International issues arising with the new tax
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VAT was introduced on 1 January 2018 and, as would be expected, a number
of issues are appearing for both taxpayers and the Saudi tax authority, the General Authority for Zakat and Tax (GAZT). Some of the most relevant points for international businesses are summarized below.
It had been expected that special rules would be applied to transactions between member
states of the Gulf Cooperation Council (GCC), namely, Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, and the United Arab Emirates (UAE). However, to date, only Saudi Arabia
and the UAE have implemented VAT and, in addition, the electronic system for the
exchange of information between member states has not been set up. As a result,
Saudi Arabia has confirmed that until further notice, no distinction will be made
between supplies of goods or services to GCC customers and supplies to non-GCC
customers. This treatment was expected for supplies of goods, but the GAZT recently
confirmed that it will also apply the same approach to services.
The VAT law contains a zero-rating for services supplied to foreign customers (strictly
speaking, the law says supplies to non-GCC residents but, as noted above, no distinction is
made between GCC and non-GCC customers). On first reading, this appears to be a useful
relief for international services. However, the law is drafted in a very restrictive way with a number of conditions to be met.
The GAZT is interpreting the conditions very strictly and, as a result, services supplied from Saudi Arabian businesses to customers outside the country will be subject to VAT in many cases. This is causing disputes between Saudi businesses and their foreign customers that had expected to receive services VAT free.
International branch to head office supplies
The VAT law states that there is no VAT on supplies that an entity 'makes to itself'. This
means that branch-to-branch transactions or head office to branch transactions are
not supplies within the scope of VAT.
This is straightforward for domestic transactions but there has been some question as to whether the GAZT is accepting this for cross-border branch to head office transactions.
We are awaiting confirmation from the GAZT on this point.
If the GAZT confirms there is no supply between branches and their overseas head
offices, there will be a question as to whether the branch will be entitled to register for VAT and recover input tax in Saudi Arabia. Further clarification from the GAZT on this point may also be required.
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