On 03/05/1438 H (corresponding to January 31st, 2017 G), Saudi Arabia ratified the Gulf Cooperation Council (GCC) Value Added Tax Framework Agreement (the "Framework Agreement") by virtue of Royal Decree No. M/51.

Set out below are some of the key features of the Framework Agreement:

  • The standard VAT rate to take effect on January 1st, 2018 will be 5% except where a zero rate or exemption applies;
  • The GCC Member States may apply a zero rate or exempt the following sectors from the VAT:

    • Local transport;
    • Health;
    • Real estate;
    • Education.
  • Companies with an annual revenue ranging between SAR. 187,500 and SAR. 375,000 have an option to register and be subjected to VAT;
  • Companies with an annual revenue in excess of SAR. 375,000 shall be under an obligation to register for TVA VAT purposes;
  • Each GCC Member State is given the freedom to regulate the VAT in its free zones;
  • The concept of group of companies is recognized in reach Member State for a consolidated VAT treatment;
  • Supplies of goods and services from a VAT registered person in one Member State to another VAT registered person in another Member State are subject to the reverse charge mechanism;
  • Export of goods to countries outside of the GCC Member States will be subject to a zero VAT rate;
  • Member States have the right to subject medical supplies to a zero VAT rate;
  • Member States may subject certain food products to a zero VAT rate;
  • Member States are allowed to subject oil derivatives and gas to a zero VAT rate;
  • Intra GCC and international transport will be subject to a zero VAT rate;
  • Member States are allowed to exempt Financial Services from VAT. Although Financial Services are not defined, they are broadly understood to cover money and securities' transactions, foreign exchange operations, deposits, trade credit facilities and related intermediary services.

Saudi Arabia is looking to implement VAT on January 1st, 2018. It is expected that the VAT law will be issued by the end of May 2017. The VAT registration process will be managed by ERAD, the DZIT's online electronic filing system.

Businesses are advised to prepare themselves for the implementation of VAT in order to secure compliance with the law and its implementing regulations which will be issued in July 2017 for public consultation and comments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.