KSA to increase VAT rate to 15% to counter Covid-19 crisis

The General Authority of Zakat and Tax (GAZT) announced, on 11 May, that the standard rate of Value Added Tax (VAT) in the Kingdom of Saudi Arabia (KSA) would be increased from 5% to 15% with effect from 1 July 2020.

Mohammed bin Abdullah Al-Jadaan, minister for finance, economy and planning, said the measures were part of important steps being taken in the KSA to counter the financial and economic implications of the global crisis caused by the coronavirus pandemic.

The KSA first introduced VAT with effect from 1 January 2018. The aim was to diversify government revenues away from heavy dependence on oil towards more sustainable and stable income streams. It is the first of the Gulf Cooperation Council (GCC) states to move away from the originally agreed GCC standard rate of 5%.

The Ministry of Finance stated: “These measures are necessary and beneficial to maintain comprehensive financial and economic stability in the medium and long-term for the interest of the Kingdom and its citizens.”

Initial indications suggest the increase has been received by taxpayers in a positive manner and the transitional rules appear to be pragmatic. The guidelines refer to 11 May 2020 as the date to consider for transitional contracts.

Generally, any transaction within the scope of KSA VAT that is not liable to a specific zero-rating or exemption for which the supply, invoicing and payment all take place before 1 July 2020 will be liable to VAT at 5% and after 1 July 2020 they will be liable to VAT at 15%. Where the supply, invoice or payment occurs before 1 July and the remainder occurs after 1 July, businesses will need to assess whether to apply VAT at 5% or 15%.

After a full lockdown across the Kingdom over recent weeks, Saudi Arabia has now detailed a three-phase plan, starting on 28 May and culminating on 21 June 2020, to ease the lockdown restrictions:

• Phase 1 – From 28 May 2020 movement will be permitted across Saudi Arabia between the hours of 6am and 3pm. Shops and malls will be permitted to re-open with social distancing and face mask guidelines in place.
• Phase 2 – From 31 May 2020 movement will be increased between the hours of 6am and 8pm. Mosques will open for prayer with social distancing guidelines in place, public and private sector workers will be able to return to offices, restaurants and cafes will be able to open and domestic flights will be permitted to resume. An international travel ban will remain in place.
• Phase 3 – 21 June 2020 the entire Kingdom (with the exception of Makkah) will return to a pre-lockdown version of a ‘new normal’ although citizens/residents will be encouraged to wear masks and exercise social distancing.

In addition to Sovereign’s expertise in handling cross-border corporate and commercial matters, including forming, administering and managing companies, Sovereign is able to assist all clients with their preparations for the VAT rate change on 1 July 2020, as well as their market entry plans into Saudi Arabia. Please contact us for a no obligation discussion.