Saudi year in review: VAT preparation in kingdom is well in place

Kingdom's simple laws, tax history will help the introduction of 5% levy on January 1

Saudi Arabia, along with its five GCC peers, are introducing taxes and undertaking fiscal reforms to cope with the low oil price environment which has slashed government income from hydrocarbons. FaisShow more

Saudi Arabia will have a relatively easy time implementing value added tax than its Arabian Gulf neighbours, largely due to its history of imposing taxes and because the 5 per cent levy to be introduced on January 1 is a simpler version compared to its GCC peers, tax experts said.  

The kingdom was the first Gulf country to ratify the unified GCC VAT agreement, heralding the end of the almost tax-free environment in the region. The UAE will be the other state to implement VAT at the beginning of 2018, but the remaining Gulf nations have yet to publish their VAT laws or specify a timeline as to when they will mimic the move.

Saudi Arabia was also the first state in the region, which accounts for about a third of the world's proven oil reserves, to publish the laws governing the implementation and collection of tax in the summer, ahead of the UAE, giving businesses sufficient time to digest the details of the levy. 

“In the broader context, being a relatively simple law in the manner that it addresses the requirement to pay tax, it [the Saudi VAT law] does make it easier for tax payers to comply with,” said Bruce Hamilton, a partner of Indirect Tax at Deloitte Middle East.

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Although, Saudi Arabia was ahead of other Gulf states in approving the laws governing the new tax regime, it was still relatively late in the year and most businesses did little to prepare themselves ahead of time.   

“A lot of businesses didn’t want to do anything about getting themselves ready to comply with the law because they thought it might not be happening. Then when it did happen there was a mad panic to get the advice they needed, and change their systems,” Mr Hamilton said. 

Saudi Arabia, along with its five GCC peers, are introducing taxes and undertaking fiscal reforms to cope with the low oil price environment which has slashed government income from hydrocarbons. In June, the kingdom also became the first GCC country to introduce excise tax at a rate of 100 per cent on tobacco and energy drinks and 50 per cent on fizzy drinks.

The UAE followed suit in October imposing the excise tax at the same rates. The kingdom estimates that income from levying of VAT next year alone will reach 23 billion Saudi riyals (US$6.13bn) and revenue from excise tax will top 9bn riyals.

In terms of VAT, there are more goods and services that are exempt and zero-rated in the UAE compared with Saudi Arabia.

Businesses exempt from VAT will not be able to recover the tax incurred on the cost of an item or a service that is not designated as exempt by the government and it will be up to the business to decide whether to pass on VAT costs to the consumer.

But when businesses have zero-rated services and goods, they can reclaim VAT they have paid from the government .

“In the case of Saudi Arabia, they have a very broad tax base – one of the broadest in the world,” said David Stevens, the GCC VAT implementation partner, at consultancy EY. “Possibly only New Zealand and Singapore have similar broad tax bases. The UAE has provided more concessions.”

In the UAEand financial hubs in the GCC, the supply of some of the financial services, residential properties, bare land and local passenger transport are exempt.

In contrast, local passenger transport is not exempt in Saudi Arabia.

The kingdom will also have an easier time implementing the tax than other GCC states because it already has an established government tax body, the General Authority of Zakat and Tax (GAZT), which has been collecting zakat or Islamic tax and income tax on non-Saudi partners in private sector businesses.

 "The challenge that the UAE had is that there isn't a culture of dealing with tax because business does not have to deal with zakat. For a lot of businesses, it is a first attempt to actually deal with a tax of any sort and that probably slowed down things in the UAE a bit more," said Mr Hamilton.

GAZT, which has registered more than 80,000 businesses for VAT, has been more lenient in terms of VAT registration.

While initially all businesses with annual revenue of 375,000 riyals or above were required to register by the end of this year, the authority later revised the target. All businesses with annual revenues exceeding 1 million riyals should have registered by December 20 and businesses with annual revenues between 375,000 riyals and 1m riyals have until December 20, 2018 for registration .

Failure to register for new tax in Saudi Arabia will incur a 10,000 riyal fine, in addition to other penalties outlined in the VAT implementation regulations. In the UAE, the penalty for the same is Dh20,000.

GAZT has also adopted a more proactive approach than its UAE counterpart the Federal Tax Authority.

“Basically GAZT has been fairly prominent in doing a lot of field visits out to businesses to sort of advise them on how preparations for VAT are going,” said Mr Hamilton.

“From that perspective, I think they probably have been a little bit more visible than the FTA and the UAE, as FTA has possibly focused more attention on public presentations.”