ZATCA publishes a VAT guideline on contracting / construction sector

The Zakat Tax and Customs Authority (ZATCA) has recently published a Value Added Tax (VAT) guideline on the contracting/construction sector. Below follows some of the key clarifications from the guideline.  The official publication, released in Arabic, is available here for your reference.

  1. Definition of construction services has been provided. In general, construction services have been defined to mean services in relation to fixed assets and immovable engineering constructions such as roads, dams, bridges etc.
  2. The tax due date for construction services has also been linked to the date of issuance of completion certificate (whenever issued). This means that the tax due date shall be the earlier of the date of issuance of payment, the date of invoicing or the date of issuance of the completion certificate. 
  3. However, it has been clarified that the above shall not apply in relation to government contracts, where the tax shall be due as per the new specific rule for such contracts, introduced in November 2021, i.e. tax shall be due on the earlier of the date of issuing the payment order issued to the supplier by the government agency, or on the date of receiving the consideration. Please click here to refer to our previous client alert for more details. 
  4. VAT shall be applicable on the amount invoiced by the supplier, even if the customer withholds a portion of the amount as a retention amount.
  5. Specific conditions have been laid down to treat security deposits as out of the scope of VAT. Broadly, the conditions are around the supplier not being able to have use of the security deposit money. Having said that it is also clarified that VAT would become due if (and when) the amount did become available for use by the supplier.
  6. The VAT treatment on liquidated damages has also been clarified - where the amount is to be adjusted from the contract, then the supplier is required to issue a credit note and reduce the value of his supply. Where the supplier is required to pay the damages to the customer, then then such damages will not be treated as an adjustment to the value of the contract and no credit note is required to be issued by the supplier.
Deloitte’s view

The guideline provides the clarity on ZATCA’s views around some of the contentious issues in the construction sector, especially around security deposits and liquidated damages.

The area of liquidated damages has always been a difficult one; we would suggest that both parties in such a situation are aligned around the VAT treatment that is to be accorded to such payments to avoid any misinterpretation – both on the seller or buyer side, and to retain relevant documentation to evidence the VAT treatment.

We are in constant communication with the ZATCA and will keep you appraised of further developments.

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