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. 

Author

Reggie Mezu is a Senior Special Counsel in Baker McKenzie Habib Al Mulla, based in Dubai. He has practiced tax for nearly 30 years in the Middle East, Africa and Europe, including in the UAE for 15 years. Reggie regularly advises clients on tax planning, corporate structuring, cross-border transactions, double tax treaties, reform and development of fiscal frameworks, general advice, and most recently, the new value added tax (VAT) regime in the Gulf region.

Author

Bastiaan Moossdorff is a Senior Associate in Baker McKenzie Habib Al Mulla, based in Dubai. He specializes in indirect tax and has practiced indirect tax for more than 7 years in the Netherlands, the UK, the UAE and the KSA. Bastiaan has multi-jurisdictional and multi-disciplinary academic qualifications in law, accountancy and taxation.

Author

Laya Aoun-Hani is a senior associate in the Corporate & Commercial practice of Baker McKenzie Habib Al Mulla, based in Dubai. She specialises in corporate and commercial transactions, including joint ventures, distribution agreements, company structuring and restructuring, mergers and acquisitions, employment and all related matters. Laya also has particular experience in all compliance and VAT matters.

Author

Mohamed El Baghdady is a senior associate in the Dispute Resolution Practice Group of Baker McKenzie Habib Al Mulla, based in Dubai. He is experienced across a number of specialized areas including civil, commercial and criminal law, energy and infrastructure, corporate disputes, real estate, construction, employment, intellectual property and tax.

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