GCC VAT: recent developments in Saudi Arabia

Businesses should continue to be vigilant even as they grow more comfortable with the VAT rules, specifically as we see more contentious tax matters arising as the regime progresses.

Recent VAT developments in the Kingdom of Saudi Arabia (KSA) include the launch of a public consultation on draft e-invoicing regulations; a new scheme for individuals viewed as undertaking business activities relating to real estate; a new tax circular providing more detailed guidance on the treatment of real estate transactions as part of a transfer of a going concern; and a warmly welcomed extension to the Covid-19 tax amnesty. The KSA tax authority, GAZT, has also issued further guidance on the increase in VAT from 5% to 15% with effect from 1 July 2020.

Public consultation on draft e-invoicing regulations

GAZT has released a draft regulation (in Arabic only) setting out proposed new rules relating to the electronic issuance and storage of tax invoices for VAT purposes.

The new e-invoicing regulations are aimed at reducing administrative burdens on taxpayers and raising the level of tax compliance generally, together with limiting and combating any hidden transaction fraud in the region.

Responses to a consultation on the draft must be submitted by 17 October 2020.

Tax amnesty extended

The tax amnesty introduced by GAZT in response to the Covid-19 pandemic has been extended until 30 September 2020, including for VAT.

The amnesty arrangement allows any taxpayer to submit a late VAT registration or voluntary disclosure of errors made and to work collaboratively with GAZT to bring all VAT compliance up to date, correctly and accurately, without the imposition of fixed and tax-geared penalties.

Businesses which have identified any outstanding VAT, or other tax, liabilities or errors should take advantage of this rare tax amnesty and its extension to 30 September, after which the full penalty regime will be re-imposed.

The ability to self-account for import VAT on the reverse charge basis on periodic VAT returns rather than having to pay import VAT up front at the point of import has also been extended until 30 September 2020.

Tax circular on real estate transferred as a going concern

In September, GAZT issued a new tax circular on the transfer of real estate (9-page / 1.24MB PDF), supplementing its previous transfer of business (TOB) guidelines (35-page / 366KB PDF).

The new circular provides much more detail than section 6.2 of the previous TOB guide, including a number of practical examples of when real estate may and may not be viewed as falling within the remit of the TOB rules when transferred.

This is important, as the application of TOB rules to a transfer of property could have significantly different results for a taxpayer than if the property were to fall back to its standard VAT treatment – for example, liable at 15% for all supplies of commercial properties and sales of residential property; with leasing and licensing of residential property exempt from VAT with no VAT recovery on associated costs.

Some important insights on GAZT's interpretation and intended application of the law included in the new circular are:

• the transfer of a leased commercial property will qualify for TOB rules even where the current lease ends and a new lease is entered into as part of the transfer, provided the tenant remains the same and the new lease is put in place immediately on similar terms;
• a fully vacant property will not qualify for TOB rules, even where it is being actively marketed for rent at the time of its transfer;
• a partially vacant property will qualify for TOB rules as long as a minimum of 50% of the property is occupied at the time of transfer and the remainder is actively being marketed for lease or is being prepared to be actively marketed for lease;
• the lease back portion of a sale and lease back arrangement is unlikely to qualify for TOB rules, unless the original use of the property was for similar leasing activities;
• the transfer of a residential property subject to an exempt residential lease will not qualify for TOB rules, and will remain exempt from VAT;
• whether mixed-use properties qualify for TOB rules should be assessed based on the status of each individual part of the property and, if appropriate, TOB should only be applied to the appropriate part of the property on the basis that it can be separately identified;
• mixed-use properties which predominantly qualify under the TOB rules may apply TOB to the entire property transfer provided that the non-qualifying piece - for example, residential – is ancillary and accounts for 10% or less of the market value of the property.

These indications of what portion of a property must meet the TOB criteria are new insights for businesses. They should be welcomed in order to mitigate risk and give businesses a clearer understanding of how the GAZT will audit the TOB provisions in the context of a transfer of real estate.

There will no doubt be alternative practical scenarios not specifically covered by this new circular. Businesses should therefore be cautious when applying the TOB rules and should seek to apply the law to their specific scenario on a case by case basis.

Further guidance on VAT rate increase

GAZT has published a second, much more detailed, guide (33-page / 4MB PDF) to the change in standard VAT rate to 15%, following the guidance on the transitional provisions for the VAT rate increase published at the time of the announcement.

The new guidance covers the transitional rules in more detail including the exact changes to the KSA Executive VAT Regulations in order to give effect to the change. It also provides businesses with sector specific support such as with real estate; tickets for travel or live entertainment; contracts with government authorities; insurance; and imports. The guide also deals with the administrative aspects of the VAT rate change including tax invoices; credit notes; correcting errors; and the misuse of the change of rate provisions by businesses.

GAZT has also progressively updated all of its other information guides to reflect the increase to the standard rate of VAT.

New VAT scheme for individual real estate transactions

The KSA Executive VAT Regulations have been updated to include a special mechanism for the supply of real estate by individuals. GAZT has also issued a detailed guide relating to this scheme, although it is currently only available in Arabic.

Generally, the sale of a principal private residential property by the owner or their spouse is outside the scope of KSA VAT as a private non-business transaction. However, there are many instances where private individuals may supply real estate in a business capacity and, as such, would be required to register for and account for VAT, subject to the registration thresholds.

The new scheme and detailed guidance set out transactions in real estate by private individuals which are within the scope of VAT and which must therefore be reported for compliance purposes. They include the sale or lease of office space, warehouses, shops and car parking spaces.

The scheme includes a simplified compliance mechanism, reducing the administrative burden on private individuals while encouraging compliance with the KSA’s VAT law.

Other developments

GAZT has updated its tax ruling request guide (24-page / 1.5MB PDF), which includes the ability to file VAT rulings in order to seek clarity on the VAT treatment or deduction rights associated with a particular transaction or project. Rulings may be requested where there is apparent ambiguity under the KSA VAT legislation and no GAZT guidance issued to date has mitigated that ambiguity. Generally, it is expected that the supplier will request rulings in the VAT context. A detailed ruling request form is included within the guide, including who may submit it to GAZT via the tax portal.

GAZT has published a guide relating to the requirement to register commercial and government contract information with the authorities within three months of the signing of and 30 days of the ceasing of contracts in the KSA. While this is not specifically a requirement imposed by the KSA VAT legislation - it is instead imposed by the KSA income tax law - the administration of this regulatory compliance in relation to contracts has been moved online to the tax portal and will possibly be linked more closely with VAT transactions and audits in future.