In accordance with the provisions of the Unified VAT Agreement, the Kingdom of Saudi Arabia issued the VAT Law pursuant to Royal Decree No. For the purposes of the KSA VAT Law, only the KSA VAT levied in connection with supplies or imports made in the KSA falls within the definition of input VAT.
ECONOMIC ACTIVITY AND VAT REGISTRATION
WHO CARRIES OUT AN ECONOMIC ACTIVITY?
MANDATORY REGISTRATION
Non-residents of the Kingdom of Saudi Arabia are required to pay VAT on supplies made or received by them in the Kingdom of Saudi Arabia and to register for VAT regardless of the value of the supplies they are required to make collect and pay the VAT14. In a transition period until 1 January 2019, companies must only be registered where the annual turnover exceeds SAR, and applications for registration must be submitted no later than 20 December 201815.
OPTIONAL VAT REGISTRATION
CATEGORIES OF INPUT TAX
- GENERAL PROVISIONS
- VAT CHARGED BY SUPPLIERS ON GOODS OR SERVICES SUPPLIED IN THE KSA VAT which is correctly charged on a supply of goods or services in the KSA by a VAT-registered
- REVERSE CHARGED VAT
- VAT PAID ON IMPORTS
The KSA design agency is obliged to calculate the VAT on the invoice itself via the Reverse Charge Scheme. The import is reported in box 8 of the VAT return (Import subject to the standard VAT rate paid at Customs).
ELIGIBILITY FOR DEDUCTION
NON-ECONOMIC ACTIVITIES
A taxable person cannot deduct input tax if it is for purposes other than Economic Activities25. VAT incurred in relation to purchases for the private enjoyment of individuals, such as business owners or employees. VAT incurred for specific types of goods or services, which according to the Implementing Regulations are considered to be received outside the economic activity of the Taxable Person26.
Further details regarding the restricted categories of input tax are discussed in section 7 of this guideline. For the definition of non-economic activities, we refer to the guideline on economic activity.
TAXABLE SUPPLIES
Example (14): Al Saeed Co, an electronics company established in KSA, supplies goods located in the Netherlands to a Dutch customer. The KSA lawyer issues an invoice with KSA VAT for his services to Al Saeed Co. The services provided by the KSA lawyer can be attributed to the supply of goods in the Netherlands which would have been taxable if the same goods were supplied in the KSA.
Therefore, Al Saeed Co is eligible to deduct the VAT charged on the KSA lawyer's invoice as Input Tax.
TAXABLE PERSONS CARRYING ON FULLY TAXABLE ACTIVITIES
The input tax on the construction company's invoice can be directly attributed to the VAT-taxed activity (commercial leasing). The input tax on the carpet company's invoice can be directly attributed to the VAT-exempt activity (residential leasing). The accountant's services relate to both the VAT-taxed and the VAT-exempt supplies of the real estate company and are therefore a non-attributable cost.
Using the standard calculation method, this share is calculated to be two-thirds (66.67%) of the VAT charged on the auditor's invoice.
RESTRICTED INPUT TAX
PRIVATE USE
RESTRICTED CATEGORIES OF GOODS OR SERVICES
Any form of entertainment, sporting or cultural services;
Catering services in hotels, restaurants and similar venues;
The purchase or lease of restricted motor vehicles; as defined below
Repair, alteration, maintenance or similar services on restricted motor vehicles;
Fuel used in restricted motor vehicles;
A restricted motor vehicle is considered to be incurred outside the economic activity and is not eligible for deduction. VAT credit is not available for a restricted motor vehicle where there is any availability for private (personal) use: the cost is not apportioned between private and business use. An employer signs an agreement with sales representatives that they may only use their company car for personal use on Thursday and Friday, and the vehicle should only be used for business purposes on the remaining days, unless management specifically instructs them to use it for personal purposes.
Although the use of the vehicle is partially restricted, the vehicle is a restricted motor vehicle and no deduction is allowed.
Any other goods and services used for a private or non-business purpose
PROHIBITED GOODS
DOCUMENTS TO SUPPORT DEDUCTION
ALTERNATIVE EVIDENCES/DOCUMENTS
- Non-Arabic invoicing
ZATCA is of the opinion that a Taxable Person who receives a supply of goods or services must in all cases seek and retain a valid Tax Invoice. 35) Section 43, Collection of Tax on Imports on Entry into the Kingdom, Implementing Regulations (36) Section 49(7), Input Tax Deduction, Implementing Regulations. A Taxable Person receiving a supply of goods or services must in all cases seek and retain a valid Tax Invoice (in Arabic) to prove VAT deduction. A Taxable Person can therefore use this invoice to exercise his right to deduct Input Tax.
The taxpayer has other evidence that VAT has been paid to the supplier (bank statement, supplier's certificate) and.
TIMING FOR VAT DEDUCTION
STANDARD TIMING
Example (25): Universal LLC, a real estate development company, used the services of an architect for the development of new commercial real estate in Riyadh. VAT was charged to Universal LLC on architect KSA's invoice. Although the property has not yet been developed, the KSA Input Tax on the invoice is already deductible for Universal LLC as the architect's services are directly linked to the intended future taxable sale of commercial real estate in Riyadh.
A taxpayer who uses the cash accounting basis may only deduct input VAT in respect of supplies of goods and services for which and to the extent that payment has been made43.
DEDUCTION IN SUBSEQUENT TAX PERIODS
ADJUSTMENT OF INPUT TAX DEDUCTION
- CHANGE TO THE CONSIDERATION PAYABLE
- NON-PAYMENT
- THEFT, DAMAGE OR LOSS
- CAPITAL ASSETS
The adjustment to Input Tax Deduction is not linked to the supplier's eligibility for bad debt relief. A Taxable Person is not required to adjust the Input Tax where the goods of the Taxable Person are lost, damaged or stolen50. Deduction of Input Tax on capital assets is determined based on the buyer's intended use of the asset on the date the capital assets are purchased.
Further information on capital assets and the deduction of Input Tax relating to capital assets will be provided in a separate guideline.
SPECIAL CASES
PRE-REGISTRATION VAT
Therefore, the maximum allowable deductible Input VAT is calculated as if the net book value, determined in accordance with the taxable person's accounting practices, was the Consideration for the Supply. The goods have not been resupplied by the taxable person or fully used by the taxable person before the registration date. The services were purchased with the aim of using them in connection with the exercise of an economic activity57;.
The services have not been further provided or fully used by the taxpayer before the registration date;
VAT INCURRED IN OTHER COUNTRIES
Further interpretation is specified for the application of this provision of the KSA in the Implementing Regulations. In cases where the goods are fixed assets, these must not be fully depreciated on the registration date (have a positive book value). The goods are not of a type that is restricted from deduction, as described in section 7 of this guide56.
Services are not of a type for which deduction is limited (as included in section 7 of this guideline)58.
PROPORTIONAL DEDUCTION
APPORTIONMENT BETWEEN ECONOMIC AND NON-ECONOMIC ACTIVITIES Input VAT deduction is only available to the extent that costs are incurred in the course of an
Input VAT attributed to the supplies made to the taxable person in the course of the continuation by him of. Input VAT attributed to the supplies made to the taxable person in the course of carrying on a non-. Taxpayers must use a method that clearly and fairly reflects how the supplies in respect of which VAT was paid by the taxable person were used, and the extent to which they were used in economic activities.
The taxable person must determine the amount of tax incurred on the supplies received by him in the course of an Economic Activity and those received by him outside the Economic Activity, before apportioning the deductible VAT between taxable and exempt activities .
APPORTIONMENT BETWEEN TAXABLE AND EXEMPT ACTIVITIES
Completed deliveries refer to all outgoing deliveries made by the municipality within the framework of its public and economic powers. Taxable supplies refer to all incoming supplies that the taxpayer makes to the municipal body as a customer. Value of taxable supplies made in the last calendar year. Value of taxable and exempt.
The municipal authority can deduct Input VAT for SAR 800, being 40% of the SAR 2,000 of VAT on overheads in relation to Taxable Supplies.
DEFAULT METHOD
If the taxable person was not VAT-registered in the previous calendar year, this taxable person must calculate the proportional default deduction based on estimated values of the current calendar year. The taxable person must then make an input tax adjustment in the final tax return for that calendar year to reflect the correct proportionate deduction based on the actual supplies for the entire year64. In the first three months, the revenue generated with VAT-required business leasing amounts to SAR 750,000.
The turnover generated with VAT-exempt residential letting amounts to SAR 250,000 in the first three months.
USE OF ALTERNATIVE METHODS
ALTERNATIVE PROPORTIONAL METHODS
It includes the value of any exempt supplies made by the person and any supplies of goods or services made that would be exempt if they were made in the KSA.
APPLYING FOR ALTERNATIVE METHOD
DIRECTION BY ZATCA TO USE ALTERNATIVE METHOD
VAT RELATING TO INCIDENTAL ACTIVITIES
Example (34): Al Barakah Co, a supplier of industrial equipment in Dammam, wants to significantly expand its business by acquiring sites in other cities in the KSA. The funds raised from the share issue are used exclusively to expand the existing business which is fully taxable for VAT. Al Barakah Co incurs financial advisory and legal costs of SAR 6,000,000 on the share issue.
As the costs are for a subsequent event relating to the raising of capital for an ongoing taxable business, the VAT charged by the advisers and lawyers on the costs is deductible as Input Tax, in accordance with the usual proportional deduction (100 % as Al Barakah Otherwise, Co has full right to deduct VAT).
VAT OBLIGATIONS OF TAXABLE PERSONS
- ISSUING INVOICES
- FILING VAT RETURNS
- KEEPING RECORDS
- CERTIFICATE OF REGISTRATION WITHIN THE VAT SYSTEM
- CORRECTING PAST ERRORS
Further information on the requirements for VAT invoicing can be found in the VAT manual or at zatca.gov.sa. The VAT return is considered the taxpayer's self-assessment of the tax due for the period in question. The VAT return must be submitted and the corresponding payment of net tax due must be made no later than the last day of the month following the end of the tax period to which the VAT return relates.
This includes all documents used to determine the VAT payable on a transaction and in a VAT return.
PENALTIES
In all cases, if an offense is repeated within three years from the date of issuing the final decision of the penalty, the Authority may double a fine for the second offence. The level of the fine or penalty imposed is determined by ZATCA in relation to the taxpayer's conduct and compliance record (including taxpayers complying with their requirements to notify ZATCA of any errors and provide cooperation in correcting errors ).
APPLYING FOR THE ISSUE OF RULINGS (INTERPRETATIVE DECISIONS)
CONTACTING US
Q&A
How does the company calculate the proportional deduction for 2018, given that the company was not registered and no taxable or exempt supplies were made in 2017? In 2018, or for any business that was not registered in the previous calendar year, the proportional deduction is based on an estimate of the taxable and exempt supplies for the current calendar year. ZATCA is of the opinion that interest earned on a checking account, on which funds are accessible to the taxpayer, is not regarded as consideration for an exempt performance by the account holder.
This means that the account holder does not need to consider the interest received from the bank in relation to the balance in the immediate access current account as VAT-exempt turnover for the default partial deduction method (see 12.3). investments, the taxpayer will have to determine the correct VAT treatment of overhead costs.
