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. 

Next steps

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.