March 2019
A year has passed since the introduction of VAT in Saudi Arabia. During that time the General Authority for Zakat and Tax (GAZT) has published a large number of taxpayer guidelines. These have helped to clarify issues related to the application of VAT and have provided an insight into GAZT’s interpretation of the VAT law.
Up to February 2019, 24 guidelines had been published, many only in Arabic. However, English translations have now been released for all these guides. This has been a major project for GAZT but it has been well worthwhile and will be of great assistance to international businesses and advisors.
Though the guides published by GAZT cover many of the most important areas of VAT, there are still many thorny issues that need to be clarified. Some of the most difficult of these issues concern the mechanism for determining the proportional deduction of input tax. This is important to businesses that make a mixture of exempt and taxable supplies. These businesses can only claim a proportion of the input tax incurred on their overhead expenses.
In Saudi Arabia, the types of businesses affected by this rule include financial institutions, insurance companies, and real estate businesses.
The method the law prescribes for carrying out the apportionment of overhead input tax is based on the ratio of taxable supplies to total supplies. This is known as the default method and it uses the following fraction:
The value of Taxable Supplies made by the Taxable Person in the last calendar year
The total value of Taxable Supplies and Exempt Supplies made by the Taxable Person during the last calendar year
This fraction is then used to calculate deductible input tax for the following year.
If the taxpayer considers the default method does not produce a fair result, it can make an application to use an alternative proportional deduction method. The use of an alternative method is subject approval by GAZT. Approval will only be given if GAZT considers the method provides a fair result and is verifiable.
In September 2018 GAZT published a detailed guide on input tax deduction that covered, among other things, proportional deduction methods. This is now available in English. The guide is very useful and provides a number of worked examples. However, a number of uncertainties remain, such as how certain types of income and activities will affect the taxpayer’s right to claim an input tax deduction. In particular, it is not clear how GAZT considers dividend income earned by holdings companies, which is outside the scope of VAT, should impact input tax deduction. Initial enquiries to GAZT on such matters have been inconclusive and this is an area where additional guidance is required. Unfortunately, because of the complexity of these matters it may be some time before all of the issues emerge.
Brian Conn
brian.conn@bdo.ae
Loay Mohamed Sobhy
l.mohamed@alamri.com