GCC Indirect Tax Weekly Digest
May 12, 2020
KSA VAT rate to increase to 15% from 1 July 2020
The Government of the Kingdom of Saudi Arabia (KSA) has announced that the Value Added Tax (VAT) rate will increase to 15% from the current 5%, effective 1 July 2020.
The increase comes as part of additional measures taken by the KSA government in response to the economic impact of the COVID-19 crisis, due to the decline in government revenue resulting from lower oil prices, reduced economic activity and increased healthcare expenditure.
How could this impact your business?
In addition to the increased VAT rate, businesses in KSA should expect an increased level of scrutiny from the General Authority of Zakat and Tax (GAZT), as VAT becomes a more important source of revenue.
Businesses whose sales are partially or fully VAT exempt, will experience an increase in costs as a direct effect of the rate increase. Nevertheless, the rate increase will impact all industry sectors in KSA and not primarily the Financial Services, Insurance and Real Estate sectors; of course, consumers will finally bear the brunt of the increases and it remains to be seen if some relieving measures, such as a lower rate of VAT, may still continue to apply to such items as food and utilities, for example to mitigate the impact.
Over the next few weeks, taxpayers will want to review existing contracts that provide for continuous or periodic supplies of goods/services, and consider the required documentation changes that should be effected before 1 July 2020. For example, businesses will need to be clear on the correct rate of VAT to charge on contracts and supplies that span both June and July 2020. As our experience of the 2018 introduction of VAT shows, the transitional rules can be difficult to implement.
The rate increase will also impact cash-flow for businesses due to the timing difference between the payment and recovery of VAT, and cash flow planning will take on renewed significance. Similarly businesses should review their internal systems and processes to reflect the increased VAT rate.
We expect additional guidance on the transitional rules to be released by the Authorities in the coming weeks, and in the meantime we recommend taxpayers start to measure the impact of the increased VAT rate on their cash flow, operations and supply chain. We would be pleased to discuss with you what steps you would need to take.
We remind taxpayers that as per our VAT Incentives alert last month, the window to make voluntary disclosures without incurring penalties remains open until 30 June 2020, the rate increase having heightened the importance for businesses to ensure they are fully compliant from a VAT perspective.
COVID-19 Indirect Tax management
Cash generation: foreign business VAT refund claims
Partner, Indirect Tax
GCC Indirect Tax Leader
The deadlines for submitting 2019 foreign business Value Added Tax (VAT) recovery claims in the United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA) are fast approaching. These schemes allow corporate entities with no establishment or VAT registration in the respective country, but which incurred VAT costs there in 2019, to submit refund claims to the UAE Federal Tax Authority (FTA) and the KSA General Authority of Zakat and Tax (GAZT) respectively.
In a time where cash flow is increasingly important, recovering additional VAT amounts from tax authorities is a key way of improving liquidity and, after the deadlines pass, this opportunity will be permanently lost. These schemes apply on a per-entity basis, meaning that a corporate group may be eligible to make a claim for one entity in a jurisdiction, even if it has another entity established or registered for VAT there.
Whilst business will be required to follow a verification process in order for refunds to be paid out, pursuing this opportunity can result in a much-needed boost and reduce historic costs. Claims will be accepted in the UAE up until 31 August 2020, but Deloitte strongly recommends beginning work on this now, due to the detailed documentation and evidence required to be submitted with any claim. In particular, businesses will need to source physical invoice copies for submission of the claim, which can be time-consuming.
Whilst the KSA scheme has not been officially opened by the GAZT, the KSA VAT legislation nevertheless provides a right for businesses to reclaim VAT incurred in the KSA in such circumstances. Whilst the process is less clear cut, we’re currently supporting clients to submit protective claims in the KSA, irrespective of the fact the scheme hasn’t been officially launched, such that your business’s right to the claim is protected once the scheme is introduced. Assuming the GAZT does not retrospectively extend deadlines from prior years, KSA claims would need to be submitted by 30 June 2020 as per the deadline in the KSA legislation, in order to be valid.
In the past, many businesses felt the administration involved in submitting this type of claim would outweigh the benefit of the refund obtained, but in these uncertain times every little helps! We’re currently supporting our clients to make the process as easy as possible, by assisting to validate the eligibility of businesses to claim under the schemes, as well as reviewing the accuracy, completeness and acceptability of claims and assisting with submission. If you think these schemes might apply to you and would like to discuss further, please reach out to any member of your usual Deloitte team or the contacts listed below.
Focus on: the Professional Services industry
Senior Manager, Indirect
Professional Services Industry SME
Professional Services may not be the industry that immediately springs to mind as being affected by COVID-19, however, it has in the last few weeks faced its own challenges with social distancing measures meaning many offices have closed their doors to employees. Businesses are adapting to new working arrangements with remote working becoming the norm. Whilst this has had some positive psychological effects for employees in decreasing commuting time and increasing family time, for many the matter of being in the same space day in day out has meant that employees are trying to create a dedicated work space at home in an attempt to obtain work/life balance.
With people setting up home offices, businesses may be considering reimbursing their employees for the additional costs that would normally be borne by the business, such as office equipment, upgrading of internet connections to support efficient working from home, electricity/water etc. Typically, input VAT on costs incurred for business purposes can be recovered in full, subject to the normal recovery restrictions set out in the Executive Regulations, but what can be recovered when reimbursing employees when invoices are not in the business’ name?
Whilst there is no hard and fast rule as to what can be recovered, as this will vary on case by case basis, businesses should carefully consider what, if any, input VAT they recover on these expenses. Challenges may come when the costs are in the employee’s name and in relation to the validity of the invoice (i.e. invoices not in the business’ name or may not meet the requirements of a valid tax invoice). Additionally, when there could be deemed to be an element of personal use, it may be difficult to determine what actual business use is for items such as the internet where it will be used for both business/non-business purposes and again this could also be challenged.
Where a business does choose to recover input VAT it should ensure it retains the proper supporting documents. It may also consider creating a company policy to support input VAT recovery. These measures will protect the business from over recovering input VAT and avoid any unwanted penalties and costs in these difficult times where cash flow is key.
This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.