Saudi Arabia removes tax representative obligation

• Non-resident taxpayers can opt not to have a tax representative
• Some KSA presence still required
• Clarity provided on zero rating

In an apparent effort to make VAT compliance in the Kingdom of Saudi Arabia (KSA) less burdensome for non-resident taxpayers, the board of directors of the General Authority of Zakat and Tax (GAZT) approved the removal of the obligation set out in the KSA VAT Regulations for a non-resident taxpayer to have a tax representative for registration and compliance purposes in the region.

This simplification of the VAT compliance process for non-residents should be greatly welcomed by the international business community, who have faced significant difficulties since the introduction of VAT on 1 January 2018 with identifying suitable tax representatives, submitting their VAT registration and VAT returns on a timely basis and achieving acceptable levels of compliance associated costs in the region.

The change is one of a number of amendments to the KSA VAT Regulations which seek to simplify or clarify the VAT rules for businesses trading in the region. Others include an up front guarantee for non-residents who do not chose to use a tax representative; clearer wording and less ambiguity on the zero-rating for export of services, and minor amendments to the eligible body refund and transitional intra-GCC rules.

Non-resident businesses

The recent changes to the KSA VAT Regulations took effect on 18 July and made it optional rather than obligatory for a non-resident taxpayer to use a tax representative to fulfil its registration, compliance, payments, retention of records, and other similar obligations in the region. However, a non-resident taxpayer not using a tax representative must still appoint a person established in the KSA for the purposes of meeting its record retention obligations.

This means that a non-resident taxpayer should now be in a position to use the KSA online tax authority portal, subject to Arabic language capabilities, for the submission of all VAT-related submissions to the GAZT directly from its home jurisdiction.

This is much more taxpayer-friendly and efficient, as it removes the tax representative from the internal VAT compliance process, shortening the cycle. On the face of it this would also look to benefit a non-resident business's overall VAT compliance costs for the region, with the removal of a tax representative's fees. This would be of particular interest to SMEs and international traders with low turnover levels, facing tight margins in the region."

An additional amendment to the KSA VAT Regulations introduced the requirement non-resident taxpayers not using a tax representative to pay a cash security or bank guarantee to the GAZT as a prerequisite to VAT registration. This amount will be assessed and determined by the GAZT, based on double the estimated quarterly sales VAT values for the taxpayer and any other accounting methodologies which GAZT views necessary to determine a reasonable value. The term of the guarantee may not exceed 12 months, but the requirement for such guarantee may be renewed at the discretion of the GAZT for a similar amount or period.

While the real on-going administrative burden and cost of compliance may reduce as a result of this amendment, the up front cash flow burden is likely to increase at the outset. The obligation to have a local KSA-established person to meet document retention obligations in the region will, in essence, require that person to either physically store the records of the taxpayer in the KSA or maintain a computer system at a KSA premises through which the electronic records may be accessed. All other requirements in relation to tax invoices and documentation retention, such as language and retention period have not been amended.

If a tax representative is used, the tax representative's extent of "joint and several liability" for a taxpayer's VAT liabilities and penalties, which was previously not capped, is now limited to a maximum of double the average quarterly value of sale VAT for the taxpayer.

Zero-rated exports

Similar to many VAT regimes across the globe, the supply of services by a KSA taxpayer to a non-resident customer is generally zero-rated for VAT purposes. In the KSA, this is regardless of the status of the customer. The services would then generally be liable to VAT on a reverse-charge (self-accounting) basis by the customer in the country of establishment or receipt, depending on local VAT/GST rules – meaning the services would be taxed where consumed.

As there are many complex supply chains across the globe, and to ensure that VAT is correctly charged where the services are "consumed" or "enjoyed", the KSA has introduced a number of anti-avoidance provisions. These types of anti-avoidance provisions are a common approach from a VAT legislative perspective in order to ensure that a "general" rule on zero-rating or place of taxation does not result in a loss of tax revenues to the local authority, where consumption or enjoyment is local.

To date, the KSA anti-avoidance rules applicable to exports of services have been quite broad and complex. Many businesses in the region have charged VAT at the standard rate at 5% on the majority of their exports, for prudence. The recent changes to the KSA VAT Regulations have sought to make the anti-avoidance provisions more clearly worded and their scope less ambiguous. The key changes include;

• the application of the zero-rating up front unless the transaction falls within one of the exception, rather than a list of conditions having to be met prior to availing of the zero rating;
• the removal of "tests" on whether the supplier has or has not got "evidence" relating to the customers residency status and the "intended" or actual place of consumption ("benefit") of the services;
• the narrowing of the application of VAT at 5% when the services are in connection with goods/property by replacing the term "services related to" with "services performed on"
• the potential narrowing of the application of VAT at 5% where the services are performed on "property" as this term has been removed, with only "tangible goods" referenced in the amended wording - this may not intend to exclude property but may simply mean that the GAZT view "tangle goods" as already including property
• the narrowing of the application of VAT at 5% where the services have been benefitted from while the customer (or other beneficiary) are situated in the KSA at the time of supply by the addition of a second criteria that the beneficiary (customer or other) must have less than full recovery (i.e. partial or no recovery) of VAT on costs - therefore, if the beneficiary located in the KSA has full recovery entitlement, the zero-rate shall still apply

These changes should give some clarity to business and also appear to increase the scope of the zero-rating for exported services.

Other changes

GAZT is no longer required to have evidence or reason to doubt a resident taxpayer's ability to meet its VAT liabilities in the region, before it can request a cash security or bank guarantee from a resident taxpayer.

Refunds of tax for generally "non-recoverable" expenses or "blocked" expenses are now allowed for certain Foreign Governments, International Organizations, Diplomatic and Consular Bodies and Missions. The period for the production of supporting documents for refund requests for all Eligible Bodies has been amended to a minimum of 20 days, rather than a maximum of 20 days.

Lastly, the KSA VAT Regulations have been updated to reflect that the KSA shall not recognise the other Gulf Cooperation Council (GCC) Member States (United Arab Emirates (UAE), Bahrain, Oman, Qatar and Kuwait) as having implemented VAT, and thereby activate the special intra-GCC trade rules set out within the KSA VAT law and regulations, without the activation and linking of the required Electronic Services System to the KSA system.

Overall, the amendment of the KSA VAT Regulations brings clarity and the 'loosening' of certain provisions which have practically been causing businesses difficulty in the region.

They should be welcomed by businesses effected, and for other areas of the law, for which taxpayers are still facing challenges, this should give some comfort on the GAZT's willingness to amend the law when required in order to achieve a domestic VAT regime which is efficient to apply by businesses and efficient for the collection of taxes by the tax authority.