Value Added Tax (VAT) was implemented in the kingdom of Saudi Arabia (the “KSA”) on January 1, 2018, in accordance with a framework agreement between countries of the Gulf Cooperation Council (the “GCC”).
In order to achieve efficient implementation of the VAT law, the requirements of the Agreement have been incorporated into national law in the Kingdom of Saudi Arabia. The KSA must additionally include in its domestic legislation areas where the Agreement does not provide prescriptive direction or where the Agreement provides for optionality.
The scope of transactions subject to VAT in the GCC Member States is defined in Article 2 of the Agreement. Member states must incorporate this provision into their domestic legislation, which the Kingdom of Saudi Arabia has done.
Taxes are collected on all taxable supplies of goods and services in the KSA made by taxable persons, and on all supplies of goods and services received in the KSA by a taxable person from outside the KSA in cases where the reverse charge mechanism applies, according to article 2 of the Law in the KSA.
In general, the following transactions are subject to VAT in the Saudi:
All supplies of goods and services made in the KSA are to be deemed taxable supplies for VAT purposes.
Each GCC Member State has the ability to establish the extent and bounds of its territory in conformity with international public law for the purposes of the Agreement.
The KSA (and its territory) are defined for VAT purposes as:
When a person makes a taxable supply in the KSA or issues a VAT invoice that includes VAT, the supplier is responsible for keeping track of VAT in Saudi. If both the supplier and the customer are inhabitants of the Kingdom of Saudi Arabia, or if the supply is otherwise specified to take place in the Kingdom of Saudi Arabia, this will be the situation.
When a supplier is not a Saudi Arabian resident and the client is VAT-registered in the country, the customer (rather than the provider) is primarily responsible for VAT in Saudi under the price adjustment technique. Similarly, if the supplier is based in the KSA and the consumer is based in another GCC Member State, and the place of supply laws mandate that the supply takes place outside the KSA, VAT may not be charged in the KSA.
Services offered electronically are governed by a different set of rules. If these services are delivered in Saudi Arabia through an online interface or portal that works as a middleman for a non-resident provider, the operator of the interface or portal is considered to be acquiring the activities from the non-resident supplier and supplying them out of his own name. The interface or portal is responsible for the tax on this delivery. If the non-resident supplier is publicly named as the supplier during the online sale process, in all legal contracts, and in billing, the non-resident supplier alone is responsible, not the interface/portal, will be recognized as liable for the VAT in Saudi
Taxable person registration:
A taxable person is someone who runs a small business and makes taxable deliveries of products and services in excess of the yearly VAT registration level of 375,000 Saudi Arabian Riyals (SAR).
On both a retrospective and prospective basis, it is determined whether a person has made taxable supplies that exceed the mandatory registration threshold. If a person has made relevant taxable supply in the past 12 months in excess of the necessary registration threshold, they must apply for registration (the retrospective test). However, if a person reasonably expects to make relevant taxable supplies in excess of the necessary registration threshold in that month and the following eleven months, they must apply for registration (the ‘prospective test’).
If there’s a requirement for some individual to register for a retrospective test, he/she is bound to the Authority within 30 days of surpassing the threshold in that particular month. Following notification, the VAT registration will take effect on the first day of the month.
If a person meets the prospective test and is required to register, he must notify the Authority within 30 days of the end of the first month in which he logically expects to surpass the required registration threshold in the period of next 12 months. The VAT registration will go into effect on the first day of that month. The reasonable expectation’ criteria should be regarded narrowly as a secondary calculation test.
The voluntary registration requirement is set at 50% of the mandatory registration requirement. This leads in a SAR 187,500 voluntary registration threshold.
Persons over the threshold whose taxable supplies consist only of zero-rated supplies shall be exempt from mandatory VAT registration.
Consequences of VAT grouping:
The result of VAT grouping is that the group is treated as if it were a single taxable person throughout the duration of the scheme. This means that:
Taxable Supplies Calculation:
The amount of VAT in Saudi must be accounted for is determined by the taxable value of a supply. The payment made for services and goods is called taxable value, whether it is made as a real amount or an amount taken as given for VAT in Saudi causes under the law.
When goods and services are delivered as part of the consideration, the taxable value is the fair market value of the goods and services. Unless the consumer has agreed that the price is exclusive of VAT, the law specifies that the declared price of goods and services is inclusive of VAT. VAT in Saudi is charged at a regular rate of 5%. The amount of VAT due is calculated using the following formula when the consideration includes VAT:
VAT = Consideration x Tax Rate/ (100% + Tax Rate)
This relates to the consideration multiplied by 0.0476 for the calculation of VAT.
Supplies exchanged between family members:
When a related person receives a supply for less than fair market value and is not entitled to full input VAT recovery, the supply is viewed as made at fair market value. The consideration that would be paid in the open market for a similar and contemporaneous supply of identical goods/services freely supplied between unrelated parties is referred to as fair market value.
The Regulations define “related people.” A natural person is related to his spouse, brother-in-law, and fourth-degree relative. A boss has a relationship with his workers. A partnership’s partners are related to one another. A person’s relationship to the business in which he is a partner or director, or in which he functions as such in guiding strategic decisions, is equally important. A person is also tied to a corporation if he owns or controls more than 50% of the shares, voting rights, or value of the company. A related person is someone who owns two companies that are both controlled by the same individual.
Financial Services that are exempt from taxation
VAT in Saudi is not applicable to the following financial services:
It should be highlighted that when goods and services are provided simply as part of a Shari’ah-compliant financial product, there is no separate provision of such products or services in line with normal regulations because they are treated as part of the product. A separate supply of goods transferred as collateral is considered to be made when the transferee gains complete disposal rights to the items or acts in such a way that the transfer is no longer considered temporary.