VAT increase approved by Parliament 

What to expect in the upcoming weeks?

• Amendment to the law – Whilst there are no updates or clarifications released by the National Bureau for Revenue (NBR) regarding the matter, we expect that the VAT rate increase will be passed as an amendment to the Decree Law no. 48 of 2018.
• Effective date – Although it is not official yet, the initial draft that has been reviewed by the Parliament’s Financial and Economic Affairs Committee prior to the vote included a clause specifying that the increased rate will apply on supplies and imports made after the effective date of the new rate which is specified as 1 January 2022.
• Transitional provisions – Official guidance in relation to transitional provisions has yet to be released. However, an earlier draft indicated that the 5% rate could remain applicable on supplies made after the effective date provided these are executed under a contract entered into before the effective rate change date. This would be until the earlier of either - the expiry, amendment or renewal of the contract; or one year after the effective date. It is expected that the Chief Executive of the NBR will issue a decision to specify procedures for applying the transitional provisions.       
• Other amendments – The initial draft also included proposed changes to two definitions in the Decree Law namely the definition of ‘Minister’ and ‘Bureau’.

How could this change impact your business?

Lessons learned from the recent VAT rate increase in the Kingdom of Saudi Arabia (KSA) have shown that the impact and implications will be different across industries. Whilst the tax is ultimately borne by the final consumer, it will likely also represent an increase in VAT cost to businesses that are engaged in providing exempt supplies.

Registered businesses will need to ensure that their systems are ready to cater to multiple rates and consider any required documentation changes before the effective date. In addition, it is recommended that existing contracts are reviewed to ensure proper segregation between supplies that are taxable at 5% and 10% and to assess the impact of the final transitional provisions once released. While the segregation may seem straightforward, catering to such changes on IT systems may represent a significant challenge to some businesses.

Further, given that imports subject to VAT paid at Customs will be obliged to start paying the increased rate of 10% from 1 January 2022, businesses may need to consider cashflow impacts as such VAT will be collected upon clearance of goods through customs, but only recovered as input VAT once the VAT return is filed.

Based on our experience in KSA, a VAT rate increase has resulted in a higher level of scrutiny from the tax authority given the importance of VAT as a source of government revenue. We expect an increase in NBR reviews and audits, so businesses will need to ensure that they fully comply with the provisions of the amended Decree Law to avoid incurring penalties.

Next steps

We anticipate that the Shura council will shortly approve the amendments to implement an increase to the VAT rate effective 1 January 2022. Further, we expect that guidance on the transitional rules will be published by the NBR in the near future. With less than four weeks to go, we recommend that taxpayers look into the potential impact of the increased VAT rate on their various business functions to ensure readiness, especially considering the short timeframe available and the resulting increase in the penalties that will arise as a result of the increase in VAT rate from 5% to 10%.