Unified Gulf Cooperation Council VAT framework Agreement for the Council States, the VAT becomes due on either the date of the supply of Goods or Services, or the date of issuance of the VAT invoice or upon partial or full receipt of the Consideration, whichever comes first, and to the extent of the received amount.

The Zakat, Tax and Customs Authority started implementing a new mechanism for VAT entitlement for establishments contracting with government entities on November 1, 2021.

This amendment to the regulation includes changing the date of supply and the VAT entitlement on all supplies of goods or services made from establishments contracting with government entities under the Government Tenders and Procurement law.

The Authority stated that the VAT due date would be either the date of issuing the payment order for the claim related to taxable supplies according to the procedures of the Tenders Law or the date of receiving the consideration for the supply or part of it, whichever is earlier, to ensure that the entity gets the VAT due on the supply before declaring it and paying it to the Authority in its periodic returns.

On 1st October 2020, Royal Decree A84 was issued, announcing the creation of a new Real Estate Transaction Tax (RETT) with a rate of 5% calculated on the value of the real estate transaction. All real estate transactions that take place after 4 October 2020 will be exempted from VAT and subject to the new RETT. This decision marks an effort to boost the real estate sector, which forms an integral part of the Kingdom’s Vision 2030.

Any natural or legal person conducting an economic activity and, in its course, makes a taxable supply of goods and services must register for VAT if the value of such taxable supplies in the KSA exceeds or is expected to exceed in the coming 12 months the value of SAR 375,000.

The threshold for voluntary registration is SAR 187,500.

Businesses making exclusively zero-rated supplies are excluded from registration.

The value of taxable supplies does not include the following:

1. Value of exempt supplies
2. Supplies taking place outside the scope of VAT in Saudi Arabia
3. Revenue from the sale of Capital assets. 

Moreover, two or more legal persons can elect to register as a VAT Group for VAT purposes if:

• Each legal person is resident and carries out an economic activity in the KSA.
• 50% or more of the capital, ownership or voting rights are held by the same person or persons.
• one person is a taxable person.

The tax authority can force two or more legal persons to form a VAT Group.
Supply of Goods and Services between members of a VAT group are considered as out-of-scope of VAT.

All members of a VAT group have joint liability for VAT during the time of their group membership.

Businesses that are not established in the KSA are required to register within 30 days as they make the first supply for which they are liable to charge VAT; this applies to supplies where the customer is not a taxable person and cannot self-account for VAT based on reverse charge mechanism. 

In Saudi Arabia, the VAT law contains provisions for determining place of supply for such electronically supplied / digital services based on the place of actual use and enjoyment of the services.  B2C electronically supplied services are subject to VAT at the place of consumption or the usual place of the consumer’s residence. Thus, such sales to KSA consumers are subject to VAT in Saudi Arabia at standard rate.

All non-resident businesses making taxable supplies in the KSA optionally appoint a tax representative. The tax representative is jointly liable for payment of any VAT due by the non-resident business. 

If the non-resident is not opting for a tax representative, then the non-resident mandatorily required to appoint a third-party accountant to comply with the bookkeeping requirements. 

The annual value of taxable supplies a taxable person makes determines its VAT period and subsequently when a business should submit its VAT return.

Companies with annual taxable supplies over SAR 40 million, in the previous twelve (12) months, have a monthly VAT period and they must file a VAT return by the end of the month following the end of the VAT period (e.g. VAT return of January must be filed by end of February).

All other taxable persons have a quarterly VAT period, and they must file a VAT return by the end of the month following the end of the VAT period (e.g. VAT return of January – March must be filed by end of April).

Submission of VAT returns is electronic via the portal of the tax authority.

Payment of any VAT due must be made by the last day of the month following the end of the respective VAT period.

The tax authority imposes penalties if VAT returns are not submitted on time, or the related VAT is not paid by the due date.

Late submission penalties can reach up to 25% of the declared VAT.

Late payment penalties are equal to 5% of the value of unpaid VAT for each month or part thereof which the VAT has not been paid.

No other declarations are required. The Common GCC VAT framework Agreement of the council States provides for the provision of an electronic services system where businesses will have to register all supplies of Goods and Services to VAT registered businesses in other member states. The system is not functional yet.

A range of additional penalties can be imposed where businesses do not comply with the VAT rules.

Administrative penalties can be applied where the business has failed to keep VAT Invoices, books, records and accounting documents, obstructed tax authority employees from performing their duties, repeated violations of the law, and no or late registration.

VAT evasion is punishable by a penalty of maximum three (3) times the value of Goods and Services which are the subject of the evasion. Criminal charges may apply too.

VAT incurred by overseas businesses can be claimed given fulfilling certain conditions.  

VAT legislation provides for two schemes. One for VAT registered businesses in the GCC and the other for VAT registered businesses in other countries.

The GCC refund scheme is available to all Gulf Council Countries that have enacted VAT legislation. The refund mechanism has not yet been approved by ZATCA.

The non-resident in the GCC refund scheme applies to all other countries where:

• The business is established in a country with a transaction tax system similar to VAT and the business is registered for that VAT.
• the business is established in a country with a transaction VAT system similar to VAT and that country allows a similar mechanism to provide refunds of VAT to residents of the Kingdom of Saudi Arabia who are charged VAT in that country.
• The person applying for a refund must have been approved by ZATCA as an ‘Eligible person.’

A single refund application for incurred VAT value of more than SAR 1,000 may be submitted for any quarterly or yearly period at the tax authority. The deadline is within six months from the end of the calendar year to which the claim period relates.

The application must be supported by valid documentation (e.g., prescribed VAT Invoice) and cannot be for goods or services disallowed for deduction.

All refund applications are subject to audit and approval by the tax authority.

Electronic invoicing is a procedure that aims to convert the issuing of paper invoices and notes into an electronic process that allows the exchange and processing of invoices, credit notes and debit notes in a structured electronic format between buyer and seller through an integrated electronic solution.

E-invoicing will be implemented in two phases:

1. Phase One, known as the Generation phase and enforceable from 4th December 2021.
2. Phase Two, known as the Integration phase and enforceable starting from 1st January 2023 and implemented in waves by targeted taxpayer groups. Taxpayers will be notified by ZATCA on the date of their integration at least 6 months in advance.

A VAT invoice must be in Arabic in addition to any other language and show:

• the date of issue
• a sequential number which uniquely identifies the VAT invoice
• the name and address of the supplier
• the VAT identification number of the supplier
• the name and the address of the customer
• the date on which the supply took place, where this differs from the date of issue of the VAT invoice
• the quantity and nature of the goods supplied, or the scope and nature of the services offered
• the taxable amount per rate or exemption, the unit price exclusive of VAT and any discounts or rebates if they are not included in the unit prices.
• the rate of VAT applied
• the amount of VAT payable, shown in riyals
• in the case where VAT is not charged at the basic rate, a narration explaining the VAT treatment applied to the supply.

In case of multiple supplies of goods or services within the same VAT period, a summary VAT invoice can be issued.

Simplified VAT invoices can be issued for transactions up to SAR 1,000. Such an invoice must show:

• the date of issue
• the name, address, and VAT identification of the supplier
• a description of the goods or services supplied
• the amount payable for the goods or services
• the value of VAT payable or a statement the payable amount is inclusive of VAT.

No, it does not provide for any SAF-T or electronic filing requirements except for the standard VAT return. We anticipate that in the near future such measures will be introduced to enhance the audit abilities of the tax authority.

The ZATCA approved to amend Articles (53, 54, 66) of the VAT regulations, One of these important amendments is the addition of a new paragraph (10) to Article 53, which states: “The Authority has the power to suspend or revoke the obligation to apply the provisions of the Electronic Invoicing Regulation – in whole or in part – to a category of designated persons or officials after examining the reasons for this, and may issue decisions. This provides an estimated space for the Authority to have the power to exempt a certain number of taxpayers or to give them additional time to do what is necessary to ensure compliance with the requirements of the Internet Billing Regulation.