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Arabian Business, Thursday, May 21, 2020 | Ramadan 28, 1441

Business impact: Saudi Arabia's new 15% VAT explained

Saudi Arabia: This was announced as part of the government's plan to save 100 billion riyals - or $27 billion - amid declining oil prices, a stagnating domestic economy, and mitigating the effects of the Covid-19 pandemic.

Apart from increasing the VAT rate, the kingdom announced a slew of austerity measures such as a cut in its monthly cost of living allowance which is granted to government workers, spending cuts in some of its landmark projects.

Today I will give you all the details you need about the new VAT and how it will impact you.

The increased rate in VAT is expected to apply to all goods and services that are currently subject to the 5% rate. 5% VAT was introduced in Saudi Arabia on January 1, 2018, and generated an estimated $12bn for the government in its first year of implementation.

Now how is this going to impact businesses?

An immediate point of attention for taxpayers affected by the rate increase is to ensure that their systems are able to issue invoices and charge VAT at the new rate.

Taxpayers should also consider how to treat goods and services that are supplied before 1 July 2020 whilst the invoice is issued or payment is given after 1 July 2020 or vice versa.

Taxpayers that supply goods or services to end-customers should factor the VAT rate increase into their pricing (and amend their marketing materials and other documentation).

Taxpayers that are (partially) exempt or unregistered companies (such as passive holding companies) that are not entitled to recover their input tax in full, will face a significant increase in the cost of doing business.

Taxpayers that provide exempt or zero rate supplies should have sufficient evidence in place to support this VAT treatment. Any error in this instance will not only lead to a significant VAT payment that may not be recovered from the customer, but may also lead to a heavy penalty of a maximum of 50% of the unpaid VAT (effectively increasing the rate to 22.5%). This is especially relevant for companies providing zero rated export services, an area where the tax authority has been very active and strict.

As a result of the above, some companies may need to reconsider their structure or transaction flows to minimize the impact of the rate increase – say Baker McKenzie.

A price inflation is expected to happen now as the burden of VAT is generally borne by the end customer. A hike in Vat also impacts consumer confidence.

Saudi shares slumped in early trading Monday after the VAT increase was announced. The Tadawul All Share Index dropped as much as 3.5% in Riyadh. Al Rajhi Bank, Saudi Aramco and Riyad Bank pressured the benchmark the most, sliding by between 2.1% and 5.7%.

The United Arab Emirates has confirmed that it currently has no plans to increase the rate and it is uncertain whether Bahrain will follow the KSA soon.

Anyway, in a nutshell,

The VAT, introduced in 2018, will be increased to 15% from 5% starting July 1

Beginning in June, the government will end a monthly cost-of-living allowance paid to government workers. The allowance was granted in 2018 after complaints from citizens about the financial impact of austerity measures taken during the last oil price rout.

Some operational and capital spending will be cancelled or delayed

Spending will be reduced on some programs under Crown Prince Mohammed bin Salman’s “Vision 2030” economic transformation plan

A committee will study the salaries and benefits given by government entities outside the civil service umbrella -- where employees are often paid significantly more than typical state employees -- and give its recommendations within 30 days

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