Saudi Arabia VAT laws get supply, real estate updates

VAT was introduced in KSA on 1 January 2018. The first amendment to KSA's VAT legislation occurred in July 2019.

New guideline for supply of services to non-KSA residents

Among the July 2019 changes to KSA VAT legislation was a welcomed rewording and narrowing of the anti-avoidance rules applicable to exports of services.

As in many VAT regimes across the globe, the KSA rules zero-rate the supply of services by a Saudi taxpayer to a non-resident customer, while incorporating anti-avoidance provisions which remove this zero rating in certain circumstances where the services are ultimately "enjoyed" or "consumed" in the KSA. However, the original KSA anti-avoidance rules were quite broad and complex, and many businesses in the region were charging VAT at the standard rate of 5% on the majority of their exports for prudence.

The GAZT has now released a new guideline (17-page / 256KB PDF) in order to provide further clarity on the application of the zero-rating to exported services and how exactly a taxpayer should apply the tests in the anti-avoidance provisions in order to ensure that the zero rate of VAT is the correct rate due. This guide will be welcomed given the complexity of both contracting arrangements and supply chains across many industry sectors in the KSA.

Among the most interesting points within the guideline are: 

Intra-GCC VAT rules

KSA VAT law and guidance notes refer to 'GCC' and 'non-GCC' as categories of persons involved in a transaction, with GCC meaning the Gulf Cooperation Council countries of the United Arab Emirates (UAE), Bahrain, Qatar, Oman and Bahrain. However, GAZT's position remains that until such time as those countries implement VAT, activate an electronic services system (ESS) for the exchange of information between the tax authorities and are publicly recognised by GAZT as 'GCC' for VAT purposes, they will continue to be classed as 'non-GCC' for the purpose of the application of the KSA VAT regime.

The expectation is that this will not occur until all six GCC states have implemented a VAT system and the ESS is set up across all six tax authorities. However, the new guide provides a table of scenarios in terms of each individual member state having or not having a VAT system, together with having or not having an ESS activated. This suggests that the KSA may move ahead with categorising individual member states as 'GCC' without waiting until all six countries are on board, perhaps driven by the delayed implementation of VAT by Qatar, Oman and Kuwait.

Most relevant establishment

The term 'place of residence' is applied inconsistently throughout the guide. Importantly, the definition of place of residence for KSA VAT purposes - as restated in the guide - clearly states that one should always look to the place "most closely connected to the supply". This concept of only considering a particular "establishment" of a person when it is the most relevant establishment for the supply in question is generally applied in the KSA to date, as well as the UAE and Bahrain, including within tax authority publications.

We see this term used within the guide when undertaking the 'direct benefit' test - that is, testing whether a person who works within a non-GCC customer but who is physically located in the KSA at the time of supply directly benefitted from the supply while in the KSA. Here, the guide clearly states that there shall be no direct benefit when the "customer's presence (in the KSA) is not related to the provision of the services". However, on the contrary, it appears that the principle is not being applied when undertaking the 'residence' test (i.e. testing whether the customer is resident in the KSA), as the guide states that an exception to zero-rating applies "in all cases where the customer has a fixed establishment or other place of residence in the KSA".

The guide goes on to give a practical example of a German law firm with a KSA branch which cannot receive KSA legal services at zero rate as a result of the presence of its KSA branch. This appears to be regardless of whether the KSA branch has any involvement or any relevance for the purpose of these supplies to the German law firm.

Direct benefit test

GAZT has clarified that the second aspect of the direct benefit test, which tests whether or not the recipient has full input VAT recovery entitlement, is relevant for "other persons" only and is not relevant where the recipient is in fact the customer itself. In addition, it provides some helpful guidance for taxpayers on how to "evidence" in their audit trail that they considered the other person's deductibility entitlement in determining the correct application of the zero rating.

No retrospective effect

The guide states clearly that the change in wording of the anti-avoidance provisions relating to zero-rated exported services takes effect from 18 July 2019 onwards, and therefore should not be applied to any transactions taking place before that date.

KSA established businesses and others with fixed KSA establishments, such as branches of foreign entities, who supply services to non-KSA customers - excluding branch to head office supplies – should ensure that they are familiar with the amended VAT regulations on the correct application of the zero rating to those exported services, together with the GAZT interpretation of how those rules should be applied in practice. In particular, any change in treatment as a result of the change to the rules in July 2019 should be identified, together with any other areas of risk in relation to incorrect application of the zero rating. Corrective steps should be taken to resolve these matters and mitigate any risk of penalties.

Businesses should also ensure that they keep up to date with VAT developments in the region in relation to the 'switching on' of the intra-GCC rules. This will require amended VAT treatment, updates to back office software, amended invoices and alternative reporting of transactions for VAT return purposes once implemented.

New real estate investment and financing guideline

This guide seeks to address specific real estate financing arrangements which may be used by property investors and private individuals for investing in real estate in the KSA.

The guide (19-page / 347KB PDF) does not present any new technical concepts or VAT treatments to those already covered by the KSA VAT regime and GAZT guides on real estate and financial services. However, it does walk those involved in these real estate investment and financing transactions through the VAT treatments of each aspect of these arrangements on a transaction-by-transaction basis, with the timing of accounting for VAT and the invoicing requirements clearly detailed. It helpfully includes the interaction of the KSA VAT refund regime for first homes for Saudi nationals within the examples, so that it is clear how this should be managed.

In addition, within the definitions section, the guide highlights how parties to investment or financing transactions can take on different roles as the seller or the buyer depending on the structure of the arrangements, together with the scope of 'real estate' as including all buildings, structures and land.

Risk tool for audit selection purposes

GAZT has indicated that it now uses a 'risk tool', benchmarked against best international standards, when selecting taxpayer returns which should be subject to review and audit.

Based on data and statistics, this tool is being used in order to better select those taxpayers and tax returns which should be subjected to further investigation. It seeks to minimise the number of queries and audits enforced on compliant taxpayers so that their compliance time is minimised and they can receive a much more streamlined service from the tax authority. It also seeks to ensure that GAZT's time and resources are more concentrated on taxpayers and tax returns which are non-compliant.

Although the exact criteria used for the purpose of audit selection has not been disclosed, this new automated approach will mean that taxpayers who have unusual trends in their tax returns from one period to the next, or who break trends for their company size and industry sector, are more likely to receive queries and audits from GAZT. It will be important to monitor whether this tool and automated intelligence will then also be used for the audit procedures themselves in future, after taxpayers have been selected for audit, to increase the efficiency of audits for both the taxpayer and the GAZT and to ensure consistency.

Automated tools of this type may become more common as country-by-country reporting in the KSA and broader Gulf region develops.

Amended zakat collection method for certain commercial enterprises

KSA operates both a corporate income tax regime at 20%, which is applicable to the proportion of profit of Saudi resident entitles which is attributable to non-GCC ownership; and a zakat regime at 2.5%, which is applicable to the proportion of profit attributable to GCC ownership. To date, both of these regimes have generally operated on a 'self assessment' basis under which the taxpayer is obliged to assess its obligation to tax, register and file tax returns on a timely basis.

The zakat regime is now changing. GAZT will now estimate the zakat due for commercial enterprises in a number of different industry sectors and issue a 'zakat bill' to the taxpayer, who will be able to amend the bill as appropriate. The change is aimed at simplifying the zakat regime while ensuring that GAZT correctly collects tax due.

Amended zakat regulations which implement this new collection procedure aim to improve the formulation; unify the terms used in the regulations and their definitions; make improvements to constructing the base value; and develop the calculation method for the zakat rate.

GAZT held a number of workshops across KSA at the end of 2019 in order to educate taxpayers and tax professionals on how the system will work. It has also issued a number of industry-specific zakat guides, which can be downloaded from the 'Knowledge Center' section of the GAZT website.

Joanne Clarke is a tax expert at Pinsent Masons, the law firm behind Out-Law.