The Unified Gulf Cooperation Council Value Added Tax Framework Agreement was published by the Kingdom of Saudi Arabia (KSA) on 20 April 2017 in the Official Gazette whereby it committed to applying value added tax (VAT) to all applicable goods and services.
The Tax Authority in the KSA is the General Authority of Zakat and Tax (GAZT) and is the body responsible for the regulation and implementation of the VAT in the region.
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What is Value Added Tax?
VAT is a tax on consumer expenditure and is collected on business transactions and imports. Basically, VAT is charged at each stage in the supply chain of goods and services. The broad effect is that businesses are not affected and VAT is actually borne by the final consumer.
Governments have been imposing taxes on their citizens for centuries and VAT is a system that has been implemented in more than 180 countries worldwide.
The state utilizes the taxes paid to establish, develop and improve infrastructure, facilities, road networks and other public services that are used for the benefit of and in the best interest of its citizens.
Persons Subject to VAT
Chapter 2 of the Executive Regulations on VAT in the KSA (the Executive Regulations) defines a Taxable Person is whoever engages in an independent economic or commercial activity for a profit and is registered, or required to be registered for VAT, in the KSA.
As provided in Article 3 of the Executive Regulations, VAT registration may be mandatory or voluntary.
In the event that the value of a Taxable Person’s taxable supply of goods or services exceeds the threshold of SAR 375,000, he/she is obligated to register for VAT.
A Taxable Person may apply for voluntary VAT registration in the event that such person’s taxable supply of goods or services exceeds SAR 187,000.
VAT Registration Application
When applying for VAT registration, the following minimum information must appear on the application form submitted to the GAZT:
- Name of the applicant (natural person or legal entity);
- Address of the actual headquarters, place of work and usual residence of the applicant;
- E-mail Address;
- Telephone Number;
- Electronic identification number;
- Commercial Registration No;
- Value of annual taxable supplies or expenses.
- Date on which the registration took effect or another alternative effective date.
The GAZT may request further documentation confirming the validity of the information provided during the application process and must grant the applicant at least 20 days within which to provide the information.
The application may be declined if the information is proven to be incorrect or the applicant is ineligible for registration.
In the event that the application is accepted, the GAZT shall notify the applicant and issue a registration certificate confirming the effective date of the registration as well as the tax identification number(TRN).
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A registered person must notify the Authority in the event of any changes to the information provided on the registration application. Such notification must take place within twenty days from the date of the change.
The registration certificate must be displayed at the person’s main place of business and its branches so that it is clearly visible to the public.
VAT Calculation in KSA
VAT may be calculated by multiplying the gross value of the supply by 15 (which is the tax rate in this case) and then divide the result by 100. The result is then the added to the gross value to get the final amount payable.
E.g., Cost of item A is SAR100. So, the VAT calculation will be:
100 x15 = 1500
1500/100 = 15
15 + 100 = 115.
The VAT is thus SAR15.
Zero-Rated Goods and Services
The following items are zero-rated supplies which are taxable supplies subject to tax at 0%:
- The supply of certain medications and medical equipment specified by the Ministry of Health and Saudi Food and Drug Authority;
- The supply of gold, silver, and platinum that is for investment purposes that is at least 99% pure and tradable in the international market;
- Any exports destined for delivery outside of the GCC;
- Services supplied to non-GCC residents; and
- International transport services in respect of goods and people, the supply of qualified international transport vehicles, and related services such as the supply of spare parts, maintenance, repair, etc.
Exempt Goods and Services
The following items are exempted from VAT:
- Financial Services;
- Lease or Sale of Residential Real Estate;
Financial Services in KSA
Financial Services are defined in the Executive Regulations as:
- The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money;
- The provision of any credit or credit guarantee;
- The operation of any current, deposit or savings account;
- Financial instruments, such as derivatives, share options, cheques.
- Interest or lending fees charged with an express margin, such as loans and credit cards, mortgages, and financial leasing;
- Provision or transfer of a life insurance contract or the reinsurance of a life insurance contract.
Real Estate in KSA
As mentioned above, the sale or lease of residential buildings is exempt in terms of the Executive Regulations. Residential Real Estate is defined in the Executive Regulations as a permanent dwelling designed for a human occupation such as a house, flat or apartment and residential accommodation for students or school pupils.
Gardens, garages and other fixtures that form a permanent part of a residential building are also treated as exempt.
However, hotels, inns, guest houses, motels, serviced accommodation or any other building that is designed to offer temporary accommodation to visitors or travelers are not considered as Residential Real Estate and will thus be subject to VAT at the standard rate of 15%.
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