Important changes to the VAT regulations
Amendments to the Saudi VAT regulations, which came into effect on 3 July 2019, make some significant changes to the zero-rating for exported services and to the VAT registration requirements for businesses that are not resident in Saudi Arabia.
The wording of Article 33 of the VAT Implementing Regulations, which allows zero-rating for exported services, has been completely revised. Very broadly, ‘exported services’ means services supplied by a Saudi-based business to a customer in another country.
In the previous version of Article 33 there were a number of complex conditions that had to be met before zero-rating would apply to exported services. These conditions could be difficult to interpret in some circumstances and they made the rules very restrictive.
The new Article 33 has fewer conditions and broadens the scope for zero-rating. It allows zero-rating for services provided to customers outside the Member States of the Gulf Cooperation Council (GCC), except where:
- The supply involves any of the services listed in Articles 17 to 21 of the GCC VAT Agreement, which are subject to special place of supply rules;
- The customer is resident in a Member State;
- The customer, or any other person, directly benefits from the services while situated in a Member State at a time when they are not entitled to a full input tax deduction;
- The services are performed on tangible goods while they are in a Member State
Though the Regulations refer to ‘Member States’, for the time being, this should simply be taken to mean Saudi Arabia because of transitional provisions that deem all countries apart from Saudi Arabia to be outside the GCC until the introduction of the GCC Electronic Services System.
The General Authority for Zakat and Tax has not yet issued guidance on how the new rules should be applied. So, for example, it is still unclear what criteria to apply when determining whether there is a ‘direct benefit’ under condition (c) above and the scope of the phrase ‘work performed on tangible goods’ under condition (d) above. Guidance on such matters will be critical to interpreting the new rules, and until such guidance is published, we recommend a cautious approach.
The changes to Article 33 are designed to reduce the tax burden on the international services sector and should be viewed as a very positive step by the Saudi tax authorities. The changes will be welcomed by Saudi businesses in the service sector and by international groups operating in the Kingdom.
Businesses that are not resident in Saudi Arabia for VAT purposes are obliged to register for VAT if they make any supplies that have a ‘place of supply’ in Saudi Arabia and the customer is not registered for VAT.
Where the customer is VAT registered in the Kingdom, the foreign business is not obliged to register and the obligation to account for VAT passes to the customer, under the reverse charge rules.
Previously, non-resident businesses that were required to register for VAT were obliged to appoint a Tax Representative that would be jointly liable for any tax debts. This joint liability meant that it was very difficult to find a Tax Representative. The changes to the regulations have removed the mandatory appointment of a Tax Representative and instead, a business will have the option of providing a cash security or a bank guarantee. This is likely to make VAT registration far more straightforward for non-resident businesses.
Businesses that do not appoint a Tax Representative will be required to engage a Saudi Tax Agent who will maintain the necessary VAT records and documents.
There are also changes to the regulations that will allow Diplomatic and Consular bodies to reclaim VAT on expenditures in the Kingdom.