KSA عربي
KSA عربي
Global عربي
In Saudi Arabia, there are three common VAT rates which are applied and they have different business and tax-related implications on them
In Saudi Arabia, the economy is revolutionizing in a way that it will not rely on a single source of income and it will also be linked to the outside world.
An important event in the financial growth of Turkey took place on 1 January 2018, when Value Added Tax began to be charged and imposed in the country.
VAT is currently the rule, so all companies, both national and global companies expanding in the Kingdom, should understand how it is applied because it is now no longer optional, but now it is a financial obligation.
However, to most people, the VAT system is too complicated. People usually ask the question: What is a taxable supply? What is the treatment of cross-border services? What can happen if a deadline for a return? Even experienced investors end up doubting the small print of compliance.
It is not only a matter of interpreting the law, but it is also a matter of being ahead of the law in a system that keeps on evolving, as was the case of imposing the rate hike from 5% to 15% in 2020, or as the demand to use e-invoicing under the FATOORAH system.
In this blog, we will not only explain the technical aspects, but we will also focus on establishing transparency.
You will be given straight facts, current figures and practical application, all you need to remain compliant and stressed no more.
This guide will give you step-by-step directions regardless of whether you run a VAT-registered company, intend to plan your investment architecture, or are merely determined to avoid unnecessary fines.
Value Added Tax (VAT) is an indirect tax whose basis of imposition is the production, distribution, and final sale of goods and services based on the chain of supply, and it is imposed on any goods and services that are purchased and sold by the taxable persons in Saudi Arabia.
This is to ensure that every business in the chain is entitled to VAT on its own sales popularly known as output VAT and reclaims it on its purchases known as input VAT and that the resulting balance is paid to the tax collecting arm. Last but not the least consumers pay the VAT and the businesses are simply a middleman.
More than 160 nations across the world rely on VAT as credible revenue generator by governments.
It has since been a major source of the national budget in Saudi Arabia, as it came into effect on 1 January 2018 in the GCC under the GCC VAT system, which was originally at 5%.
The General Authority of Zakat, Tax and Customs (ZATCA) is the body that operates the system and also advises businesses to educate them and reassure them about compliance with the system.
The model of this tax allows preserving the transparency of transactions and imposing taxes on a fair supply chain, contributing to financial responsibility, and protecting the end consumers from paying the same tax.
On 1 January 2018, the Kingdom of Saudi Arabia carried out a significant fiscal transformation, introducing Value Added Tax (VAT), agreeable with the Unified VAT Agreement between the Gulf Cooperation Council (GCC) States.
This came to be a landmark of VAT, and the initial standard rate was 5%, charged on most goods and services, that is, on consumer goods as well as on professional services.
Although the move was first met by mixed feelings, it was finally agreed upon on 4 May 2016 when Saudi finance minister Ibrahim Al-Assaf approved it during the gathering of the GCC finance ministers.
The Kingdom of Saudi Arabia had engaged in a regional agreement of six nations in terms of implementation and had already emphasized the diversification of the sources of revenue other than oil. VAT would come in support of fiscal sustainability, which is a strategic initiative to be undertaken by Saudi Vision 2030.
The next two years were spent with the ZATCA readying to roll out: they have been issuing the implementing regulations, educating the business community, and developing digital platforms where registration and filings of returns can be done. VAT was legalized on 1 January 2018.
The great shift came in the middle of 2020, characterized by the world fighting to recover its economy in the aftermath of the COVID-19 pandemic.
With the attempt to settle down the public finances, the Saudi Ministry of Finance has also stated on 11 May 2020, that VAT will be increased by triple to 15%, in place of the current 5% level from 1 July 2020. This increment was effected by Royal Decree No. A/638 and remains in force today.
There are two important concepts in Saudi Arabia on which VAT operates on and businesses must acknowledge clearly Output VAT and Input VAT.
Both are very important in deciding whether a given business is to pay some money to the tax authority or whether a refund can be made to the business.
Output VAT is the VAT that a business applies on the purchase of taxable goods or services sold to customers.
It is gathered in the name of the Zakat, Tax and Customs Authority (ZATCA). To explain, suppose a given retailer deals in electronics, he or she adds 15% VAT to the selling price; this is the Output VAT.
The seller is required to calculate this tax individually and report to ZATCA.
In contrast, when other VAT-registered suppliers sell the same business goods, services, and capital items, it suffers they incur VAT, which is referred to as the Input VAT.
This aspect of VAT is specifically written on purchase invoices, and it is normally recovered or claimed against Output VAT.
The relationship is straightforward:
-When the Output VAT is more than the input VAT, then the business has to pay the difference to ZATCA.
-In cases where the total amount of Input VAT is more than the amount of Output VAT, the business may even rectify the amount in advance or receive a refund.
-The mechanism makes it transparent and efficient since only the value added at every stage of the supply chain is taxed.
It is important to realize who should be registered to pay VAT and who may register at their choice to meet the rules of compliance and maximize cash flow.
- Resident Businesses: All the businesses not subject to tax or individuals involved in any economic activity within Saudi Arabia should register when their supplies exceed SAR 375,000 in the past or the coming 12 months.
- Non-Resident Businesses: The foreign company which contributes to the supply of goods or services in Saudi Arabia is also required to be registered without any regard to turnover. It is required that the business should be nominated within 30 days following the first taxable supply with an approved ZATCA tax representative.
This applies to businesses that are based in Saudi Arabia that;
- Have a taxable turnover of SAR 187 500 - SAR 375 000 in the last or that will be the case in the next 12 months, or
- You will be liable to pay input VAT and have a desire to have deductions made in advance.
- The voluntary registration allows those businesses which have not reached the threshold limit to claim back the input VAT, and this occurs prior to them reaching the mark of SAR 375,000 in supplies.
- Any two or more legal entities with a residence in Saudi Arabia may apply to be considered as a single VAT group, if;
- The members have more than 50% common ownership,
- Everyone engages in economic activity.
- At least one of them attains the SAR 375,000 obligatory level.
In this case, the group is going to be allocated and given only one VAT registration number and the calculation is done based on a consolidated basis by adding up the output and the input VAT of all the groups.
In Saudi Arabia, there are three common VAT rates which are applied and they have different business and tax-related implications on them:
1. Standard Rate – 15%
The Kingdom charges a standard VAT of 15% on most goods and services from 1 July 2020, after increasing it since the introduction of 5% implemented in 2018.
This rate has become widely applied by economic individuals in the process of day-to-day transactions in relation to retail goods and services, telecommunication, local transport and lease of business properties, amongst others.
2. Zero‑Rated Supplies – 0%
Some of the supplies are included in the zero-rated category. These are part of the VAT, but they are charged at 0%. In such a scenario, businesses can recover their input VAT on their related expenses. Some of these important examples are:
- Goods and services exportation outside the GCC.
- Transportation of passengers and cargo globally.
- Qualified medical equipment and medicines.
- Initial provision of investment metals, e.g. gold, silver, platinum.
3. Exempt Supplies
These supplies are not subject to VAT, whereby VAT is not charged and input VAT is not reclaimable. Commonly, there are exempt items as follows:
- Financial services (e.g. some banking services).
- Health and Life Insurance.
- Leases of real estate that are long-term residential, without hotels and short-term rentals.
VAT represents consumption-based indirect taxes charged at every transaction point. Income tax is imposed on the profits or earnings of individuals or businesses.
Businesses collect VAT on behalf of end-consumers, whereas taxpayers pay income tax based on net income.
In Saudi Arabia, VAT is regulated by the ZATCA tax authority and is programmed to impact on goods, services as well as the corporate tax or zakat that targets resident and non-resident companies according to special regulations.
Businesses can log in to their ZATCA portal, navigate to the section on “indirect Tax VAT Return” and select the period under tax, fill in the details of output and input VAT and submit within the set deadline.
After submitting, the confirmation is confirmed by email or SMS. In the situation where the business did not do any activity, a nil return should still be filed for that period.
A penalty on the outstanding VAT is charged when the VAT return is not submitted on time and varies between 5% to 25% of the amount of VAT due, depending on the delay and amount.
However, with the exemption program of the ZATCA until June 2025, late payment fines will not be imposed in case an overdue return is made with payment.
As per the ZATCA laws, a penalty of 5% is charged on the unpaid VAT amount per month or part thereof at the time of delaying payment.
The penalty is charged depending on the amount of VAT outstanding, and it accumulates every month until full VAT is paid .
For example, suppose that a SAR 10,000 amount of VAT is owed and is not paid before the due date, the business will then be charged a SAR 500 penalty per overdue month.
In case th.e payment is delayed by three months, the overall amount of penalties would be SAR 1500 aside from the initial VAT.
Let us consider the case of a business that has paid off the pending VAT or joined a registered payment schedule in an initiative run by ZATCA under its fine exemption campaign.
Then accumulated penalties might be forgiven, as long as all the conditions are met before the initiative deadline .
The invoice complying with ZATCA has to contain:
- Legal name of the seller, address of the seller and the VAT registration number.
- Number of sequential invoices and date of invoice.
- Name and the VAT-number of the buyer.
- Title, item description, quantity, unit price and good/service total value.
- VAT applied and rate to be charged.
- Under FATOORAH regulations, E-invoicing elements include: QR code or UUID.
In both B2C transactions and transactions below SAR 1,000, a simplified tax invoice will be applied to exclude non-required fields such as seller details and total VAT.
A standard tax invoice, however, will be needed in the case of B2B transactions and high-value invoices and must contain details of buyer and seller VAT, line item summaries, and VAT amounts.
The business is expected to follow e-invoicing rules available in both formats, which depend on the kind and value of transactions that the business is making.
Yes, online shopping is liable to VAT in Saudi Arabia. All of the local and foreign sellers who offer digital services to their Saudi-based clients are under an obligation to impose 15% VAT,
regardless of the physical location of the seller within Saudi Arabia. In the case where the buyer has a valid VAT number, it is measurable by the reverse charge mechanism.
In Saudi Arabia, the VAT does not apply to long-term residential rent i.e. tenants do not have to pay the VAT and landlords cannot claim input VAT. On the other hand, commercially rented properties such as offices, shops and short-term lodging such as hotel rooms are subject to 15% value-added tax (VAT).
Yes, international tourists can claim a VAT refund on purchases made in Saudi Arabia as long as the purchases qualify.
The tourist has to shop in stores that are registered in the VAT refund scheme, reach minimum spending levels and claim the refund during their departure at the refund kiosks at the airport or claim through the Saudi government portal by carrying out the steps below.
1- Log in through the ZATCA website.
2- Go to the "Indirect Tax- Value Added Tax".
3- Click on Refund Request VAT.
4- Make a refund request.
A response to your request will be acknowledged, and subsequently, you will be updated upon evaluation of the refund request.
The FATOORAH is the official Saudi Arabian electronic invoicing system, which the ZATCA plans to implement to remove physical invoices and substitute them with digital ones.
It encourages real time reporting, discourages tax evasion and enhances transparency in both business to business and business to customer deals. All VAT-registered residents in the Kingdom including businesses that issue tax invoices, simple invoices,
and credit/debit notes, are required to use e-invoicing in their operations. The system has two stages, namely Generation (Phase 1) and Integration (Phase 2).
Phase 1: Generation Phase (Effective from 4 December 2021)
In this phase, all businesses that are a part of the VAT have to generate and retain electronic tax invoices with the use of compatible systems. Such e-invoices are not mandatory to report to ZATCA in real-time,
though they include mandatory fields such as VAT number, QR code, and timestamp. It is simply an online form of conventional invoices.
Phase 2: Integration Phase (Rolled out in waves starting 1 January 2023)
In this phase, companies need to integrate their e-invoicing system with the ZATCA platform, with the result that the invoices could be validated online and reported online to that platform.
All businesses that have been selected by ZATCA and have received a letter in each wave are required to comply. It results in higher tax collection and transparency whereby the taxpayers will be directly connected with the tax authority.
These two are both compliant, implemented using technical specifications and data validation rules.
In Saudi Arabia, all businesses sustaining a yearly limit of supply as indicated by the ZATCA (Zakat, Tax, and Customs Authority) are required to contribute to VAT online registration.
It is entirely done online through ZATCA portal, and would be easy when the business has its documentation at ease.
Main Procedures for VAT registration to ZATCA
1- Register in the portal of ZATCA.
2- Enter the dashboard of the "General Authority of Zakat and Tax (GAZT)".
3- On the Taxpayer Portal, select the option Register for VAT.
4- Enter the needed business information, including:
5- Commercial Registration (CR) number.
6- Turnover of financial details, expected taxable sales etc.
7- Contact information.
8- Upload copies of the documents required such as ID documents, licenses
9- Check and apply.
After your submission, ZATCA will go through your application. In case it is approved, a VAT Registration Certificate with your Tax Identification Number (TIN) will be issued to you. It is a required certificate to issue VAT invoices and fill returns.
All businesses that generate SAR 375,000 and above in a year are required to register, and all businesses that generate 187.500 and above but less than 375.000 are allowed to voluntarily register.
VAT returns in Saudi Arabia are filed on monthly and quarterly basis depending on the taxable turnover of the businesses in whatever year.
When the turnover is over SAR 40 million, it is obligatory to file monthly and businesses with a turnover below SAR 40 million can file quarterly. All returns shall be made through the ZATCA portal within the last day of the month after the reporting period.
In the Kingdom of Saudi Arabia, the consequences of non-compliance with VAT may include severe financial punishment, imposed by the Zakat, Tax and Customs Authority (ZATCA). These penalties are changed according to the amount of the violation, and repeat violations may increase the fines substantially.
This is a list of some of the major VAT violations and their penalties according to ZATCA rules set out by ClearTax KSA:
- Failure to VAT register: SAR 10,000
- Failure to file VAT returns on time: A late-filing fine would be imposed, which can be between 5% and 25% of the unpaid tax, depending on the level to which the VAT return is late
- Delayed payment of VAT: A further 5% is added to the unpaid tax
- Error in VAT submission (e.g. understating tax): Up to 50% of the difference between the amount of tax payable and the amount reported
- Failure to issue tax invoices or records maintenance: Up to SAR 50,000
- Prevention of ZATCA inspectors, during inspection: Up to SAR 50,000
The inability to issue e-invoicing regulations (FATOORAH):
- The initial violation leads to the warning notice.
- In the second violation, it is punishable by a SAR 1,000 fine.
- In the third violation, the result is a SAR 5,000 fine.
- In the fourth violation, punishments include a SAR 10,000 fine.
- The fifth and other following violations may extend to SAR 40,000.
If the violation is repeated in the future, ZATCA can take more severe penalties or even legal prosecution.
It is highly recommended that businesses go out of their way to stay compliant, frequently update their systems, particularly e-invoicing, and make payments and filings on time, to avoid disruption or the process being subjected to audit.
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
