Andersen

2021/08/01

When is the Partial Deduction imposed on the taxpayers?

Partial deduction applies to VAT registered businesses that are participating taxable and exempted goods and services which made on the previous calendar year based on the tax percentage for that time. This percentage is deducted as well from the VAT calculation.

A VAT registered business with taxable and exempted sales are eligible to claim taxes paid only on inputs related to taxable sales. On the other hand, as for the tax-exempt sales, not eligible for VAT registered business to fully claim paid tax. Therefore, some companies prefer to separate the input tax for taxable and exempt, so there will be no problem determining which input tax is deductible and non-deductible.

However, this process gets complicated when the taxpayer can’t accurately separate the deductible from the non-deductible input tax. This could be due to a variety of reasons, such as the fact that the same inputs are related with taxable and exempt sales at the same time. In this case, the taxpayer must apply the partial deduction formula, to determine the approximate amount of the deductible part.

Business companies may have multi taxes paid during the year, such as taxes on goods transport vehicles, telephone tax, production input tax, spare parts, auditing services tax, legal services, stationery, office equipment and furniture, or any other tax paid on the company’s purchases, which makes it difficult to determine the sales share, assuming that the joint tax paid during the year was 50 thousand riyals, the total sales subject to the company during the year were 100 thousand riyals, and the exempted sales were 20 thousand riyals. Suppose you have deducted these taxes in full when submitting tax returns (that is, you have taken advantage of the full tax deduction). The company will have to calculate the partial deduction rate by dividing the total sales subject to tax by the total sales during the year.

What if, at the end of the year, it turns out that this percentage is different from last year?

It is usual to have a difference (increase or decrease) in the revenues by the end of the year compared to the previous one, which leads to the recalculation of the partial deduction rate. If the company discovers that the current year’s percentage differs from the last year’s percentage, where the percentage of its tax-exempt sales in this year reached the percentage of the previous one, then the company has the right to adjust and recalculate the receivable for the decrease in the percentage of its taxable sales.