15% VAT Rate in Saudi Arabia - Transitional Provisions Explained

15% VAT Rate in Saudi Arabia - Transitional Provisions

The Saudi tax authority (General Authority of Zakat and Tax - GAZT) on 20th  May 2020 announced guidelines concerning transitional provisions that will apply to contracts signed and tax invoices issued before the effective date of the new VAT rate. The transitional guidance is summarized below as follows:

• Effective date of VAT rate increase to 15% -1 July 2020
• Decree issuance date (Effective date of transitional measures)- 11 May 2020
• End date of transitional measures -30 June 2021
• Continuous Supplies-Supplies that are partially executed before 1 July 2020, and partially executed on or after 1 July 2020

Contracts signed with government entities

·  a) Before 11 May 2020 — the 5% rate will apply until the date of -

• expiration or
• renewal of the contract, or
• until 30 June 2021, whichever is earlier.

·  b) Between 11 May 2020 and 30 June 2020 (inclusive) — the 5% rate will apply on supplies made before 1 July 2020; the 15% rate will apply on supplies made on or after 1 July 2020.

Example 1: On 15 January 2020, a company signed a contract with a government entity to supply computers with a value of 500k plus 5% VAT of 25k, the computers will be supplied in a phased manner, the last phase will end in August 2020.

Reply - The VAT rate applicable to that supply is 5% as the contract is a B2G contract signed before 11 May 2020.

Example 2: A company has signed a contract with a government entity to provide office supplies with a value of 50k plus 5% VAT of 2.5k, and the offices supplies will be provided on 15 June 2020. 

Reply -The supply will be subject to 5% VAT rate as the supply has been actually provided before 1 July 2020

 Example 3: On 17 May 2020, a company has signed a contract with a government entity to supply office printers with a value of 150k plus 5% VAT of 7.5k, the offices printers will be supplied on September 2020.

 Reply - This supply will be subject to 15% VAT rate (22.5k) as the contract signing date is on or after 11 May 2020 and the actual supply will be on or after 1 July 2020

Contracts signed between VAT registered persons

• Before 11 May 2020 — the 5% rate will apply until the date of expiration or renewal of the contract, or until 30 June 2021, whichever is earlier (the customer must be entitled to deduct input VAT in relation to that supply in full).
• Between 11 May 2020 and 30 June 2020 (inclusive)—the 5% rate will apply on supplies made before 1 July 2020; the 15% will apply on supplies made on or after 1 July 2020.
• If the contract has been signed before 11 May 2020 and the supply will continue on or after 1 July 2020, a 5% VAT will be applicable to the supplies related to that contract till the end date of the contract, contract renewal date or 30 June 2021, whichever comes first.

Tax invoices issued before 11 May 2020

• If tax invoices are issued before 11 May 2020 in relation to supplies to be made on or after 1 July 2020, the 5% rate will apply provided that the supply is made before 1 July 2021.
• Supplies made on or after 1 July 2021 will be subject to the 15% rate. In this situation, the supplier must issue an additional tax invoice for the additional amount of VAT.

Tax invoices issued between 11 May 2020 and 30 June 2020 (inclusive)

• If tax invoices are issued between 11 May 2020 and 30 June 2020—the 5% rate will apply on supplies made before 1 July 2020.
• The 15% rate will apply on supplies made on or after 1 July 2020; in this situation, the supplier must issue (at the time of supply) an additional tax invoice for the additional due VAT.

Through examples, the guide also clarifies that:

·        Where a tax invoice is issued before 11 May 2020 for supplies that extend beyond 30 June 2021, the value of the supplies made until 30 June 2021 would be subject to VAT at 5% and the value of the supplies made after this date would be subject to VAT at 15%.

·        There may be instances where a contract is entered into prior to 11 May 2020 and under the agreed terms, a monthly payment/premium is made by the customer and tax invoices would be issued by the supplier each month. The guide confirms that in such cases, the supplies made on or after 1 July 2020 would be subject to VAT at 15% and the tax invoices issued after this date should also be at the higher rate.

·        Where a tax invoice has been issued at 5% for a supply that would be subject to VAT at 15% based on the guidelines set out by GAZT, a taxpayer would be required to issue an additional tax invoice for the same supply for the VAT difference due.

Examples:

1) On February 2020, a one year contract has been signed between two VAT registered businesses to supply construction materials, with a value of SAR 300k plus a 5% VAT of SAR 15k, the supply will be in a phased manner along the contract period.

Reply : This supply will be subject to 5% VAT rate till the contract end, or renewal date whichever comes first.

2) On 20 May 2020, a two years contract has been signed between two VAT registered businesses to supply raw materials, the contract value of SAR 180k plus a 5% VAT of SAR 9k, the supply will be provided in a phased manner along the contract period.

·Reply : The supplies done before end of June 2020 will be subject to 5% VAT, and 15% VAT (SAR 21k) will be applicable to supplies provided starting from 1 July 2020.

3) A car has been bought in March 2020 with a value of SAR 80k plus 4k 5% VAT, an invoice has been issued on the same date with a full value, with a condition that the car will be delivered on August 2020.

Reply : A 5% VAT rate will be applicable to that supply as the invoice has been issued before 11 May 2020.

4) On 15 April 2020, a maintenance company signed a 5 years home maintenance contract with a customer, an invoice has been issued on the contract date with the full amount of the contract plus 5% VAT.

 Reply :  So if an invoice has been issued in the contract date with the full value of the supply plus 5% VAT, the value of the services provided to the customer from 15 April 2020 to 30 June 2021 will be subject to 5% VAT rate, and any services provided starting from 1 July 2021 will be subject to 15% VAT. and the supplier should issue an invoice with the tax difference.

5) On 1 May 2020 an individual signed a health care insurance policy with a health insurance company, based on the the agreement the customer will pay the due amount on a monthly basis and a separate monthly invoice will be issued for the monthly insurance services provided.

Reply : The insurance services provided to the customer during the period of 1 May 2020 to 30 June 2020 will be subject to 5% VAT rate, and starting from 1 July 2020 the insurance services provided will be subject to 15%, and all invoices related to the services rendered starting from 1st of July 2020 should include new VAT rate 15%.

 6) On 20 May 2020 a Tablet has been purchased for SAR 3000 plus SAR 150 (5% VAT), a tax invoice has been issued on the same date and the tablet will be delivered to the customer on 15 June 2020.

Reply : The transaction will be subject to 5% VAT rate, as the supply (the tablet delivery) occurred before 1 July 2020.

7) A person purchased a vehicle through a local auto agency and accordingly received an invoice dated 5 May 2020. The buyer paid the total value of the vehicle but the seller will not deliver the vehicle before 1 July 2020 as the car will arrive to KSA after 1 July 2020.

Reply : a) In case the auto agency issue the tax invoice pertaining to payment of the vehicle’s total value, and accordingly handed the invoice to the buyer prior to 11 May 2020, 5% VAT applies to the transaction if the vehicle imported and delivered to the buyer before 30 June 2020.

·           b) In case the vehicle imported on or after 1 July 2020 and delivered to the buyer prior to 30 June 2021, the VAT applied by the customs at 15% and should be paid by the seller as per the importation’s date applicable percentage (the date of importation is the date where importation take place as per the Unified Customs Law and its procedures applicable in the Kingdom of Saudi Arabia).

On the contrary, the 5% VAT applies to the selling transaction from the auto agency to the buyer/client,and the seller has the right to take input tax credit for the VAT paid to customs, through the VAT return.

             c) In case the vehicle delivered to the buyer after 30 June 2021, the 15% VAT applies to the selling transaction, whereas the seller should issue an additional tax invoice pertaining to the difference of the applicable tax due.

IMPORTED SHIPMENTS:

• How to deal with Imported shipments placed prior to 1 July 2020?
• A mobile phone has been purchased during April 2020 through a global e-selling portal and the buyer paid the total amount for his/her purchase request, but the purchased mobile won’t arrive in Saudi before 1 July 2020.

Reply - the VAT applied by the customs at 15% as the date of importation falls on or after applying the new percentage (the date of importation is the date where importation take place as per the Unified Customs Law and its procedures applicable in the Kingdom of Saudi Arabia). The 5% VAT applies only in case the importation fulfilled on or before 30 June 2020, and the 15% applies to all importations occur after 30 June 2020.

• Reverse Charge Mechanism -The mechanism by which the taxpayer is bound by the tax due on behalf of the supplier, and is responsible for all obligations stipulated in Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) and VAT  regulations in Saudi Arabia.
• Interstitial Imports- It’s the tax borne by the taxpayer in relation to the goods or services supplied to him or imported for the purposes of practicing an economic activity.
• Taxable imports - Imports for which the tax is imposed by the applicable rate or zero rate, and for which the interstitial imports tax is deducted, in accordance with the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) and VAT regulations in Saudi Arabia.

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.