Saudi Arabia: Q&As on VAT rate increase (COVID-19)

Saudi Arabia: Q&As on VAT rate increase (COVID-19)

The Ministry of Finance—in response to the effects of the coronavirus (COVID-19) pandemic—announced an increase to the value added tax (VAT) rate to 15% (from the current rate of 5%).

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The new VAT rate will be effective 1 July 2020. Read TaxNewsFlash

KPMG tax professionals have prepared the following “questions and answers” (Q&As) about transitional provisions, administration, and other issues related to the increased VAT rate.
 

Transitional provisions

  • Question: When is transitional guidance expected to be released?

Answer: Currently, there is no indication from the tax authority (GAZT) when the transitional provisions will be published. Given the short amount of time until the rate change, guidance will be needed to afford taxpayers enough time to prepare and tax professionals hope more information will become available before Eid.
 

  • Question:  Is the transitional guidance expected to be similar to the implementation rules (e.g., for long-term contracts with pre/post components)?

Answer: Yes. It is expected that GAZT will be keen to discourage planning aimed specifically at avoiding the rate increase.
 

  • Question: Is it appropriate (or even effective) to encourage early invoicing and payment?

Answer: It would be premature to accelerate invoicing or payment without transitional rules in place. If a supply is completed prior to 1 July, an invoice would need to be raised accordingly, as per the current requirements.
 

  • Question: How will transactions before and after 1 July be differentiated for rebates, adjustments, etc?

Answer: Accounting systems must be able to identify and report pre- and post-1 July transactions by date and/or the rate.
 

  • Question: If invoices are received after 1 July with the old rate, can the VAT be claimed on the return?

Answer: Provided the taxpayer holds all the required evidence and the input tax relates to a taxable supply, the tax would appear to be deductible.
 

  • Question: Will VAT have to be applied on the transactions between Saudi Arabia and the UAE?

Answer: The normal rules as outlined in the VAT regulations would apply when determining if a supply to the UAE can be zero-rated.
 

  • Question: How will the increase apply to services provided/received before 1 July but invoiced after this date?

Answer: This will be subject to the transitional provisions. However, performance may possibly create a time of supply and the liability for VAT.
 

  • Question: For sales returns after 1 July for items sold with a VAT rate of 5%, would the credit note have a VAT rate of 5% or 15% VAT?

Answer: This will be subject to the transitional provisions. However, it is expected that only the VAT charged on the original supply will be credited.
 

  • Question: How will VAT be accounted for continuous service contracts running into 1 July 2020 and beyond, but already billed and payment collected?

Answer: Tax professionals hope that the time of supply provisions in the Gulf Cooperation Council (GCC) agreement will be used to determine the rate of tax for the supply.
 

  • Question: How will the transitional changes apply in terms of open POs/contracts? Should addendums be signed to agreements with suppliers and customers?

Answer: Taxpayers may want to examine the contractual terms entered into with suppliers and customers to understand the effect of the tax/VAT clauses. For example, can a higher rate of VAT be charged on the supplies made or received?
 

  • Question: Will there be a rule for unearned income?

Answer: When VAT was implemented on 1 January 2018, unearned income balances at 31 December 2017 became subject to VAT at 5% once they were credited to income.
 

  • Question: What will happen to bookings made in June but when execution of service is in July? Would invoices need to be revised once the rate increased?

Answer: This will be subject to the transitional provisions. However, it is likely that performance would be required to create a time of supply and a liability for VAT.

 

Administration

  • Question: Is this likely to be a temporary increase?

Answer: It is unlikely given the substantial costs to the economy of the COVID-19 pandemic.
 

  • Question: Are differential rates expected to relieve the VAT costs on lower income groups?

Answer: It is common for jurisdictions with increased rates to introduce reduced rates on essential goods and services to offset the additional costs to residents.
 

  • Question: Will there be any grace period to adapt systems after July 2020 or will the implementation be delayed?

Answer: There has not been any indication that a grace period for implementation will be allowed or that implementation will be delayed.
 

  • Question: Is GAZT expected to be stricter in its approach to audits and disputes after the amnesty period has ended?

Answer: Tax professionals assume that GAZT will continue to enforce the VAT legislation as usual.
 

  • Question: Is the design of the VAT return expected to change?

Answer: The current return system automatically calculates the amount of VAT due based on the values input to the system. In order to cater for supplies made with both 5% and 15% VAT rates, it would be necessary to allow taxpayers to separate the sales and purchase values on which VAT is calculated on the return. Therefore, the GAZT submission portal is expected to be updated to accommodate the rate change.
 

  • Question: Will there be any impact on entities that only make zero-rated supplies in Saudi Arabia?

Answer: The impact should only be in terms of cash flow management (i.e., the time required to receive a refund from GAZT). It will be important to seek accelerated refunds to mitigate the cash flow effect.
 

Other taxes

  • Question: Will the increase in VAT impact excise tax?

Answer: The change will impact the automatic calculation of excise tax by the GAZT’s system. The parameters of the calculation will have to be amended in order to account for the correct amount of excise tax.
 

  • Question: Is an increase in other tax rates expected?

Answer: Tax professionals are unaware of any plans to alter other taxes in Saudi Arabia.

 

For more information, contact the head of KPMG’s Global Indirect Tax Services:

Lachlan Wolfers | +852 2685 7791| lachlan.wolfers@kpmg.com

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