Saudi Arabia triples the VAT rate: Is your business ready?

Saudi Arabia’s value added tax (VAT) rate will increase from 5% to 15% on 1 July 2020. The kingdom’s Ministry of Finance announced this VAT hike, along with other fiscal austerity measures, to maintain economic stability during the global coronavirus crisis.  

Falling oil prices and production, together with pandemic-related policy adjustments, have weighed on Saudi Arabia’s economy. From January to March, total revenue decreased by 22%, contributing to a $9bn budget deficit.1

Implications for the business community

This sudden tax regime change – announced less than three years since VAT was first introduced in the kingdom – will have a sizable impact on VAT registered companies. These taxpayers have just a few weeks to assess the impact across their businesses; and get ready.

Outlined below are some critical issues for consideration2:

  1.     Pricing: Pricing adjustments may be necessary, particularly in relation to annual price lists which extend beyond the implementation date. Also, as the retail price of goods and services rise, this could impact the competitiveness of customer-facing businesses. These organizations need to evaluate whether it is worth absorbing a portion of the VAT increase in order to maintain market share. 
  2.     Contracts: Adjustments may need to be made to VAT clauses in existing contracts to avoid over- or under-charging VAT.
  3.     Supplies: Certain supplies, such as rental agreements and subscription services, will extend beyond the VAT increase date. Businesses will also need to plan carefully around time of supply, paying attention to whether these are continuous or one-off. 
  4.     Exempt Activities: Businesses with supplies of goods and services that are exempt from VAT may face a significant increase in costs, as they will be unable to claim input VAT incurred on exempt activities. This could impact cash flow, as well as competitiveness (in the case of higher costs being passed on to customers).
  5.     Systems: Companies will have to adjust their accounting systems, point of sale solutions and tax platforms to account for the new VAT rate, as well as ensure that they are ready to produce accurate VAT invoices, debit and credit notes from 1 July. Importantly, businesses need to keep the 5% VAT rate in their systems during the transition period, so they are able to issue credit notes at 5% after 1 July for invoices issued before the implementation of the new VAT rate.

Given the volatility that can be expected going forward, it will be more valuable than ever to have indirect tax determination and reporting systems that can be updated quickly in line with ongoing regulatory changes in the GCC VAT landscape. Rules can change overnight in the region and systems need to be capable of handling multiple VAT rates. For example, there’s a possibility that Saudi Arabia will soon introduce a lower VAT rate for essential products, such as food. This will result in businesses having to update their systems and invoices yet again. It will also add complexity to VAT return preparations, due to the varying VAT rates involved.

All of these factors will add more complexity from a compliance point of view. Companies should keep an eye out for potential changes to the VAT form and/or updated guidelines for reporting purposes.

In closing

Making changes to manual tax processes and ERP systems in such a short space of time can increase the risk of VAT accounting and reporting errors. Given that the VAT penalty regime remains firmly in place, businesses need to assess whether their systems would benefit from additional automation capabilities, enabling them to manage ongoing VAT complexity with ease.  

Thomson Reuters can help. Get in touch with our GCC VAT technology specialists today.

References

[1]  https://www.bbc.com/news/business-52612785

[2] https://home.kpmg/us/en/home/insights/2020/05/tnf-saudi-arabia-vat-rate-to-increase-to-15-percent-covid-19.html

Diana Caceres is the Senior Tax Research Manager for the Middle East, Asia and Emerging Markets at Thomson Reuters. She joined Thomson Reuters in London to be part of the Indirect Tax Research team across Europe and Latin America.

Diana started her career as a Tax Accountant with KPMG where she gained knowledge in Direct and Indirect taxes, as well as tax matters relating to Mergers and Acquisitions. Diana is a Chartered Accountant and holds an M.B.A (Finance) from the University of Wales, UK.

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