19 July 2018
VAT was introduced on 1 January 2018 and as would be expected, a number of issues are rising for both tax payers and the Saudi zakat and tax authority, the General Authority for Zakat and Tax (GAZT). Some of the most relevant points for international businesses are summarised below.
It had been expected that special rules would be applied to transactions between member states of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). However, to date, only Saudi Arabia and the UAE have implemented VAT and in addition, the electronic system for the exchange of information between member states has not been set up. As a result, Saudi Arabia has confirmed that until further notice, no distinction will be made between supplies of goods or services to GCC customers and supplies to non-GCC customers. This had always been expected to be the case for supplies of goods but GAZT has recently confirmed that it will also apply the same approach to services.
The VAT law contains a zero-rating for services supplied to foreign customers (strictly, the law says, supplies to non-GCC residents but as per the item above, no distinction is made between GCC and non-GCC customers). On first reading. this would appear to be a useful relief for international services; however, the law is drafted in a very restrictive way with a number of conditions to be met. GAZT is interpreting the conditions very strictly and as a result, services supplied from Saudi Arabian businesses to customers outside the country will be subject to VAT in many cases. This is causing disputes between Saudi businesses and their foreign customers, who had expected to receive services VAT free.
International branch to head office supplies
The VAT law states that there is no VAT on supplies that an entity ‘makes to itself’. This means that branch to branch transactions or head office to branch transactions are not supplies within the scope of VAT. This is straightforward for domestic transactions but there has been some question as to whether cross-border branch to head office transactions might be treated differently. We are awaiting confirmation from GAZT on this point. If GAZT confirms there is no supply between branches and their overseas head offices, there will be a question as to whether the branch will be entitled to register for VAT and recover input tax in Saudi Arabia. Further clarification from GAZT on this point may also be required.
Please contact a member of our International Tax Team or your local BDO advisor with questions about VAT updates and its impact.