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Accounts & VAT
Established on 1 January 2018, VAT has quickly established itself as a central pillar of the Kingdom’s tax laws, delivering stable government revenue and a sophisticated system for businesses. VAT is applicable to most goods and services in Saudi Arabia as part of the Unified VAT Agreement of the Cooperation Council for the Arab States of the Gulf. It is important for businesses in KSA that deal in imports and exports to know how VAT works so that the business can run smoothly, comply and avoid penalties. Regardless if you are a new entrepreneur or large company that is also operating internationally, VAT on imports and exports is complex.
The good news is that with the proper information you can actually do your transaction more efficiently and compliantly. This guide takes you through key VAT aspects including the standard procedures and special exemptions, as well as the zero rating mechanism for exports and provides you with the means to handle VAT on imports and exports in KSA with ease. In addition, we will also discuss e-invoicing in Saudi Arabia, which is becoming an essential part of VAT compliance in the Kingdom. In addition to Riyadh, businesses in major cities such as Riyadh must also comply with e-invoicing in Riyadh for smooth tax reporting and regulatory compliance.
All goods entering the Kingdom are subject to VAT in Saudi Arabia whether or not they are subject to customs duties. According to Saudi VAT regulations, the tax is levied at 15% and is based on the CIF value of the goods, including freight and insurance costs. That means even if some goods are exempt from customs duty, they will be subject to VAT. Goods cannot be cleared unless the VAT is paid at the customs process.
Key Points:
1. Imported Goods: All imported goods are subject to VAT of 15% under Saudi VAT law. It is a tax applicable to every imported item, even if the goods are exempted from customs duties. Most imports will be taxed, but there are exceptions for certain specific goods under certain circumstances. Knowing which products are exempt is important to avoid paying taxes on your imports you don’t need to. In any case, VAT is payable at the time of importation and is calculated on the customs value, which includes the cost of insurance and freight.
2. VAT is applied separately on importation of goods from Supply of those goods in Saudi Arabia. If the goods are imported before customs clearance, they are not subject to VAT at the time of importation. But when the goods are cleared and sold within the Kingdom, VAT is applied on the supply. The two stage application of VAT ensures that businesses only pay the tax at the importation stage and again at the stage the goods are sold or supplied within KSA to ensure tax efficiency in both stages.
For instance, If a Saudi company imports goods from outside the GCC region, it will pay VAT on the CIF (cost, insurance and freight) value of the goods. This just means that the VAT is based on the entire value of the goods and includes the value of the insurance and transportation costs. Input VAT paid at importation can be reclaimed later, if the goods are used in taxable business activities. This input VAT can be set against the VAT the business collects on its own sales, thereby reducing the VAT burden.
VAT on imports is calculated in Saudi Arabia based on the customs value (CIF price, plus any applicable excise taxes, customs fees or other duties). Importers are required to fill in a Customs Declaration Form (Bayan) which should contain the tariff code, value in Saudi riyal (SAR), imports and exports in KSA, and the country of origin of the imported goods. It is corrected with Saudi Customs if there is an error in the declaration and VAT payment is made. Generally, overpayments of VAT are not refunded, but they can be claimed as input tax credits in future transactions.
1. Zero rating of certain goods: Zero rated goods include qualifying medical supplies and investment metals at their final destination. This means they are not liable to VAT on importation but are liable to VAT on sale in the country.
2. Goods such as diplomatic and military imports, and personal belongings of citizens or expatriates moving to Saudi Arabia are exempt from VAT and customs duties. It is these exemptions which reduce the tax burden on particular categories.
3. Personal Items of Travelers: Personal items up to SAR 3,000 that travelers bring into the Kingdom are exempt from VAT. This allows personal belongings to be smoothly brought into the country without further tax complications.
VAT is only applicable to the value added during the stay of imported goods temporarily in Saudi Arabia for processing or repair. This means that goods imported into KSA for temporary purposes and then re-exported are subject to VAT only on the additional value created in Saudi Arabia (i.e. processing or repairs). This allows businesses to not pay VAT on the full value of goods not being sold or consumed permanently in the Kingdom.
Goods that are stored in customs warehouses, duty free zones or under transit procedures are not subject to VAT until they are released into free circulation in Saudi Arabia. During the time these goods spend in these zones, businesses can store or process these goods without paying VAT. Goods are brought into the zone for storage or processing and VAT is due only when the goods leave the zone and are released into the Saudi market for sale or use, thereby facilitating smooth trade operations within these areas.
Saudi Arabia provides a choice for businesses that import goods on a frequent basis to pay VAT through their VAT returns rather than paying Customs at the time of import. The process requires the approval of the General Authority of Zakat and Tax (GAZT) and businesses must have fulfilled all VAT obligations during the past 12 months. This method gives companies the ability to simplify the VAT payment process, and therefore improve their cash flow management and reduce the administrative burden of paying VAT on each individual import transaction.
Import of services in Saudi Arabia is VATed differently compared with goods. Through the reverse charge mechanism, services received from non-resident suppliers are charged with VAT. In other words, when a business in KSA receives services from outside the GCC, such services are treated as if the business had provided the services to itself and the business is responsible for paying the VAT. This mechanism guarantees VAT compliance even when there is no formal customs process for services.
Example
For example, if an UAE based company offers online security services to a bank in KSA, the VAT responsibility in this case rests with the KSA bank even though the UAE company has a registered branch in the Kingdom. The reverse charge will apply, where the KSA bank must report the VAT on the services received from the UAE supplier, and VAT will be collected and accounted for in the KSA.
In general, services provided to a taxable person in the Kingdom of Saudi Arabia are deemed to be supplied in the Kingdom for VAT purposes. Nevertheless, certain services, such as services of leasing transportation or real estate services, are subject to special rules in accordance with the Unified VAT Agreement. These rules are designed to make sure that services are taxed according to where the service is supplied, which can be different depending on the nature of the service.
Example
For instance, if a KSA company hosts an event in Riyadh, E-invoicing in Riyadh and hires an international guest speaker, this is deemed to be the supply of the service within KSA for VAT purposes. And even if the speaker or service provider is established outside the Kingdom. It is the location of the service being performed in Saudi Arabia that is relevant for VAT compliance and not the country of origin of the service provider.
Under the reverse charge mechanism, the supplier of the service must report VAT as if it were the recipient of the service. In other words, the recipient has to account for output VAT and deduct the input VAT, provided the standard deduction conditions are fulfilled. In Box 9 of the VAT return, these transactions are reported, which allows businesses to adjust the VAT amount by deducting deductible input VAT and report the tax correctly.
Example
If a KSA bank uses the services of a UK law firm to provide legal services for SAR 100,000, then the bank must apply the reverse charge mechanism and report the amount in Box 9 of the VAT return. The VAT calculation will be adjusted by the bank to reflect the fact that a non-deductible VAT amount of 30% is applicable and the deductible portion is reported in line with Saudi VAT laws.
VAT is not applied through the reverse charge mechanism when a non-taxable KSA resident receives services from a non-resident supplier. Nevertheless, if the non taxable person receives services contributing to economic activities on a frequent basis and the service receipts exceed the mandatory registration threshold, he may be obliged to register for VAT.
Generally, VAT on exports of goods outside the GCC is on the zero rate, so that exporters can recover any input VAT on related costs. Although VAT is charged at 0%, the zero rate treatment allows exporters to reclaim VAT paid on goods and services used in the export process.
In order for a supply to constitute an export, it must involve:
1. The exporter must submit an export declaration to Saudi Customs, indicating the goods to be exported and the destination.
2. Export of goods outside the GCC territory: The goods have to physically leave the territory of GCC and complete the export process as well as fulfil the legal conditions for zero rating.
When supplies to other GCC member states are in the transitional phase of the VAT system, they may be treated as exports and zero rated if there is no VAT system in these countries when the supplies are made.
Example
In the case of Delivered at Place (DAP) terms, the goods are transported to a destination outside the GCC by the supplier. The goods will be exported to a non GCC country, and both parties agree on that. In this case, the transaction is export treatment and VAT is levied at the zero-rate as the goods are exported. The supplier benefits from zero rating and thus has a lower VAT burden on the transaction.
Direct and Indirect Exports
Direct Exports
When the supplier assumes responsibility for the export process and organizes the transportation of goods out of Saudi Arabia, direct exports occur. In such cases, if the appropriate export documentation is presented to Saudi Customs, the export will qualify for the zero rate of VAT.
Indirect Exports
In the indirect exports, the goods are transported by the non-resident customer. To be able to use the zero rate VAT, the supplier must export the goods and keep the required evidence of exportation to comply with export regulations.
However, exporters must keep a number of key documents to prove the export of goods, including
1. Export Documentation Issued by Customs
The export documentation issued by Saudi Customs must be retained by exporters to prove that goods have left the Kingdom. This documentation is proof of export for VAT purposes.
2. Commercial Documents Identifying the Customer and Delivery Address
Invoices and contracts are examples of commercial documents which must identify the customer and delivery address. This will record the export correctly and associate it to the buyer.
3. Transportation Documentation
The goods also have to leave the GCC territory and transportation documents, such as bills of lading or shipping receipts, must indicate this. This shows that the goods have been exported as demanded for VAT exemptions.
Even if goods that have cleared export are resold during international transport, within Saudi territorial waters, they are still considered as exports and are zero rated VAT.
Example
If a KSA refinery sells bitumen to an Italian customer, who in turn sells it to a Swiss trader after export clearance, both transactions are zero rated for VAT and the tax compliance is ensured.
Exports for VAT purposes do not include goods moved outside of Saudi Arabia without a sale, for example personal shipments or transfers of a company’s own goods. Since there is no actual supply of goods being involved in these transactions, these transactions are not eligible for zero rate VAT exemption.
Special Cases
1. Supplies Under Customs Suspension
If the supplier can prove that the goods remained in a customs suspension zone, such as a warehouse or duty free shop, during the supply process, then goods supplied in customs suspension zones are zero rated.
2. Re-exports of Imported Goods
The zero rate applies to goods imported temporarily for repair, refurbishment or processing and re-exported. The VAT conditions for applying the zero rate for re-exports and standard exports are identical.
Zero rating of services export to non GCC residents or to GCC recipients without a VAT system is possible if certain conditions are satisfied. These provisions are transitional and are applicable until all GCC states fully implement VAT systems and establish an Electronic Services System for intra GCC VAT transactions.
In Saudi Arabia, VAT is charged when the “place of supply” for the service is considered to be in the country. Services provided by a KSA resident are by default subject to VAT, except for some exceptions.
1. Supplies to Taxable Customers
The place of supply is the customer’s country when services are supplied to a taxable customer (VAT registered individual or business) in another GCC state. This is only applicable if the customer’s country has implemented VAT.
2. Exceptions for Special Cases
Even if the services are provided to non-residents, some services are still subject to VAT in Saudi Arabia. These include services related to real estate located within KSA or any activity involving property within the Kingdom irrespective of the recipient’s location.
If the service benefits the customer outside GCC and fulfills the criteria under the Implementing Regulations, the services provided to customers outside the GCC can be zero rated.
1. Services with No Tangible Connection to KSA
If the service does not have a tangible connection to Saudi Arabia, services such as intellectual property rights or consultancy which benefit the non-resident customer outside KSA can be zero rated.
2. Services Directly Benefiting KSA
If a service has something within Saudi Arabia benefiting from it, like a repair on goods in KSA, VAT at the standard rate of 15% is charged as it is deemed a domestic service.
In Saudi Arabia, a VAT registered person can claim input VAT on goods and services used in his economic activity, and this is the VAT efficiency and compliance with VAT regulations.
1. General Provisions
VAT charged by KSA suppliers, self-accounted VAT under the reverse charge mechanism or import VAT can be deducted as input VAT. Nevertheless, it cannot be deducted on exempt activities or non-business related expenses, including entertainment or cultural services.
2. Proportional Deduction
A business that makes both taxable and exempt supplies can deduct only the VAT attributable to taxable supplies. Proportionate deduction of shared expenses for taxable and exempt activities must be made.
3. VAT on Imports
According to Saudi customs law, only the importer is entitled to deduct VAT on imported goods. However, if the goods are imported by another party, the VAT deduction is not available.
4. Reverse Charge Mechanism
If the goods or services are used for taxable economic activities, VAT paid under the reverse charge mechanism is deductible. It helps businesses to offset VAT costs on cross-border transactions.
5. Zero-rated Exports
Input VAT incurred on goods or services used to make zero rated exports is deductible and this often gives rise to refund claims for excess input VAT. This allows businesses to reclaim VAT paid on export related costs.
To avoid tax inefficiency, it is important for businesses in Saudi Arabia to understand VAT on imports and exports in KSA. Managing VAT is important whether you are importing or exporting and whether you are deducting, zero rating or using the reverse charge mechanism can help streamline your operations and cut costs. VAT in the Kingdom allows businesses to operate while maintaining profitability through a number of ways, including from input VAT deductions on goods and services and handling VAT for zero rated exports.
In a world where the VAT system in Saudi Arabia is still evolving, it is important for businesses to be aware and pro-active about VAT obligations. The trick is to have the knowledge to know how to deal with VAT on imports and exports as well as how to claim input VAT deductions, which is what these companies should fill them up with. Keeping a pencil and paper handy and being aware of the latest situation of regulations and proper document will save you from pitfalls and make your transactions excellently smooth in domestic as well as international trade.
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