KSA VAT rate increase: transitional rules published

Further to the announcement of the increase of the VAT rate from 5% to 15% that will take effect from 1 July 2020, GAZT has published a Guideline in Arabic providing examples of how its transitional rules will apply to the VAT rate change in KSA.

Although the law around the VAT rate change is yet to be published, the initial set of guidelines should be positively received by taxpayers as they allow what appears to be a reasoned approach to dealing with the VAT accounting issues associated with such changes.  In particular, those businesses engaged with the Public Sector will be pleased to note that VAT at 5% 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, such as insurers will also note that for invoices issued prior to May 11 but where services are provided post-1 July 2020, the 5% rate will still apply.

The Guideline summarises the transitional rules governing the impact of the VAT rate increase on:

1. contracts signed before the announcement of the VAT rate increase;
2. contracts signed after the announcement of the VAT rate increase; and
3. tax invoices relating to supplies taking place before and after the VAT rate increase.

In this respect, the transitional rules refer to 11 May 2020 as the date on which the VAT rate increase was announced – as a result, this is the key date to consider for transitional contracts.

The key aspects of the transitional provisions are summarized below.
 

Contracts

For contracts entered into between a VAT registered supplier and a Government body:

1. Where contracts were entered into before 11 May 2020 and span the effective date of the rate increase –  the supply can remain subject to 5% VAT until the earlier of the (i) time the contract expires, (ii) time the contract is renewed or (iii) 30 June 2021;
2. Where contracts were entered into between 11 May 2020 and 30 June 2020 –  5% VAT will apply if the supply was delivered before 30 June 2020.  If the supplies are delivered from 1 July 2020 onwards, the increased rate of 15% VAT should apply. 
   
   For contracts entered into between two VAT registered businesses:
3. Where contracts were entered into before 11 May 2020, and the supplies are continuous until after 1 July 2020, made to a recipient who can fully recover its input tax – the supply may be treated as subject to 5% VAT until the earlier of the (i) time the contract expires, (ii) time the contract is renewed or (iii) 30 June 2021;
4. Where contracts were/are entered into between 11 May 2020 and 30 June 2020 the 5% VAT rate will apply if the supply was delivered before 30 June 2020. If the supply is delivered from 1 July 2020 onwards, the increased rate of 15% VAT should apply.
    

Tax invoices

1. Where tax invoices are issued before 11 May 2020 which relates to a supply delivered on or after 1 July 2020 – the supply may be treated as subject to 5% VAT, provided the supply is delivered before the end of 30 June 2021.
2. Where tax invoices are issued between 11 May 2020 and 30 June 2020  – 5% VAT should apply where the supply will be delivered by 30 June 2020. If the supply will be delivered on or after 1 July 2020, the increased rate of 15% VAT should apply.
    

Next steps

We are still awaiting the formal law and regulations on these transitional rules, so there is still some detail that will need to be ascertained. However for the time being, the rules published so far should provide some assurance to a large number of taxpayers around the expected VAT accounting that will need to happen over the next 6 weeks. 

As the VAT rate change is fast approaching, we recommend all businesses to start the process of reviewing contracts and tax invoices for supplies that span the VAT rate increase period in order to assess, and properly address the VAT impacts.

Deloitte is prepared to assist you with the actions needed to help your business become prepared for the 1 July VAT rate change, providing support to help mitigate exposures and advising on how to most effectively manage your
business from a VAT perspective moving forward.