Value Added Tax Law in the Kingdom of Saudi Arabia

• (The Law) The Basic Law was published in the Official Gazette, Umm Al-Qura Edition, Issue 4681, on July 28, 2017.

• The following are the highlights of the law:

  Effective date of implementation - Article 53 stipulates that the law is effective from the beginning of the fiscal year following the date of publication of the law in the Official Gazette. Hence, VAT becomes effective in the Kingdom of Saudi Arabia on January 1, 2018.

• Fee range

  Article 2 stipulates that all imports and supplies of goods and services are subject to value added tax in accordance with the provisions of the GCC Value Added Tax Framework Agreement and implementation regulations established by law.

• Tax rates:

  The fixed rate of VAT described under the VAT framework for the countries of the Gulf Cooperation Council is 5%. However, some goods and services may be subject to a zero rate or be exempt from VAT.

• Register

  Article 53 stipulates that everyone who is required to file value added tax must register with the General Authority for Zakat and Income Tax.

• Register

  The general provisions for zakat and income.

• Tax Evasion and the Liability of Evidence

  Article 39 states that the responsibility to prove that there is no intent (to evade tax) rests with the taxable person.

infractions

• Tax evasion:

  After proving tax evasion, a fine of no less than the tax due and not more than three times the value of goods and services is imposed.

• Failure to apply for registration:

  Anyone who does not apply for registration within the period specified in the regulations will be fined 10,000 Saudi riyals ($2,666).

• Submitting an incorrect tax return to the Zakat and Income Authority:

  Any person who submits a tax return to the Zakat and Income Authority, or amends the tax return after its submission, or claims an incorrect amount of recoverable value added tax, will be fined an amount equal to 50% of the difference between the calculated tax and the real tax, and the law empowers the authority of the Zakat and Income Authority. to waive or reduce this penalty.

• Failure to file a tax return by the due date:

  A fine of not less than 5% and not more than 25% of the value of the tax to be reported is imposed.

• Issuance of a Tax Invoice by an Unregistered Person:

  A person who is not registered with the Zakat and Income Authority is subject to a fine not exceeding 100,000 Saudi riyals (26,660 US dollars) when issuing a tax invoice, without prejudice to any additional penalty stipulated by any other law.

• Failure to keep invoices, books, records and accounting documents:

  A fine of no more than 50,000 Saudi riyals (US$13,330) is imposed for each tax period.

• Preventing or obstructing the employees of the Zakat and Income Authority from performing their duties:

  A fine of no more than 50,000 Saudi riyals is imposed for each tax period.

• Violation of any other provisions of the law or implementing regulations:

  A fine of no more than 50,000 Saudi riyals is imposed for each tax period. The penalties stipulated in the law are without prejudice to any other penalties stipulated in any other laws and furthermore, the penalties mentioned above shall be paid in addition to the VAT due.

• Penalty for repeat violation:

  The fine may be doubled if the same offense is repeated within three years from the date of the final decision of the penalty.

• Time limit for filing an appeal:

  A decision may be appealed by the competent judicial authority within 30 days from the date of notification of the decision, and after the lapse of 30 days, the decision is considered final, and it may not be appealed before any other judicial body.

• Issuance of implementing regulations:

  The Board of Directors of the Zakat and Income Authority shall issue the regulations within 30 days from the date of publication of the law and the regulations shall become effective from the date of entry into force of the law.

• Interim condition:

  Article 21 states that even if an invoice is issued or paid before the date of execution or registration, VAT is considered due if the date of supply of goods and services is on or after the date of execution or registration.

• Issuance of implementing regulations:

  The Board of Directors of the Zakat and Income Authority shall issue the regulations within 30 days from the date of publication of the law and the regulations shall become effective from the date of entry into force of the law.

• The Act refers to implementing regulations that will provide more specific guidance on the following:

• Registration requirements:

  • Divide the VAT into groups
  • cancel registration
  • Commercial operations that are token or counted as supplies
  • Conditions determining the place of supply of goods and services
  • person's place of residence
  • Conditions determining the time of supply of goods and services
  • Terms and conditions for claiming input tax deduction.
  • Content and format of the tax invoice
  • The content and form of the tax return, including its conditions
  • Reconciliations of tax invoices and tax returns
  • Pay taxes and other dues related to value added tax

The original law shall be published in the Arabic language and in the event of a conflict between the original (Arabic) version and any translation, the Arabic version shall prevail.

The law states that people whose gross annual income exceeds the mandatory limit of 375,000 Saudi riyals ($100,000) must register with the Zakat and Income Authority, and failure to register will result in a penalty of 10,000 Saudi riyals. The Zakat and Income Authority has published the implementing regulations in draft form, and these regulations provide a set of comprehensive provisions related to specific requirements for VAT, including zero-rated and exempt business sectors. The Zakat and Income Authority has chosen to apply a 5% VAT rate for most commercial transactions, and therefore, the scope of the VAT is wide, with limited deviations from the applicable rate.

The publication of the published VAT law states that companies must be prepared to calculate value-added tax as of January 1, 2018. This leaves businesses with five months to prepare for the value-added tax, which is a huge challenge for large companies.

Although many large companies have started studies to determine the impact of VAT on their operations, a large section of the business community is still waiting for the enactment of the law in order to establish financial budgets for VAT compliant projects. Given the very short time frame to achieve VAT readiness, it is important for all businesses to begin assessing the impact of VAT immediately and determining the impact of VAT on their operations.

• This assessment should consider the impact of VAT on the following main areas:

  • Finance and Accounting
  • Information technology and systems
  • Tax compliance.
  • Supply Chain - Goods and Services
  • Contracts
  • Sales and marketing
  • Legal Structure
  • HR

The impact assessment should be used in a clear plan of the steps to be taken to be VAT ready by the start-up date of January 1, 2018.

What is the registration for value added tax?

• It is the process by which a facility subject to VAT is registered, and upon registration of the facility, a VAT account number will be generated.

• What establishments must be registered?

  Mandatory registration

  All establishments or entities that supply goods and services subject to VAT whose annual revenues exceed 375,000 SAR are required according to the system to register for VAT before December 20, 2017. Noting that all taxable establishments whose value-added taxable supplies exceed the mandatory registration threshold and do not exceed one million Saudi riyals annually, will be exempted from the registration requirements until December 20, 2018.

• Optional registration

  Establishments that supply goods and services subject to VAT and whose annual revenues exceed 187,500 SAR are eligible for voluntary registration in VAT. Voluntary registration also provides significant benefits to establishments as it allows input tax deduction.

• Registration for non-residents of the Kingdom who are obligated to pay VAT

  Non-residents who engage in economic activities without having a fixed place of business or establishment in the Kingdom of Saudi Arabia are required to register if they are obligated to pay VAT in the Kingdom of Saudi Arabia. All non-resident taxable persons must appoint a tax representative in the Kingdom of Saudi Arabia, who shall be approved by the Authority. For more information about the tax representative, please follow the link: https://gazt.gov.sa The General Authority for Zakat and Income has the right to request documents from the taxable facility to prove that the above-mentioned requirements have been met.

• How to register?

  In order for businesses to register for VAT, they must first be registered with the Authority for Zakat or income tax purposes. Some large enterprises will be automatically registered in the value-added tax system by the General Authority of Zakat and Income, especially enterprises registered for other taxes in the Kingdom of Saudi Arabia:
  • If this applies to your facility, you will receive a notification from the General Authority of Zakat and Tax informing you of this
  • In this case, we advise you to log in to verify the correctness of the information and contact information, and to upload any supporting documents you have at the following link: https://gazt.gov.sa
  If your facility is not registered automatically, registration will be for all eligible establishments since August 2017 through the following link: https://gazt.gov.sa.

• The registration form will ask you to select the following:

  • Is your facility importing?
  • Is your facility exporting?
  • IBAN (for refunds): Not required if you are registered with the General Authority of Zakat and Tax
  • VAT eligibility start date
  • Supplies subject to VAT (expected over the next 12 months)
  • Supplies subject to VAT (past 12 months)
  • Purchases subject to VAT (expected over the next 12 months)
  • Purchases subject to VAT (past 12 months)
  • Tax representative details

What is a tax return?

• The establishment (eligible for value added tax) pays the tax on its purchases subject to value added tax and collects the tax on the products it has supplied. Thus, the establishment collects the tax, on behalf of the General Authority of Zakat and Income, and has the right to claim the tax paid on its purchases subject to it. The facility will be required to file a tax return showing details of transactions related to supplies and purchases subject to VAT. Based on this declaration, the facility will be required to either pay VAT or refund the excess. This group of activities is referred to as the value-added tax tax return, and the General Authority for Zakat and Income has the right to issue a new assessment to amend the previous assessment, accompanied by an official notification submitted to the taxable entity.

• Who can file a VAT return? And when?

  All establishments subject to VAT that have an annual supply of goods and services whose value exceeds 40,000,000 SAR must submit a monthly VAT return. All other establishments subject to value added tax must submit a value added tax return every three months. The authority also allows establishments to have the option of submitting monthly applications after the approval of the General Authority for Zakat and Income Tax. All taxable establishments will have one month to file a VAT return, from the end of the tax period (specified above), for example:
• • If the monthly return is submitted for the tax period from January 1, 2018 to January 31, 2018, the tax return must be submitted by February 28, 2018.
  • In the case of filing a tax return for the three-month period from January 1, 2018 to March 31, 2018, the tax return must be submitted by April 30, 2018.

• How to file a VAT return?

  Taxable establishments must submit a tax return through the electronic portal of the General Authority of Zakat and Income. Those establishments will be required to fill out a special form for value added tax declaration by filling in the following information about their commercial activity:
  • Domestic sales subject to VAT
  • Sales of registered customers in GCC countries
  • Zero-rated domestic sales
  • Zero-rated domestic sales
  • Exempt sales
  • Domestic purchases subject to VAT
  • Imports subject to VAT paid at customs
  • Imports subject to VAT through the reverse charge mechanism
  • Zero percent purchases
  • Exempt purchases
  • Corrections from the previous period (up to SAR 5,000)
  • Corrections from the previous period (up to SAR 5,000)
• Please note that in the event of corrections (due to an error or omission) of a value of more than 5,000 SAR, the facility will need to complete the adjustment itself. In the event that the taxable entity does not submit the tax return within the specified period, the General Authority for Zakat and Income Tax has the right to conduct a tax assessment.

Payment and collection

• After the establishment submits the tax return, the payment process begins after an automatic issuance of a “SADAD*” invoice containing the invoice number and the tax amount due.

• How is the payment made?

  Once the “SADAD” invoice is issued and sent to the facility, the amount of tax due must be paid through the bank account of the General Authority for Zakat and Income, through the electronic payment gateway “SADAD” online or through an automated teller machine. After completing the payment process, the facility will receive a receipt from the General Authority of Zakat and Tax, with the amount paid, attached to the tax return reference number.

• Payment application

  The facility can make a payment up to the total amount due in the “SADAD” invoice, and the payment received by the General Authority for Zakat and Income is applied to the remaining balances in the following order:
  • Obligations of the tax period specified in the SADAD invoice
  • Fines for the tax period specified in the SADAD invoice
  • Fines from previous tax periods, starting with the earliest period

• Please note the following:

  The General Authority for Zakat and Income Tax has the right to use any credit balance of the value-added tax, to settle other taxes owed by the facility, and the General Authority for Zakat and Income will notify the facility in case the credit balance is used.

• Installing the amounts due

  In the event that the entity provides evidence that it is unable to pay the amount of the tax due on the due date, or if it is found that paying the amount of the tax due through one payment may expose the entity to financial difficulties, the General Authority for Zakat and Income can allow the entity to pay the amount of tax due or Required fines. The facility must submit a request for the installment of the tax due within a specified period not exceeding 12 months. The amount will be scheduled into installments, after the tax return official approves the facility's request. Once the proposed schedule for paying the tax in installments is approved, the schedule will be in effect. For more information, please see Article No. 60 of the VAT Implementing Regulations.

• When must the tax be paid?

  The amount of value added tax due after filing the tax return (unless there is a credit balance that can be settled with the amount of tax due) must be paid no later than the last day of the month following the tax period. In the case of a monthly payment period, the payment deadline will be the last day of the month following the one-month tax period. For example, February 28 is the deadline for paying dues for the January tax period, which runs from January 1 to 31. In the case of the quarterly payment period, the deadline will be the last day of the month following the 3-month tax period. For example, if the tax period is from January 1 to March 31, then the deadline for payment will be April 30. In the event that the deadline for paying the tax is exceeded, the fines will be applied and added to the amounts owed on the account of the establishment.

• What will happen if the establishment exceeds the deadline for paying the tax?

  In the event that the facility exceeds the deadline for paying the tax, the facility will be notified on the day following the deadline, informing it of the penalties imposed on it due to the delay in paying the tax. After a certain period of time has passed without receiving any response from the facility, actions will be taken, which may include commercial penalties or legal actions.

• Migration and recovery

  In the event that there is a credit balance after submitting the tax return, the facility can request that the credit balance be carried over to the subsequent tax period or request its refund. Before posting or recovering the credit balance, the General Authority for Zakat and Income shall verify that there are no other tax obligations before allowing the facility to recover or carry over that balance.
• * “SADAD” payment system is one of the systems of the Saudi Arabian Monetary Agency, which is a central system for displaying and paying bills and other payments electronically in the Kingdom of Saudi Arabia.

The terms and definitions set out below clearly define the terms and statements used in VAT

• value added tax

  The value added tax imposed on the import and supply of goods and services at each stage of production and distribution, and includes the assumed supply

• Taxable Person

  A person who independently carries out an economic activity with the aim of generating income, and is registered or obligated to register for tax purposes in accordance with the provisions of the Agreement

• Convention

  The Unified Agreement for Value Added Tax for the GCC States

• tax group

  Two or more legal persons residing in the Kingdom and registered as one taxable person

• The economic activity

  Activity that is practiced on an ongoing and regular basis and includes commercial, industrial, agricultural, professional, service or any use of tangible or intangible property, and any other similar activity

• import goods

  The entry of goods into the Kingdom of Saudi Arabia from outside the territory of the Gulf Cooperation Council countries in accordance with the provisions of the Unified Customs Law

• output tax

  Tax due and levied on any taxable supply of goods or services made by a taxable person

• input tax

  The tax borne by a taxable person in relation to goods or services supplied to him or imported for the purposes of carrying on an economic activity

• Net tax

  The tax resulting from subtracting the deductible tax in a member state from the tax due in that country during the same tax period, and the net tax may be either payable or refundable.

• tax invoice

  An invoice issued in respect of taxable supplies in accordance with the requirements stipulated in the VAT Law and its Implementing Regulations

• Tax-exempt supplies

  Supplies that are not subject to tax, and the associated input tax is not deducted in accordance with the provisions of the Agreement and the local law

• Taxable Supplies

  Supplies on which tax is imposed in accordance with the provisions of the agreement, whether at the basic rate or at the zero rate. The associated inputs are deducted in accordance with the provisions of the agreement

• intra-regional supplies

  Supplies of goods or services by a supplier residing in a Member State to a customer residing in another Member State

• Reverse charge (assignment)

  The mechanism by which a taxable customer is obligated to the tax due on behalf of the supplier, and is responsible for all obligations stipulated in the agreement and local law

• Mandatory registration limit

  The minimum value of actual supplies under which a taxable person becomes obligated to register for tax purposes

• Optional recording limit

  The minimum value of actual supplies under which a taxable person may request registration for tax purposes