Last month Saudi Arabia’s General Authority of Zakat and Tax (GAZT) released the final implementing regulations to legislation governing the new GCC-wide value-added tax (VAT).
The move, which was announced on GAZT’s website and in the official gazette, is a milestone for companies operating in both the Kingdom and the wider GCC, as they prepare for full implementation of the law on January 1, 2018.
The 5% VAT, which will be rolled out across the six member states of the GCC under a unified agreement, will apply to all goods and services, though the treatment of certain sectors will be left up to individual countries. Financial services – to which an exemption is generally applied – as well as education, health care, real estate and local transport all fall into this category.
Tax revenue to help offset lower hydrocarbons receipts
The new tax is part of efforts by countries in the region to develop additional public revenue streams. While oil prices have rebounded somewhat this year, with Brent crude trading at around $57.50 per barrel as of mid-October, this is still roughly half its 2014 peak.
“The introduction of a VAT regime is representative of the economic climate in which we find ourselves. That can also be applied to the region at large,” Mishal A Al Hokair, deputy CEO and general manager of the entertainment division at Al Hokair Group, an entertainment and hospitality conglomerate, told OBG. “The reality of lower hydrocarbons revenue means we must adapt to sustain ourselves in the long term – this is the new reality.”
Direct revenue from the tax is expected to bring in the equivalent of 1.6% of the Kingdom’s GDP annually, according to estimates from the IMF.
In addition to bolstering government revenue, the introduction of VAT brings Saudi Arabia more in line with countries on the MSCI Emerging Markets Index, for which the Kingdom has been listed as a possible addition. Indeed, many MSCI countries have applied even higher rates; Malaysia has a 6% goods and services tax, while Russia and Turkey have an 18% VAT.
Saudi businesses prepare for VAT registration
All companies with an annual taxable supply of goods and services of SR375,000 ($100,000) or higher are required to register by December 20; however, companies that do not exceed SR1m ($267,000) will be granted a one-year extension. This should go some way towards helping small and medium-sized enterprises achieve compliance smoothly.
Businesses with turnover below the threshold, but in excess of SR187,500 ($50,000), can register voluntarily to help recover VAT from their expenses.
The largest businesses in the country, particularly those already registered for other forms of tax, are being automatically signed up for VAT, and 55,000 businesses had already enrolled by the end of the first month of registration.
For companies that fail to register before the deadline, there will be a fee of SR10,000 ($2670). Other VAT-related offences include: failing to submit a VAT return when due, resulting in a fine of 5-25% of the due tax; failing to pay tax on time, resulting in a fine of 5% of the unpaid tax per month; non-registered companies issuing a VAT invoice will face a fine of up to SR100,000 ($26,700); while the punitive amount will be up to SR50,000 ($13,300) for those who hide or fail to keep proper records.
Excise tax and expat levy to support Vision 2030 objectives
The new VAT is in keeping with Saudi Arabia’s broader tax approach, as the country adjusts to the economic situation facing the region.
The expatriate levy – whereby companies pay SR200 ($53.33) per month per expatriate employee – will be increased annually through to 2020, and in July an additional fee of SR100 ($26.67) per month for each expatriate dependant was introduced.
In June the GAZT imposed an excise tax, referred to in local media as the “sin tax”. The tax targets products that are deemed harmful to health, with taxes at a rate of 50% on soft drinks and 100% on energy drinks, tobacco and tobacco products.
The extra funding from these new taxes will contribute to the government’s future budgetary targets, as well as to Saudi Vision 2030, the national diversification strategy launched in April of last year.