The Saudi Arabia Government has approved the final Kingdom of Saudi Arabia VAT Law and published the statute in the official gazette, Um Al Qura Edition 4681, on 28 July 2017.
The highlights of the Law are:
Effective date of implementation – Article 53 provides that the Law shall be effective from the beginning of the financial year following the date of publication of the Law in the official gazette. Accordingly, VAT will become effective in Saudi Arabia on 1 January 2018.
Scope of levy – Article 2 provides that all imports, and the supply of goods and services, shall be subject to VAT in accordance with the provisions of the Gulf Cooperation Council (GCC) VAT Framework Agreement, the Law and implementing regulations to be prescribed under the Law.
Tax rates – The standard rate of VAT prescribed by the GCC VAT Framework is 5%; however, certain goods and services may be subject to a zero rate or exempt from the levy of VAT.
Registration – Article 53 states that every person required to register for VAT shall register with the General Authority for Zakat and Tax (GAZT).
Tax evasion, burden of proof – Article 39 provides that the burden of proof to support the absence of intention (for tax evasion) is with the taxable person.
- Tax evasion. A fine of not less than the tax due and not more than three times the value of goods and services shall be imposed, subject to evasion.
- Failure to apply for registration. Any person who fails to apply for registration within the period specified in the regulations shall be fined SAR10,000 (US$2,666).
- Submission of a false tax return to GAZT. Any person who submits a false tax return to the GAZT, or amends the tax return after submitting it, or claims an incorrect amount of recoverable VAT, shall be fined with an amount equal to 50% of the difference between the tax calculated and the tax due. The Law empowers the GAZT to waive or reduce this penalty.
- Failure to submit a tax return by the due date. A fine of not less than 5% and not more than 25% of the value of tax that was required to be reported shall be imposed.
- Failure to pay tax on the due date. A fine equivalent to 5% of the value of the unpaid tax for each month or part thereof for which tax remains unpaid, shall be imposed.
- Issuance of a tax invoice by a non-registered person. A non-registered person shall be liable to a fine not exceeding SAR100,000 (US$26,660) for issuing a tax invoice without prejudice to any increased penalty provided by any other law.
- Not maintaining invoices, books, records and accounting documents. A fine of not more than SAR50,000 (US$13,330) for each tax period shall be imposed.
- Preventing or obstructing officers of the GAZT from performing their duties. A fine of not more than SAR50,000 for each tax period shall be imposed.
- Violation of any other provisions of the Law or implementing regulations. A fine of not more than SAR50,000 for each tax period shall be imposed.
The penalties set out in the Law are without prejudice to any other penalties prescribed in any other laws. Further, the penalties mentioned above shall be payable over and above VAT due.
Penalty for repetition of offense – If the same offense is repeated within three years from the date of final decision of the penalty, the fine may be doubled.
Time limit for filing an appeal – An appeal may be filed against a decision of the competent judicial authority within 30 days from the date of notification of the decision. On the lapse of 30 days, the decision shall be deemed to be final and after that period, there is no right of appeal to any other judicial body.
Issuance of implementing regulations – The Board of Directors of the GAZT shall issue the regulations within 30 days from the date of publication of the Law and the regulations shall come into effect from the date of the Law coming into force.
Transitional provision – Article 21 provides that even if an invoice is issued or payment is made before the implementation or registration date, VAT shall be deemed to be due if the date of the supply of the goods and services is on or after the implementation or registration date.
The Law refers to the implementing regulations, which will provide more specific guidance on:
- Requirements for registration
- VAT grouping
- Transactions to be considered as nominal or deemed supplies
- Provisions determining the place of supply for goods and services
- Person’s place of residence
- Provisions determining the time of supply for goods and services
- Terms and conditions for claiming input tax deduction
- Content and form of tax invoice
- Content and form of tax return including conditions thereof
- Adjustments to tax invoices and tax returns
- Payment of tax and other dues relating to VAT
The original Law is published in Arabic. In case of a conflict between the original version (Arabic) and any translation, the Arabic version will prevail.
The Law specifies that persons with a gross annual turnover exceeding the mandatory threshold of SAR375,000 (US$100,000) are required to register with the GAZT. Failure to register will give rise to a penalty of SAR10,000. The GAZT has already published the implementing regulations in draft format and these draft regulations provide a set of comprehensive provisions on specific VAT requirements, including the business sectors that are zero-rated and exempt. The GAZT has opted to apply the standard 5% rate of VAT to most business transactions, and therefore, the scope of VAT is wide, with limited deviations from the standard rate.
The approval and publication of the VAT Law mandates that businesses must be ready to account for VAT from 1 January 2018. This leaves businesses with five months to prepare for VAT, which, for large businesses, represents a significant challenge. Although many large businesses have initiated studies to determine the impact of VAT on their operations, there is still a large section of the business community waiting for the enactment of the Law in order to commit financial budgets for VAT-readiness projects. Given the very short time frame to achieve VAT-readiness, it is important that all businesses initiate a VAT impact assessment immediately in order to determine the impact of VAT across their operations. This assessment should consider the VAT impact on the following key areas:
- Finance and accounting
- IT and systems
- Tax and compliance
- Supply chain ― goods and services
- Sales and marketing
- Legal structure
- Human resources
The impact assessment should be used to develop a clear plan on the steps that must be taken to be ready for VAT by the go-live date of 1 January 2018.