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What companies and taxpayers in Saudi Arabia need to consider with VAT at 15%

With VAT increasing in Saudi Arabia, here are a few things businesses and taxpayers need to keep in mind as they brace for the change.

The Kingdom of Saudi Arabia (KSA) has announced it will triple the rate of VAT to 15%, which come into effect on 1 July 2020 The 5% VAT rate is specified in the GCC VAT Framework Agreement that has to date been implemented by three (Saudi Arabia, United Arab Emirates and Bahrain) of the six member states The United Arab Emirates has confirmed that it currently has no plans to increase the rate and it is uncertain whether Bahrain will follow the KSA soon

By: Baker McKenzie Habib Al Mulla experts

The Kingdom of Saudi Arabia (KSA) has announced it will triple the rate of VAT to 15%, which come into effect on 1 July 2020. This is a significant rate increase and one of the fiscal measures taken by the KSA Government to mitigate the negative effects of the COVID-19 pandemic and other macro-economic developments on public finance. The increased rate is expected to apply to all supplies of goods and services that are currently subject to the 5% VAT rate. Companies should carefully consider how this impacts their businesses, particularly the following:

• An immediate point of attention for taxpayers affected by the rate increase is to ensure that their systems are able to issue invoices and charge VAT at the new rate. 

• Taxpayers should also consider how to treat goods and services that are supplied before 1 July 2020 whilst the invoice is issued or payment is given after 1 July 2020 or vice versa. Although no specific transitional provisions may be published to resolve such issues, the Implementing Regulations contain transitional provisions drafted for similar situations resulting from the introduction of VAT on 1 January 2018. 

• Taxpayers that supply goods or services to end-customers should factor the VAT rate increase into their pricing (and amend their marketing materials and other documentation). 

• Taxpayers that are (partially) exempt or unregistered companies (such as passive holding companies) that are not entitled to recover their input tax in full, will face a significant increase in the cost of doing business. 

• Taxpayers that provide exempt or zero rate supplies should have sufficient evidence in place to support this VAT treatment. Any error in this instance will not only lead to a significant VAT payment that may not be recovered from the customer, but may also lead to a heavy penalty of a maximum of 50% of the unpaid VAT (effectively increasing the rate to 22.5%). This is especially relevant for companies providing zero rated export services, an area where the tax authority has been very active and strict. 

• As a result of the above, some companies may need to reconsider their structure or transaction flows to minimize the impact of the rate increase. 

Wider GCC 

The 5% VAT rate is specified in the GCC VAT Framework Agreement that has to date been implemented by three (Saudi Arabia, United Arab Emirates and Bahrain) of the six member states. There is no reference to the 5% VAT rate in the KSA VAT Law or Implementing Regulations. The GCC VAT Framework Agreement can only be amended by agreement of all of the six GCC countries. It is therefore unclear whether the rate increase would require amending the GCC VAT Framework Agreement or whether the KSA will do so unilaterally by amending its VAT Law. The United Arab Emirates has confirmed that it currently has no plans to increase the rate and it is uncertain whether Bahrain will follow the KSA soon.

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