The VAT rate will be increased to 15% (from the current rate of 5%) effective 1 July 2020.

The tripling of the VAT rate is intended to address the fiscal imbalance caused by a decrease in consumer and commercial spending, the loss of oil and tax revenues, and the cost of healthcare initiatives put into place in response to the pandemic.

KPMG observation

It is anticipated that the VAT rate increase could directly affect consumer spending, both before and after the rate change—with increased spending expected before the higher rate of VAT takes effect. In particular, there are expectations of increased sales in certain sectors (such as automotive, retail, electrical, and real estate) before the rate increase on 1 July 2020—much like the trend experienced before the VAT measures were effective at the end of 2017.

There also can be implications for businesses that supply directly to the final consumer. One consideration is how to remain competitive and whether to absorb part or all the VAT increase so that the retail prices of goods and services are affected as little as possible.

Among the issues that will require further consideration and action possibly include:

• Supplies that span the effective date of the increase (such as rental agreements, insurance contracts, cleaning contracts, and subscription services)
• The time of supply (continuous supplies versus one-off supplies)
• Advanced payments received before the rate increase
• Goods returned after the rate increase
• Adjustments to VAT clauses in existing contracts
• Pricing (absorbing the VAT increase to support market competitiveness)
• Annual price lists adjustments
• Rebate and discounts
• Purchase of immovable property
• Changes to accounting systems, point of sale and digital platforms to include the new tax rate
• Changes to tax invoices, debit and credit notes
• Change of use of capital assets
• Splitting the input VAT apportionment calculation for businesses that make both taxable and exempt supplies

Businesses in the financial and real estate sectors—those in which significant proportions of the goods and services are exempt from VAT—may face a significant increase in costs because they are not able to claim input VAT incurred that relates to exempt activities. This increase will affect profitability and, eventually, could have a cascading effect on customers.

Government bodies, public schools, and hospitals are prohibited from claiming any VAT on their expenses because of their activities, and thus they will be at a disadvantage with the VAT rate increase. Also, foreign businesses that incur VAT will need to consider filing claims for refund; the deadline for submission of the refund claim by foreign businesses is 30 June for VAT incurred in the previous calendar year.

Along with the rate change comes the increased risk if taxpayers make mistakes in their VAT accounting. Therefore, taxpayers need to assess the readiness of the business to manage VAT reporting in an accurate and timely manner. The VAT penalty regime could have adverse financial impact that results from accounting errors.

Transitional provisions

Taxpayers need to review their existing contracts that provide for ongoing or periodic supplies of goods or services. For example, for continuous supplies (services, construction or installation of complex equipment), it could be prudent to agree on an intermediary service acceptance and invoicing protocol to avoid the entire supply being taxed at the higher rate especially in situations when customers are unable to recover input VAT in full. In this respect, the businesses need to consider what relief may be provided in any transitional rules (expected to be issued) and take appropriate steps.

Implications for the GCC

The impact on the Gulf Cooperation Council (GCC) agreement and the future of VAT in the region is unknown. Under the GCC agreement, the VAT rate is stipulated by Article 25 and is not determined by local law or regulations. As such, a rate increase is to be agreed upon by the GCC member states and must be announced at least six months before implementation so that business and consumers can plan. The VAT increase in Saudi Arabia is only six weeks away.

There will be questions regarding the enforcement of the GCC agreement as a common VAT framework, such as: Will the remaining GCC countries also increase their VAT rates to match Saudi Arabia? If the rates across the GCC are not aligned, consumption and spending in the Kingdom is likely to shift to those GCC states without VAT or with lower VAT rates.

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

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