Supplies of Services to Non-GCC Residents in KSA

KSA GAZT has recently issued a revised guideline on applicability of VAT for supply of services to GCC Non-residents. In this guide, GAZT has discussed applicability of VAT at Zero rate on transactions with Non-GCC residents. Generally, transactions which have a place of supply in KSA and are rendered to a Non – GCC Resident customer (who does not have a place of residence in KSA or any member state) are subject to VAT @ 0%. This statement provides for two conditions one which has a place of supply in the State and other is to identify the customer who is a Non-GCC Resident. We have analysed below these two conditions.

However, there are certain exceptions in this regard. As for the place of supply, the following two exceptions have been stated:

• Place of supply is in the State: As per the applicable place of supply rules, place of supply of various services is within the UAE except for the following conditions:

a) Supplies to customers resident in other GCC Member states - In this case, as the place of supply is the state (other GCC member state) in which the customer is resident, VAT should be paid depending on the registration status of the recipient as well as total value of exports by the supplier. Accordingly, this is an exception to the fact that for zero rating the place of supply has to be in the State. It is important to note that the preconditions for this exception are:

1. Member state where the customer is resident has introduced VAT
2. Member state also has an Electronic Services System is the place with the KSA

Unless the above conditions are fulfilled, the customers in other GCC Member states shall also be considered as Non GCC-resident customers.

b) Place of supply of services are not in KSA as there are special rules for certain services under the Unified VAT Agreement. Further, services such as leasing of transport to non-taxable customers, supply of passenger and transportation services, supply of services closely linked to Real Estate, Telecommunication services etc. may have a place of supply which is not in KSA. Accordingly, the applicability of Zero rating on all such transactions may differ.

• Identification of Customer - Another important issue which clouds the applicability of zero rating is to identify who is the customer for such services. Generally, one would argue that it is a very simple task to identify the customer. However, there are certain scenarios where in it is difficult to identify the customers such as where the supplier is interacting with different persons of one corporate group. In such cases the following parameters are helpful to understand that who is the customer:

a) With whom have you entered a contract

b) Who does the supplier owe obligations

c) Who instructs the supplier to supply goods or services

d) Who shall receive the benefit/ output of the services

e) Who is obliged to pay the value of supply and tax in normal cases

• Customer or other person directly benefits from the service in KSA. In a case where the benefit of the service is received by the customer or any other person in KSA, such a transaction will not be zero-rated. This is another vexed issue which will time and again bother companies as how to determine whether the benefit has been received by a Non GCC- resident customer or anyone situated in KSA. Situations such as interactions with subsidiaries in KSA, visit of representatives in KSA to take some services, indirect benefit of services in KSA, coordinating with businesses present in KSA to provide the services to customer situated outside GCC etc. will continue to haunt.
• The next condition provides that where the benefit of the supply is accrued to a Customer in KSA, still Zero rating can be considered provided the beneficiary is entitled to avail full input VAT on such transaction. To substantiate the same, the service provider should obtain a written confirmation from the customer before applying Zero rate. Where such declaration to substantiate the availability of 100% credit is not available, standard rate should be applied.
• Services performed in relation to tangible goods located in KSA shall not be zero rated as the benefit of such service is within UAE and also that the goods are consumed in KSA

Where the above conditions are satisfied, such transactions may qualify as zero rated. Alternatively, there are other transactions for which Zero rating is to applicable despite not complying with the above conditions.. Thus, It is important that such contracts/ transactions be analysed carefully by understanding the nature of service/ activity, for whom such services are being provided, who shall be the customer (from a fiduciary relationship) etc. before taking ascertaining the tax liability on such transaction.

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