Saudi Arabia's General Authority of Zakat and Tax (GAZT) has released new transitional rules for the rise of the VAT rate from 5% to 15%, which will take effect on July 1, 2020. The transitional measures began on May 11, 2020, the day after the new VAT rate was announced. The GAZT has provided information on transitory provisional guidelines that clearly describe how the transitional rules will apply to the KSA VAT rate adjustment to prepare taxpayers for the VAT rise. In this article, we will take you through the new VAT rules in Saudi by explaining to you what is VAT?, how does VAT work in Saudi Arabia?, what is the VAT rate in Saudi Arabia?, how do you register for VAT in Saudi? And much more. So, stay tuned.
If you are starting a business in Saudi Arabia or already have one, you should know VAT. VAT stands for Value Added Tax. To assist you, we've put together this comprehensive guide on the VAT rules in Saudi in 2022.
With its enormous terrain and valuable resources such as petroleum, natural gas, iron ore, gold, and copper, the Kingdom of Saudi Arabia is a wealthy country. The country has amassed enormous wealth with its natural riches, resulting in economic growth and prosperity.
Although Saudi Arabia is an Islamic country, it welcomes foreign investors and talent. It continues to invite international investors, regardless of race, faith, or religion, into the country.
Foreign investors can get licenses to launch their businesses without a local partner and hold 100% of the company.
Isn't it incredible?
If you want to start a business in Saudi Arabia, you need to be aware of the new VAT rules in Saudi Arabia to keep compliant and up-to-date at all times.
In this post, we've put up a guide on how to pay VAT in Saudi Arabia so you can have a better understanding of the country's VAT structure.
Let's dive right in to learn more.
Table Of Contents
- What is VAT?
- How does VAT work in Saudi Arabia?
- New VAT rules in Saudi Arabia
- What is the VAT rate in Saudi Arabia?
- How do you register for VAT in Saudi Arabia?
- What is a reverse charge mechanism under VAT rules in Saudi in 2022?
- What is a place of supply under the new VAT rules of Saudi?
- Can you de-register VAT?
- What is the filing frequency in Saudi Arabia?
- How to pay VAT in Saudi Arabia?
- What are the penalties for late payment?
- Frequently asked questions
- The bottom line
What Is VAT?
VAT is a type of tax charged on the sale of goods and services when they are eventually sold to the customer. VAT is an important component of every country's GDP. While VAT is imposed on the sale of products and services and paid to the government by producers, the actual tax is imposed on the consumers or end-users who purchase these goods and services. As a result, it is an indirect tax that customers pay to the government through manufacturers of products and services.
VAT (Value Added Tax) is a multi-stage tax applied at each stage of the production of products and services that involves a sale or purchase. Anyone who supplies goods and services and earns more than the required turnover is required to register for VAT. VAT, or value-added tax, is imposed on both domestic and imported goods.
How Does VAT Work In Saudi Arabia?
A registered firm in the Kingdom of Saudi Arabia that purchases raw materials for the manufacture of a product must pay an additional 5% VAT on top of the selling price. The vendor will collect this 5% VAT, and it will be remitted to the government later. The output VAT is the tax paid to the seller for the sale of raw materials.
The registered firm will then sell this manufactured item to a customer, who will be charged an extra 5% VAT on top of the item's selling price. Input VAT is the tax paid by the consumer to the registered firm for the provision of the goods.
Let us look at an example.
- A furniture maker, Woodcraft, sells furniture to a distributor, Salim & Co, for 10,000 SAR. Woodcraft is required by the VAT system to collect 5% VAT (500 SAR) on behalf of the government. Salim & Co have agreed to pay a total of 10,500 SAR.
- Now Salim & Co have established a new selling price for the furniture (15,000 SAR) and are selling it to a company called Desert City Furniture. The delivery is also subject to a 5% VAT charge (750 SAR). They will pay the government 750 SAR and obtain a refund for the 500 SAR in VAT they paid to Woodcraft in the first phase. Desert City Furniture will pay a total of 15,750 SAR.
- Desert City Furnitures raises the furniture's selling price to 20,000 SAR and sells it to the final user. They also charge the government 5% VAT (1,000 SAR) and obtain reimbursement for the VAT paid to Salim & Co in the previous phase. A total of 21,000 SAR is paid by the consumer.
VAT is enforced at each stage of the supply chain, and registered enterprises are given refunds or tax credits for the VAT they paid in the preceding step.
New VAT Rules In Saudi Arabia
Taxable businesses (mandatory): All firms with taxable sales above 375,000 SAR in the previous 12 months (or estimated taxable sales in the coming 12 months) must register, collect tax, and file VAT reports. Businesses with taxable sales above 1,000,000 SAR in the previous twelve months (or estimated taxable sales in the future twelve months) must register, collect tax, and file VAT reports in 2018.
Taxable businesses (VAT optional): Businesses having taxable sales between 187,500 and 375,000 SAR in the previous twelve months (or estimated taxable sales in the coming twelve months) can opt-out of VAT registration. VAT registration is optional if a company's sales exceed 375,000 SAR, but it exclusively produces zero-rated deliveries.
What Is The VAT Rate In Saudi Arabia?
The VAT rate in Saudi Arabia, often known as the standard rate, is presently set at 15% on most products and services. The new rate went into effect on July 1, 2020, replacing the old rate, which was levied at 5% previously. Unless otherwise noted, all products and services purchased, sold, or imported into Saudi Arabia are subject to VAT. The following are some examples of taxable products and services:
- Food and beverages - fast foods, dining out, basic groceries, etc
- Education services
- Private healthcare services
- Local transportation
- All types of insurance except life insurance
How To Register For VAT In Saudi Arabia?
Business owners must submit a VAT application form to GAZT to register for VAT. To register for VAT in Saudi Arabia, follow these four steps:
1. Obtain a Tax Identification Number (TIN)
To receive your TIN, submit the relevant information to the tax authorities (GAZT) online. The following information is provided:
- Physical address or place of business
- Email address
- Existing electronic identification number issued by the GAZT
- Commercial Registration number
- Value of annual supplies or annual expenses
- The effective date of registration
You will get a certificate of registration with your TIN (Tax Identification Number) and the registration date after the GAZT officials have approved your application.
2. Login to the GAZT website
To finish the VAT registration process, connect to your account via the GAZT site after you have your TIN.
Create a user account.
Next, choose Entities Registration from the Zakat and Tax Services card.
There will be a pop-up window. To proceed, read the terms and conditions and choose the checkbox to continue.
If you already have your TIN, choose the "already have TIN" checkbox on the next page. On this page, input your entity type, ID type, date of birther, TIN, ID number, CR number, email address, and cellphone number, as well as the verification code issued to your phone. After that, move on to the next stage.
3. Furnish business details and supporting documents
You must supply GAZT with information about your firm as well as supporting papers. This phase requires you to supply financial information about your company, such as:
- Taxpayer details - Enter your tax identification number (TIN), company registration number (CR), and business address. You must identify whether your company exports or imports products and services, as well as the IBAN and the date your company becomes VAT-eligible.
- Financial details - Declare your company's financial situation, as well as the actual value of taxable sales and costs from the previous year and estimated taxable sales and expenses for the next year. As proof, you must include supporting documents such as income statements, balance sheets, and custom reports.
- A financial representative for non-resident - Residents of Saudi Arabia can skip this stage. This area is for non-KSA residents. In Saudi Arabia, a non-resident must supply their chosen tax representative information. Each non-KSA company must supply the following information about its tax representatives: TIN (if applicable), ID number (such as a Saudi, Iqama, or GCC ID), contact number, and email address.
4. Fill in the declarations
After providing the business information, business owners must verify and confirm that all given information and documents are accurate.
Enter your name, ID number, and company title once you've double-checked the information.
Submit the form by clicking the submit button.
You will be given an application number as well as a downloadable acknowledgement letter.
Finally, your business's VAT registration has been completed! Congratulations on finishing the procedure.
What Is A Reverse Charge Mechanism Under VAT Rules In Saudi In 2022?
The beneficiaries of goods and services, rather than the sellers, are responsible for remitting VAT under the reverse charge system. Customers who purchase goods and services will pay VAT to GAZT directly.
So, when is it appropriate to use the reverse charge mechanism?
The Reverse Charge Mechanism may be used in a variety of situations, including:
- Taxable services (i.e., online services such as software) are imported into Saudi Arabia by a VAT-registered firm.
- A taxable individual obtains services from an international company.
- Trade between the Gulf Cooperation Council's (GCC) member states.
Importers of products (material assets) into the Kingdom of Saudi Arabia will be responsible for paying VAT and extra tariffs, and other expenses to pass customs.
What Is A Place Of Supply Under New VAT Rules In Saudi?
It's critical to identify the location of supply of the products and services, as well as the type of transportation involved when determining the tax rate for your transaction.
The place of supply simply refers to the site where products or services are consumed after they have been made, instead of the area where they are manufactured.
However, the laws governing where products and services are supplied vary depending on whether they are domestic or international.
By default, the site of provision for services is the supplier's domicile. However, various exceptions to the above-mentioned criteria apply. Special regulations apply to various categories under the unified VAT Agreement, such as:
- Supply of goods and passenger transportation
- Supply of services link to real estate
- Telecommunications services and electronic suppliers
- Restaurant, hotel, and catering services
- Cultural, artistic, sport, educational, and recreational services
Can You De-register VAT?
For the following reasons, you can deregister your VAT account:
- De-registration is required if your firm has discontinued operations.
- If the value of your taxable sales in the previous or forecast 12 months is between SAR 187,500 and SAR 375,000, you can de-register voluntarily.
If a non-resident has not made any taxable supply in Saudi Arabia in the previous 12 months, they must request to deregister.
What Is The Filing Frequency In Saudi Arabia?
In Saudi Arabia, a VAT Return is a document that shows your company's tax due for the reporting period.
Use the GAZT site to submit your VAT return online.
Depending on the yearly turnover of the business owner, the tax period might be monthly or quarterly.
Your annual taxable sales determine your VAT reporting period. For example,
- if your annual revenue is less than SAR 40 million, your reporting period is every quarter.
- If you earn more than SAR 40 million, you will be required to file once a month.
The deadline date for your VAT filing will be the final day of the next reporting month. You must make payment to settle your VAT due when you file your VAT return.
How To Pay VAT In Saudi Arabia?
Once you've filed your VAT Return to the General Authority of Zakat and Taxation, you'll need to pay (GAZT).
You can pay off your VAT debt by transferring payments using your bank's online services. The SADAD payment mechanism may be used to make the bank transfer.
If you are unable to pay VAT by the due date, you may request an extension.
You can contact GAZT and ask to have your payment deferred. Please provide the following details:
- Your total VAT liability
- Your reporting tax period
- The reason for an extension
Your request will be reviewed by GAZT authorities, who will either reject or allow your request to delay the VAT payment for 20 days.
What Are The Penalties For Late Payment?
You will have to pay a fine or penalty in Saudi Arabia if you forget to file your VAT Return or remit your tax payment on time. Here are some examples that will incur fines or penalties:
- filing an incorrect tax return - 50% of the value of the difference between the calculated tax and tax due
- failure to make payment by the expected due date - 5% of the value of the unpaid tax for each month
- failure to file the tax return by the expected due date - a penalty from a range of 5% to 25% of the value of tax due
- a non-registered person issuing tax invoice - SAR 100,000 or less
- an eligible taxable person who has not registered for VAT within the specified period - SAR 10,000
Frequently Asked Questions
1. What are zero-rated supplies?
Zero-rated supplies are taxable supplies with a VAT charged at 0%. The following supplies are deemed zero-rated supplies:
- Exports of goods or services outside the Council Territory backed by evidence of the export. Exports of services include where the customer is not a resident within the Council Territory and/or the consumption does not take place within the Territory
- Supply of goods or services within customs duty suspension zones
- International transport services of goods or passengers
- Medical equipment and medicines
- Investment in precious metals
2. What are exempt supplies from VAT?
When compared to zero-rated goods, exempt supplies are different. VAT is not charged on exempt items. However, it is charged on zero-rated supplies. You are not obligated to collect VAT in your sales transactions if you are a company owner selling exempt products and services. You cannot deduct or seek a refund for the input VAT paid to your suppliers at the same time. The following supplies are VAT exempted:
- The issue or transfer of money or security for the month
- Operations of current, deposit, and savings accounts
- Financial instruments
- Islamic finance products – Shari’ah compliant
- Interest on loans, credit or debt security
- Life insurance
- Residential real estate leases
3. What is the excise rate?
According to the General Authority of Zakat and Tax (GAZT) in Saudi Arabia, the Excise Tax Law has been in force since June 11, 2017.
The excise rate is a surcharge applied to some items that are harmful to consumers' health or the environment. These items are often more expensive than those in other product categories. And if customers want to consume it, they will have to pay for it.
The following are some examples of items in Saudi Arabia that have excise rates:
- sugar-sweetened beverages - 50%
- electronic devices for smoking - 100%
- liquids used in electronic devices - 100%
- energy drinks - 100%
4. Do you need to register for VAT?
VAT registration is not necessary for all enterprises operating in Saudi Arabia.
Only enterprises with taxable deliveries worth more than SAR 375,000 in the previous 12 months or the upcoming 12 months are required to register for Saudi VAT.
Those who are not residents of Saudi Arabia but provide products and services in the country must register for VAT, regardless of the threshold.
As a non-resident, you should hire a GAZT-approved tax agent in Saudi Arabia to assist you with your VAT payment obligations.
5. Can you register for VAT voluntarily?
If your annual taxable supplies fell between SAR 187,500 and SAR 375,000 in the previous 12 months or are expected to fall within the stipulated range in the next 12 months, you can register for VAT voluntarily.
You are responsible for collecting, documenting, and paying VAT to the GAZT in Saudi Arabia once you have voluntarily registered for VAT.
The Bottom Line
While history is actively being made in Saudi Arabia with the adoption of VAT, businesses may take advantage of the new business climate under VAT by preparing and planning properly. We hope this guide was useful for businesses to make fruitful tax decisions in Saudi Arabia.