Andersen

2021/03/30

The last year has witnessed significant changes in the local tax landscape, including the latest decision to increase the Value Added Tax (VAT) from 5% to 15% which has taken effect on Wednesday 1^st of July 2020 in Saudi Arabia (KSA). This increase will directly impact consumers and commercials spending which raised the concern on how to stay competitive.

On the brighter side, there are various techniques that help minimize the negative impacts on businesses by using adaptive strategies to further thrive

How do private corporate sectors deal with the VAT increase?

VAT increase decision was issued as part of a range of necessary measures undertaken to protect the Saudi Economy and overcome the unprecedented financial and economic ramifications of the global COVID-19 pandemic in the best way possible. The increase of VAT has many impacts. The general transitional provisions cover the period before and after the month of June 2020. On May 11^th of 2020, the decision to increase the tax rate was made. The new VAT rate was implemented on July 1^st of 2020. Corporates had until June 30^th of 2021 to prepare themselves for this transitional phase. Dates play a key factor with this change where they should be taking into consideration, such as the date of issuing the tax invoice, the date of supply, and the date of contract issuance.

To further explain, those businesses engaged with the Public Sector will be pleased to know that 5% VAT will still apply for contracts that were entered into prior to May 11, 2020 (when the VAT rate change was announced) up until the end of June 2021, and businesses, should be mindful that the invoices issued prior to May 11 but services were provided post 1 July 2020, the 5% rate will still apply according to the conditions clarified below.

General provisions during the transitional period and how businesses can apply to mitigate non-compliance risks

Companies and private sectors must apprehend how to deal with the increase in Value Added Tax (VAT) through the provisions of the VAT Law and Regulations. Article 79 of the relevant provisions during the transitional period addressed the issue of contracts concluded between a VAT registered supplier and a Government body: I) As stated, if the contract issued was before May 11, 2020, and the supplies would continue after July 1^st of 2020, it is permissible to apply the 5% tax until the end of the contract, its renewal, or on July 30, 2021, whichever is earlier. II) However, if this contract took place between May 11^th of 2020 and June 30^th of 2020, in this case, the supplier should be aware of the VAT increase, and therefore only 5% would apply if the supply actually took place before July 1, 2020, and all supplies that will be from and after July 1, 2020, will be subject to the 15% rate.

If the contract is between two VAT registered businesses, it also has the same treatment for the first part “ I) ” aforementioned, provided that the recipient can fully recover its input tax related to the supplied goods and services of the relevant contract.

Businesses need to be aware of the Tax invoices issued before 11 May 2020 which relate to a supply delivered on or after 1 July 2020 and apply 5% VAT for this supply; provided the supply is delivered before the end of 30 June 2021. While, tax invoices issued between 11 May 2020 and 30 June 2020, a 5% VAT should apply where the supply will be delivered by 30 June 2020, and 15% VAT should apply if the supply will be delivered on or after 1 July 2020.

Impacts of Increased VAT Rate and How to Deal with It

We can highlight some of the implications of the VAT increase and provide you with ways to deal with it. For example, the application of the Value Added Tax of 15% will be on all supplies of goods and services as of 1 July 2020 regardless of the purchase date of the goods in stock or the percentage of the tax that was paid when purchasing was made. For example, for a commercial company that has warehouses and the goods have been purchased at a rate of 5%. Therefore, this does not mean that invoices are issued at a rate of 5%; the tax that was paid upon purchase of the inventory.

Another issue your company may face is the overlapping of tax rates. There is still a great confusion between tax rates and chaos in tax reports to some extent, and this overlap could lead to large fines in the future if it has not been controlled at present. Also, among the resulting consequences is the increase in the cost of economic activities for the entities with exempted supplies and taxable input. Furthermore, the impact on the cash flow will be much significant with higher amounts and a longer average collection period of receivables. In addition to the wrong application of the tax in the absence of proper understanding for the relevant transitional period provisions, issued invoices, and/or treatment of contracts before 11 May 2020. It is common to apply the wrong tax rate, and if the supply is subject to a rate of 15%, and a 5% rate is implemented instead, then the consequences are enormous.

Another important impact to address is the effect of contracts’ amendments. Any amendment to a contract must be taken into account and carefully treated in compliance with the relevant provisions of the transitional period.

Required Changes and Solutions to VAT Increase

Some solutions and amendments must be made in order to mitigate these effects. First, the ERP system must accommodate the new VAT rate, test the relevant reports, adjust the sales invoices and review clients’ and suppliers’ tax codes and rates. Also, contracts must be reviewed taking into consideration the effects resulting from the increase in the VAT rate and the provisions of the transitional period. It is important to track the date of supply, tax invoices, adjustments to supplies, and review the policies to be in line with the changes. Review the Payable and Receivable policies to reduce the tax impact in the event of non-payment or delay in payment. It is also important to keep an eye on the bank reconciliations and warehouse module for any mistakes regarding the tax due date. On the bright side, your organization may benefit from the initiative of the General Authority for Zakat in which they announced to continue FINES’ Exemption which will include all fines due against those who failed to submit their tax declarations or amend their submitted tax declarations and all fines due against taxpayers who manage to register for GAZT, in addition to installment plans which will continue till 31 DEC 2020 (GAZT may decide to extend).

Why Andersen?

Through Andersen’s experienced consultants, proven methodologies, and appropriate tools, we provide end-to-end tax compliance services. The entire work is evaluated taking into account the dynamics of the surrounding environment, which requires us to dive into the provision of our tax services. We are present globally in more than 200 locations with more than 6,000 consultants around the world. We serve our clients in KSA with more than 120 experts and the number is increasing. We are located in Riyadh, Jeddah, and Al-Khobar. Our main services are Tax and Zakat and Business Advisory. We add great value to our customers from different sectors and understand their requirements and provide them with solutions that are not the easiest, but the best.