Saudi Arabia announced the introduction of value added tax (VAT) in the recent budget. It is expected that the legislation would be issued sometime during 2016 with implementation of VAT within 12 to 18 months thereafter. VAT is generally considered as a tax on consumption. The more a person consumes goods and services subject to VAT (VAT-able supplies), the higher the VAT burden on that person. Basic essentials are generally excluded from the scope of VAT in order to reduce the impact on citizens. Taxpayers and businesses need to prepare for VAT and different impacts will be felt by different businesses. This first article in the series discusses the general concepts of VAT based on prevailing laws and regulations around the world. Why should business start preparing for VAT now? VAT readiness will require businesses to look at all of their business processes. While the Saudi VAT law has not been announced, VAT law, practice and methodology is generic in most VAT systems around the world, with slight adjustments to meet country specific requirements. Businesses can start to assess their readiness to meet these generic requirements now, updating their assessments for any Saudi specific requirements as they become known. VAT readiness could require reconfiguring IT systems, which could take several months depending on the size of business and operations. System reconfiguration is a major exercise for a large organization and therefore, system readiness and testing could take anything from nine months to a year. Given this, preparations for VAT readiness should begin now. Some basics of VAT Generally, VAT applies to the supply of goods and services. Businesses making VAT-able supplies are generally required to register for VAT in order to collect VAT when making supplies to their customers. Certain businesses can be exempt from being required to charge VAT. The standard rate of VAT in Saudi Arabia is expected to be around 5% (Standard-rated supplies). However, certain goods and services could be subject to VAT at special rates (Special-rated supplies). In addition, certain goods and services could be subject to VAT at a rate of zero percent (Zero-rated supplies). Certain supplies could be exempted from VAT altogether (VAT-exempt supplies). Goods and services imported into a country are generally subject to VAT at the import stage. VAT in relation to import of goods is often collected by the customs authority at the time of release of the shipment. Generally, VAT on imported goods is applied on landed cost inclusive of the applicable customs duty. Normally only VAT-registered businesses are allowed to charge and collect VAT on the supply of VAT-able goods and services (Output VAT). Against such output VAT, businesses are usually entitled to adjust any VAT paid on VAT-able goods and services procured by the business (Input VAT). The net VAT (Output VAT minus Input VAT) is then deposited into the national treasury. Standard-rated supplies Most local supplies of goods and services in a country generally fall under this category. These can include whole-sale and retail sale of goods (including sales by retail stores), the consumption of food in a restaurant, the provision of services by lawyers, accountants, architects, etc. Zero-rated supplies Goods and services that are exported out of a country may be Zero-rated, that is, subject to VAT at a rate of zero percent. VAT-exempt supplies While the final list of VAT-exempt supplies has not been announced, the following businesses are often exempted from VAT in order to reduce the impact on citizens: Educational institutions on tuition fees Pharmaceutical supplies (medicines) Financial Services including both banks and life insurance companies Sale or lease of residential property It is likely that the Government would announce a detailed list of VAT-exempt supplies and an important consideration would be to minimize the impact on citizens. Out of Scope supplies Supplies where goods and services are delivered by an overseas supplier to another overseas person generally fall under this category as do private/non-business transactions. Charging and collecting VAT Businesses generally need to satisfy certain conditions for claiming Input VAT on business purchases and expenses. For example only the Input VAT on business purchases may be recovered and Input VAT incurred on non-business purchases would not be recoverable. VAT returns and payments VAT-registered businesses are generally required to submit periodic returns to the respective tax authority summarizing different categories of VAT-able supplies subject to Output and Input VAT and the net amount to be deposited into the treasury or claimed as a refund (or carried forward for offset against the VAT liability for the following period). The frequency of the returns can be monthly, bimonthly or quarterly. Generally, there is no matching concept in VAT to match the Input VAT against the Output VAT for a particular supply. A business should still be able to claim a credit for Input VAT paid on purchases in the VAT return for the period in which the product is imported or purchased. What changes are needed for VAT readiness? VAT is likely to impact different segments and businesses to varying degrees. Business will need to undertake a VAT mapping exercise of their current procedures and processes. Depending on the size and complexity of the organization and operations, VAT readiness can take anything between three months and a year. Conclusion VAT is likely to have a significant impact on business operations. VAT readiness needs to be considered and eventually implemented to try to ensure minimal impact on continuing business operations. If there is a single piece of advice one can give to businesses, it is to start VAT readiness preparations early. * The author is a Director at KPMG Al Fozan & Partners and leads the VAT practice. He can be reached at [email protected] for any clarifications in relation to the contents of this article
