In February 2023, the Kingdom of Saudi Arabia (“KSA”) Tax Authority released a Tax Circular outlining the mechanism, controls and procedures for the tax refund to persons who are not residents of the GCC Member States and carry out an economic activity with VAT (or a similar tax system) registration in another country (“non-resident taxpayers“) in accordance with Article (67) of the GCC VAT Framework.
In response to the opening of the KSA VAT refund mechanism, non-resident taxpayers should:
- test whether they would satisfy the requirements of a qualifying non-resident taxpayer;
- identify and quantify expenses incurred with KSA VAT in 2022 (calendar year basis);
- investigate if appropriate documentation and records are in place with respect to the invoices received from KSA suppliers on these payments;
- determine if these costs would be recoverable in accordance with the KSA VAT legislation; and
- consider their internal resource’s bandwidth to support the refund application.
In more detail
Following the introduction of VAT in 2018, there has been a number of changes in the VAT landscape in KSA, including the increase of VAT standard rate from the initial 5% to 15% in May 2020. Over the course of the period, we have witnessed taxpayers undertaking review of their tax positions with respect to the application of the VAT legislation. In some instances, the interpretation could lead to applying a standard rate of 15% on transactions made to non-resident customers which give rise to increased costs to the business and VAT leakage.
The release of the Circular on VAT refund for non-resident taxpayers is a welcoming move as it provides a platform for qualifying non-resident taxpayers to seek KSA VAT refunds. Based on the Circular, the refund application process will take place in two stages by using the e-service for “Register as a Person Eligible to Refund Value Added Tax” on the online portal:
- the non-resident person applies for registration as a person eligible for a tax refund, and
- the registered person applies for the refund.
Each of these processes will require the applicant to demonstrate that he satisfies the relevant requirements, including providing all necessary documentation and information.
With respect to the first stage process, the applicant needs to demonstrate his status as a qualified non-resident taxpayer by satisfying the following requirements:
- The applicant has no residency in the GCC, is incorporated in a country that applies a transaction tax system similar to VAT and is registered for that tax; and
- The country that the applicant is incorporated in provides a similar mechanism which provides tax refunds to KSA residents who are charged with tax in that country (i.e., reciprocation).
The second stage of the refund requires the qualified non-resident taxpayer to meet all of the following conditions:
- That the tax paid by the non-resident taxpayer person is not a result of the supply of goods or services in any GCC Member States.
- That the tax paid by the non-resident taxpayer is for the purposes of his economic activity relating to making of taxable supplies and not subject to restricted input tax recovery rules (e.g., entertainment expenses).
- The total tax amount for which the application is submitted should be SAR 1,000 or more.
- The application must be submitted electronically through the KSA Tax Authority’s online portal, together with all supporting documents attached. The Authority has the right to request any of these supporting documents in a hard copy.
The supporting tax invoices must be available and meet requirements stipulated in Article 53 of the KSA VAT Executive Regulations, fulfill the provisions of the electronic invoicing regulations, and be supported by proof of payment.
The Circular provides that a refund request may be submitted on the basis of the calendar year only, and no more than one refund request may be submitted for the same period.
From a timeline perspective, the Circular provides that the KSA Tax Authority will review the application within an appropriate time frame and may request additional information if needed. Once the application has been processed, the KSA Tax Authority will issue a notice to the qualified non-resident taxpayer with the result within 20 days. If the request is approved, the KSA Tax Authority must refund the amount within 60 days. It is unclear whether the reference refers to calendar or business days. In the absence of specific reference, the default interpretation would be calendar days.
Finally, the Circular also provides that the applicant can object to the decision if they disagree with it.
For further information and to discuss what this development might mean for you, please get in touch with one of the Baker McKenzie contacts below.