Indirect tax snapshot
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The Saudi Council of Ministers in May 2021 approved merging of the General Authority of Zakat and Tax (GAZT) and the General Authority of Customs to form the Zakat, Tax and Customs Authority (ZATCA).
Value Added Tax (VAT) is the main type of indirect taxation in the Kingdom of Saudi Arabia. The tax was introduced from 1/1/2018 and is the result of a common agreement of 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 tax base with limited zero-rated and exempt items. Financial Services are subject to VAT in KSA.
VAT taxes consumption of goods and services, is applied in the entire supply chain and although it burdens the final consumer, the tax is collected and paid to the tax authorities by businesses.
VAT registered businesses will charge VAT (output tax) on its taxable sales and incur VAT (input tax) on its taxable purchases (including any VAT paid during import of goods). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, it can be carried forward to the next tax period or a refund can be claimed.
There are two rates of VAT that are applied to goods and services in the KSA; the standard rate at 15%, and the zero rate. In addition, certain goods and services are exempted from the VAT.
Businesses that make exempt supplies are unable to claim all of the input tax that they incur.
Most goods imported into the KSA are subject to VAT. The tax will have to be paid by the importer at the time of importation and is calculated at CIF price plus custom duties. VAT registered importers can opt to pay import Vat through their VAT return subject to approval by the tax authorities.
According to the Unified VAT Agreement for the Council States the tax becomes due on the date of the supply of Goods or Services, the date of issuance of the tax 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, beginning 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 tax due date would be 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 tax due on the supply before declaring it and paying it to the Authority in its periodic returns.
On 1 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, public or private, resident in KSA, 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.
Two or more legal persons can elect to register as a Tax Group for VAT purposes if:
- each of the legal persons 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 Tax 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 as soon 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.
Furthermore, taxable supplies related to certain economic segments (eg real estate) require the non-resident business to register even if the customer is a taxable person.
Non-resident businesses making online sales to end consumers must register if their sales in KSA are more than SAR 375.000.
B2C electronically supplied services are taxed at the place of consumption or the usual place of the consumer’s residence. Thus, such sales to KSA consumers are taxed in the Kingdom 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 Tax due by the non-resident business until such date the tax representative is confirmed by the tax authority as ceasing to act on behalf of the non- resident business.
VAT representatives can be:
- members of SOCPA or established law firms
- a KSA resident, commercially active for at least 5 years and have a contractual agreement with the non-resident business.
The annual value of taxable supplies a company makes, determines its tax 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 tax period and they must file a VAT return by the end of the month following the end of the VAT period (eg VAT return of January must be filed by end of February).
All other companies have a quarterly tax period and they must file a VAT return by the end of the month following the end of the VAT period (eg 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 tax due must be done until the last day of the month following the end of the respective tax period.
Penalties are imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date.
Late submission penalties can reach up to 25% of the declared tax.
Late payment penalties are equal to 5% of the value of unpaid Tax for each month or part thereof for which the Tax has not been paid.
No other declarations are required. The Common VAT Agreement of the States of the Gulf Cooperation provides for the provision of an electronic platform 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 Tax Invoices, books, records and accounting documents, obstructed tax authority employees from performing their duties, repeated violations of the law, and no or late registration.
Tax 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 some prerequisites.
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 been yet approved by competent tax authority.
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 tax
- the business is established in a country with a transaction tax system similar to VAT and that country allows a similar mechanism to provide refunds of Tax to residents of the Kingdom of Saudi Arabia who are charged Tax in that country.
A single refund application for incurred tax 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 (eg, VAT Invoice) and can’t be for goods or services disallowed for deduction.
All refund applications are subject to 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:
- Phase One, known as the Generation phase and enforceable as of December 4, 2021.
- Phase Two, known as the Integration phase and enforceable starting from January 1, 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 tax 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.
Although the law provides the use of electronic invoices, the relevant legal framework has not been put in place.
The VAT law is very new, and 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. Please be noted that such resolution will be implemented on 4 Dec 2021.
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