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Executive summary

On 28 August 2024, Saudi Arabia's Zakat, Tax and Customs Authority (ZATCA) released a public consultation document on the Istitlaa platform (i.e., a public consultation platform), proposing certain amendments (Draft Amendments) to the Value Added Tax (VAT) Implementing Regulations.

The Draft Amendments cover changes relating to more than 25 Articles of the VAT Implementing Regulations and provide further clarifications on the respective articles.

Detailed discussion

Background

The ZATCA has issued several amendments in recent years, seeking to develop Saudi Arabia's tax system by aiming to improve compliance and provide increased clarity for taxpayers. One of the key amendments would modify the VAT Implementing Regulations, which the ZATCA has put forward for public consultation.

The deadline for receiving recommendations and comments on the Draft Amendments is 17 September 2024.

Highlights of the Draft Amendments

VAT group provisions

To be part of a VAT group, each entity must conduct a taxable economic activity and be eligible for VAT registration on a standalone basis. This differs from the current provisions, which require only one member of the tax group to be eligible for VAT registration on a standalone basis while the rest of the members are only required to conduct an economic activity. Further, the proposed amendment also outlines that persons (i) licensed to operate in special zones with suspended customs status or (ii) eligible for refunds under Article (70) of the VAT Implementing Regulations, such as licensed real estate (RE) developers, cannot join a VAT group.

Services provisions

The ZATCA has introduced a detailed, though non-exhaustive, list of items that constitute services for VAT purposes, including: granting rights, providing facilities, undertaking to refrain from certain acts, agreeing to waive participation rights, transferring indivisible shares in goods, and allowing the use or transfer of intangible rights such as copyrights and trademarks.

Transfer of going concern (TOGC) provisions

The Draft Amendments introduce a requirement for both the supplier and the recipient to notify the ZATCA of the transfer of a going concern no later than the end of the month following the transaction, using a specified form that includes details such as names, addresses, tax identification numbers, the transfer date, and specifics of the transferred goods and services, along with a copy of the transfer agreement and any other documents the ZATCA requires. Further, under the proposed changes, the recipient in a TOGC transaction assumes the supplier's previous and future rights and obligations, which would have significant commercial implications for such transactions.

Amendments to Article 33: Supply of services to nonresidents

The provisions have been refined to stipulate that if a service confers a benefit upon a person residing in KSA, such a person must be "associated" with the contractual client. The practical application of this provision will depend on the ZATCA's interpretation of the term "associated."

Ineligible expenses

The ZATCA has added a category of expense not eligible for VAT recovery — "attending events." It remains to be clarified if this is linked to entertainment and cultural events — or all events, including, for instance, business conferences that would now be considered a legitimate expense for VAT recovery purposes.

Restricted motor vehicles

The meaning of "restricted motor vehicles" has been amended to remove from scope vehicles that carry more than 10 persons, emergency vehicles and yellow goods (i.e., construction vehicles).

VAT error time limits

The legislative wording has been revised to refer to "net due tax" rather than "overstated tax payable" in terms of error corrections and time limits.

Nominal supplies

The ZATCA has updated the language regarding the conditions related to input VAT deduction relating directly to the purchase, production or onward supply of the goods or services forming part of the potential nominal supply test. The question remains as to whether the same provision will apply where no VAT was incurred by the supplier of the goods or services for no consideration.

Amendments to Article 70

The proposed amendments to Article 70 clarify the refund process. It is not permissible to submit a refund request for a tax amount of less than 5,000 Saudi Riyals (SAR5,000). The Draft Amendments include the addition of paragraphs (15) to (20), which mention that the ZATCA has the right to review refund requests and can request additional documentation if needed, which should be submitted within 20 working days. Approved refunds are paid within 30 working days and may be offset against any tax, fines or amounts due to the ZATCA. The ZATCA can cancel the eligible person's registration in certain cases, including loss of eligibility to be registered and intentional, repeated, unlawful claims. The ZATCA has also proposed that claims cannot be amended once made.

Military supplies provisions

The Draft Amendments clarify the definition and requirements for qualified military goods, including the need for a certificate from the General Authority for Military Industries, where the criteria for qualified military goods are specified. It is mandated that such goods be locally manufactured and the zero rate can only be applied by the manufacturing entity itself. Additionally, suppliers are required to obtain certification from the General Authority for Military Industries to confirm compliance with all stipulated requirements and controls.

Electronically supplied services provisions

The Draft Amendments address the VAT liability in cases where services are supplied electronically through online interfaces or portals, particularly when acting as intermediaries for nonresident or non-KSA-VAT-registered suppliers, defining the circumstances under which the operator of the interface or portal is liable for paying the VAT.

Implications

Taxpayers should review the Draft Amendments and assess the potential supply chain, administrative and compliance implications to their businesses and monitor the final version of the Draft Amendments to the extent they are eventually approved and promulgated.