The Kingdom of Saudi Arabia (KSA) has announced to triple the rate of VAT to 15%, which will come to 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.

For further information, please feel free to contact one of the lawyers below or your usual Baker McKenzie contact. 


Reggie Mezu is a Senior Counsel in Baker McKenzie's Tax Practice Group based in Dubai. He specialises in corporate tax and has practiced tax for nearly 30 years, including in the UAE for 15 years. Reggie advises on corporate direct and indirect tax matters, with particular focus on cross-border and transactional work across the Middle East and Africa. He concentrates on tax aspects of corporate and business structures and also regularly participates in various initiatives aimed at enhancing the tax regimes of developing countries.


Laya Aoun-Hani is a senior member of the Baker McKenzie International Commercial & Trade Practice Group in the Middle East. With over 15 years of experience in the Middle East, Laya regularly advises multinational clients from different industries on commercial transactions, multijurisdictional distribution and agency arrangements, commercial disputes settlements, competition law, trade compliance, export controls, sanctions and customs matters. She also has extensive experience in the healthcare and consumer goods and retail sectors.

Write A Comment