Saudi Arabia: VAT rate to increase to 15% (COVID-19)

The Ministry of Finance on 10 May 2020 announced an increase to the value added tax (VAT) rate—measures to counter the economic implications of the coronavirus (COVID-19) pandemic.

The VAT rate will be increased to 15% (from the current rate of 5%) effective 1 July 2020.

The tripling of the VAT rate is intended to address the fiscal imbalance caused by a decrease in consumer and commercial spending, the loss of oil and tax revenues, and the cost of healthcare initiatives put into place in response to the pandemic.

Transitional provisions

Taxpayers need to review their existing contracts that provide for ongoing or periodic supplies of goods or services. For example, for continuous supplies (services, construction or installation of complex equipment), it could be prudent to agree on an intermediary service acceptance and invoicing protocol to avoid the entire supply being taxed at the higher rate especially in situations when customers are unable to recover input VAT in full. In this respect, the businesses need to consider what relief may be provided in any transitional rules (expected to be issued) and take appropriate steps.

Implications for the GCC

The impact on the Gulf Cooperation Council (GCC) agreement and the future of VAT in the region is unknown. Under the GCC agreement, the VAT rate is stipulated by Article 25 and is not determined by local law or regulations. As such, a rate increase is to be agreed upon by the GCC member states and must be announced at least six months before implementation so that business and consumers can plan. The VAT increase in Saudi Arabia is only six weeks away.

There will be questions regarding the enforcement of the GCC agreement as a common VAT framework, such as: Will the remaining GCC countries also increase their VAT rates to match Saudi Arabia? If the rates across the GCC are not aligned, consumption and spending in the Kingdom is likely to shift to those GCC states without VAT or with lower VAT rates.

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