May 21, 2020 Saudi Arabia announces transitional rules for VAT rate increase Executive summary Following the announcement on 11 May 2020 that Saudi Arabia would increase the standard rate of value-added tax (VAT) from 5% to 15%, the General Authority for Zakat and Tax (GAZT) has announced transitional rules governing supplies taking place around, or spanning, the rate change. Detailed discussion The measures announced relate specifically to the rate applicable to supplies made under contracts signed before 11 May 2020, between select parties, as well as in relation to invoices issued before that date. Contracts Supplies made under contracts signed before 11 May 2020, by registered taxpayers to government departments or tax-registered recipients entitled to full recovery of VAT charged on the supply, will continue to be subject to 5% VAT until the earlier of:
For contracts signed on or after 11 May 2020, if the supply is made or completed before 30 June 2020, it will be subject to 5% VAT. Otherwise, if the supply is made from 1 July 2020 onwards, the increased standard rate of 15% will apply. Supplies of a continuous nature, contracted before 11 May 2020, will continue to be subject to 5% VAT, to the extent they are delivered up to 30 June 2021. Where such supplies are agreed on or after 11 May 2020, 5% VAT will apply to the extent the services are delivered up to 30 June 2020, and 15% thereafter. Invoicing Special rules also apply to invoices issued before 11 May 2020, although there is no requirement for the recipient of the supply to be a government department or a registered recipient entitled to full credit. Accordingly, these special rules will also cover supplies to individuals and entities that are not entitled to a full credit. The transitional rules in relation to invoices specify:
Supplies of a continuous nature, invoiced before 11 May 2020, will continue to be subject to 5% VAT, to the extent they are delivered up to 30 June 2021. Where such supplies are invoiced on or after 11 May 2020, 5% VAT will apply to the extent the services are delivered up to 30 June 2020, and 15% thereafter. These rules apply to invoicing only, and do not cover pre-payments. Consequently, unless a pre-payment made before 11 May 2020 is accompanied by a corresponding invoice issued from the supplier dated 10 May 2020 or earlier, the normal VAT rules on time of supply will apply. Implications Businesses will need to examine contracts and invoices in the context of the transitional rules, to identify potential risks and exposures. The restrictions for eligible contractual recipients of supplies – e.g., government departments and tax-registered recipients able to fully recover the VAT on the supply – means that additional diligence will be required by suppliers, and dialogue with their customers, to determine status, will be critical. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young and Co (Certified Public Accountants), Riyadh
Ernst & Young and Co (Certified Public Accountants), Jeddah
Ernst & Young and Co (Certified Public Accountants), Al Khobar
EY Consulting LLC, Dubai
Ernst & Young LLP (United States), Middle East Tax Desk, New York
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