Update in VAT Regulations in KSA
The VAT rate in KSA has been increased from 5% to 15% by the government due to which companies need to adjust and modify their accounts, invoicing, and financial transactions recording methods accordingly. This VAT rate increase will require businesses to act swiftly to ensure that their systems are ready to charge 15%. Needless to say, it will have a significant impact on taxpayers, consumers, and the economic sectors of KSA. Aviaan Accounting offers specialized VAT services in KSA with a professional team of accountants who are well aware of the VAT changes and their implications on different businesses.
Impact of VAT on taxpayers in KSA
Taxpayers in Saudi Arabia will have to immediately act to adjust their systems to be able to issue invoices and charge VAT at the new rate.
Short-term VAT Impact: The update in VAT rate would increase cash flow costs and operating costs, particularly for those who are unable to fully recover the VAT they pay on their expenditure.
Long-term VAT Impact: In the long-term, businesses may need to reevaluate and refurbish their structure, contracts, and transaction flow to mitigate the impact of the rate increase.
Impact of VAT on Consumers in KSA
It is most likely that the KSA economy will experience price inflation as a result of the VAT rate increase as well as a reduction of spending on luxury items. All companies undertaking exempt activities and unregistered businesses will also feel the impact of the VAT rate increase on their profits. The VAT increase usually causes a short term rise in spending before the increase and a short term decrease after the implementation
Impact of VAT on Business visitors in KSA
The higher VAT rate augment the cost for foreign businesses and individuals procuring goods and services in the country. Since foreign visitors are not registered for VAT in KSA, they cannot claim back the VAT, effectively increasing the price by 15%.
Impact of VAT on Tourism Sector in KSA
This could have a negative impact on the tourism and event industry in the kingdom. Saudi may be less attractive as a holiday destination or for luxury shopping, especially since neighboring GCC countries such as the UAE and Bahrain apply a lower rate.
Impact of VAT on Cross-border Businesses in KSA
Services provided by Saudi-based companies to the companies residing outside the kingdom are in principle subject to zero VAT. However, exceptions apply and the tax authority looks closely at taxpayers applying the zero rate of VAT. In case the zero rate does not apply to services, the non-resident company cannot get a refund for the VAT incurred. For multinational companies that operate in Saudi, this could increase the cost significantly. These companies may need to change their business workflow mechanism to minimize the impact of the rate increase.
Impact of VAT on Real estate Sector in KSA
KSA government exempts certain real estate transactions from VAT as of October 4, 2020. The additional exemptions as would an introduction of a reduced rate or more zero-rating would result in a more complex VAT regime that is costlier to administer, both from a tax authority and business perspective.
VAT service in KSA offered by Aviaan Accounting
Aviaan accounting offers VAT services to facilitate companies in all VAT processing matters. As a result of the rate increase, the amount of VAT that is managed by the taxpayer on behalf of the government increases significantly on both the input cost and output revenue side.
Getting it wrong can have significant financial impacts. The penalty for under-accounting VAT is 50% of the underpaid amount. With a VAT rate of 15%, this means a potential financial impact of 22.5% of the fee received by the taxpayer.
VAT Exempted Supplies in KSA
Given below are the supplies which are VAT exempted in KSA, and therefore deemed as not eligible for reclaims of input VAT reclaims:
- The issue or transfer of money or security for a month
- Credit services
- Operation of current, deposit, and savings accounts
- Financial instruments
- Islamic finance products – Sariah compliant
- Interest on loans, credit or debit security
- Life insurance services
- Residential real estate leases services
Zero-rated VAT supplies in KSA
Certain service and goods are zero-rated by the KSA tax authority:
- Exports of goods or services outside the Council Territory
- Supplies within customs duty suspension zones
- Exports of services
- International transport services of goods or passengers
- Medical equipment and medicines
- Investment in precious metals
How the VAT mechanism works in KSA
A registered business in the KSA that procures raw materials for manufacturing a product will pay a VAT on top of the selling price. The seller will collect this VAT and will account for it later to the government.
- The tax paid to the seller for the sale of raw materials is called output VAT.
- Then the registered business will sell this manufactured product to a consumer, who’ll pay an additional VAT on top of the finished item’s selling price.
- The tax paid by the consumer to the registered business for the supply of the product is called input VAT.
VAT registration in KSA
Registration for non-residents of KSA: Non-residents of KSA making taxable supplies inside the country are required to register and file VAT returns. This can be done by appointing professional VAT service providing firm in KSA. The tax agent submits VAT returns and makes payments on behalf of the non-resident taxpayer.
Group registration: Under KSA VAT, two or more legal persons can register for VAT as a group using GAZT’s electronic application form. To be eligible to register as a group:
- At least 50% ownership or controlling power must be in the hand of same individual or individuals
- Members of the group should conduct an economic activity
- Group members should be legal residents of KSA
Fulfil the threshold conditions for VAT registration