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Saudi Arabia triples VAT to 15%, suspends cost of living allowance for state employees

Saudi Arabia announced today it will triple VAT from 5% to 15%, while also suspending the cost of living allowance as part of austerity measures to combat the impact of the coronavirus pandemic.

VAT was first introduced on January 1st as part of an effort to diversify the Kingdom's revenue away from oil, and as a step towards Vision 2030 The cost of living allowance of SAR 1,000 ($267) per month to state employees was introduced in 2018 to help offset increased financial burdens including VAT and a rise in the price of gas "These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term... and overcome the unprecedented coronavirus crisis with the least damage possible," Finance Minister Mohammed al-Jadaan said.

[UPDATE 29/6/2020: The Kingdom is set to also charge 15% VAT on goods imported through e-commerce from July 1. Joanne Clarke Tax Director at Pinsent Masons Middle East comments: “This announcement by Saudi Customs authority is not a new legislative change to the VAT rate increase to 15% already legislated for. Instead, it is a public reminder to ensure that there is no doubt or ambiguity among businesses that imports are also caught by this VAT rate increase. It reminds businesses that VAT is applied at the time of import at the effective VAT rate on that date. Therefore, any import generally liable to import VAT in the Kingdom will be liable at the 15% rate from 1 July onward.”]

[Original story follows]

After introducing VAT for the first time on January 1st, 2018 to diversify the country’s revenues away from oil and as part of Crown Prince Mohammad Bin Salman’s Vision 2030 reformatory plan, Saudi Arabia has now announced it will be triple the original figure of the tax from 5% to 15%, while also suspending the cost of living allowance. 

Prior to the pandemic, the IMF had already told Saudi Arabia to raise their VAT value to 10%, stressing the importance for the world’s top oil exporter to improve its fiscal position amid lower crude prices, Reuters reported last year.

The cost of living allowance of SAR 1,000 ($267) per month to state employees was introduced in 2018 to help offset increased financial burdens including VAT and a rise in the price of gas.

According to Khaleej Times: “To improve spending efficiency, a ministerial committee has been established to study the financial benefits paid to all employees, contractors and those of similar status whom are not subject to Civil Service Law in government ministries, institutions, authorities, centers, and programs, and present its recommendations within 30 days.”

These decisions are part of austerity measures the Kingdom has said are necessary to weather the coronavirus pandemic in light of the unprecedented impact to the oil market and prices, and the overall impact on the economy. the Saudi Press Agency (SPA) reported.

“These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term… and overcome the unprecedented coronavirus crisis with the least damage possible,” Finance Minister Mohammed al-Jadaan said in the statement shared by SPA.

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The VAT increase will take place on July 1st, while the suspension of the cost of living allowance will be commence starting from June 1st. 

“The announcement came after state spending outstripped income, pushing the kingdom into a $9bn budget deficit in the first three months of the year,” the BBC reported. “That’s as oil revenues in the period fell by almost a quarter from a year earlier to $34bn, pulling down total revenues by 22%.” Last week, Saudi Jadwa Investment company said it expects the kingdom to record a budget deficit of $112 billion this year.

The British news site continued: “At the same time Saudi Arabia’s central bank saw its foreign reserves fall in March at their fastest rate in at least two decades and to their lowest level since 2011.”

Just last week, Saudi Arabia’s Tadawul index, the region’s largest stock exchange, fell a significant 7.4% after lingering concerns regarding COVID-19 dampened investor sentiment, coupled with decreased spending in most sectors.

That same week,Saudi Finance Minister Mohammed al-Jadaan said that “painful” measures may need to be taken for the sake of the country and its citizens, in an interview with Al Arabiya.  He also said that the government may need to redirect some public funds to support the health sector in coming quarters.  

Overall spending for 2020 will remain close to what was planned as money saved gets re-allocated to health care and aid for businesses, Finance Minister Mohammed Al Jadaan told Gulf News in a telephone interview on Monday.

Could other GCC states follow in this VAT hike? It is possible. However, the UAE Ministry of Finance issued a press statement today saying it does not plan a VAT hike, as a reaction to KSA’s announcement, UAE tax firm Aurifer noted

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