In a previous article entitled "Introduction of Value Added Tax ("VAT") in the Kingdom of Saudi Arabia", posted on May 24th, 2017 on , it was indicated that the General Authority of Zakat and Tax ("GAZT") was soon to release the draft VAT law (the "Draft Law") for public consultation. It is now common knowledge, that all the GCC states signed the GCC Unified Agreement on VAT ("UAVAT") bringing together all the member states and aligning their approach to the implementation of VAT throughout the GCC. The conclusion of the UAVAT also formalized the common standards and where individual GCC states could have flexibility when formulating their own internal VAT laws and policies. The GCC member states are all in the process of finalizing their internal VAT legislation in anticipation of the implementation date on 1 January 2018, and the Kingdom of Saudi Arabia ("KSA") are the first to do so with the release of the Draft Law which has now been posted on the GAZT's website ( for public consultation and comment till June 29th, 2017, where after the final law is expected to be released in the third quarter of 2017.

After analysis of the Draft Law, consisting of some 12 Chapters and 77 Articles, we highlight some of its key features herein below. It must however be borne in mind that the Draft Law must be read together with the law's implementing regulations expected to be published by the end of September 2017 (the "Regulations") which are yet to be released and to which the Draft Law refers to over 100 times, not to mention the reference in the first 55 Chapters to UAVAT.

Scope of Application

Article 2 of the Draft Law provides that the VAT shall be imposed broadly on most supplies of goods and services and on imports. The concept of imports will include the local utilization of services such as those provided electronically from foreign jurisdictions.

Taxable Persons

Article 3 of the Draft Law provides that taxable persons are persons who carry out an economic activity independently as a primary or supplementary occupation, irrespective of where this economic activity is carried out and where such persons are registered or ought to register for VAT within KSA.


Under Article 4 the Draft Law, the registration requirements and obligations are determined. The UAVAT stipulates that persons generating annual revenues of SAR. 375,000 (Three Hundred Seventy-Five Thousand Saudi Riyals) and above are obligated to register for VAT purposes which should be reiterated in the Regulations later. Article 4 also allows for voluntarily registration provided certain conditions laid down in the Regulations are met.

A worthy feature is the allowance granted by Article 5 of the Draft Law to groups of companies to register as a VAT group which is defined as a group of entities which carry on an economic activity, reside in KSA and have close financial or economic ties with one another. Persons registered as a VAT group shall be treated as a single taxable person for the purposes of their VAT obligations and although it will alleviate the necessity of charging VAT in inter-company transactions, both companies will be jointly and severally responsible for each other's VAT obligations.

It is to be noted that the GAZT will start registering businesses for VAT purposes through its electronic registration system-Erad, once the Regulations are published. Upon registration, a taxable person shall be assigned a Tax Identification Number (TIN).

Article 6 further provides general rules for registration and deregistration.

Place and Time of supply Rules

Chapters 4 and 5 deal with the place and time of supply rules that will be applicable. It is extremely important to establish compliance with these rules as the place and time of supply of goods and services are not always apparent and some special rules apply in certain circumstances and of importance is the application of these rules when dealing with imports from both GCC states and non-GCC states, and the Regulations will contain certain "reverse charge" VAT (referred to in Article 27) of the Draft Law.

Exempt and Zero Rated Supplies

An important distinction must be drawn between zero-rated and exempt supplies as the former brings imposes a registration obligation upon the supplier however also allows the supplier to reclaim VAT expended in the supply chain leading to the supply of the goods or services. A supplier of exempt goods cannot deduct any VAT charged to the supplier during the supply chain process. In Chapter 6 also states that the Regulations will set forth which supplies would be exempt and be zero rated for VAT.

Deemed Supply of Goods

Under the provisions of Article 13 of the Draft Law, a person is deemed to have supplied taxable goods in the KSA where the goods in question have been transported outside of Saudi Arabia by the person itself or by the customer or by any person on their behalf, but the person has failed to provide evidence of the transport taking place within the time limits specified in the Regulations.


Imports shall be taxed in accordance with the provisions of the UAVAT. An import of goods is deemed to have taken place on the date the goods are brought into the KSA, which is the date of the customs' declaration and where such declaration does not exist, when the goods are physically imported into KSA. Where the goods are held in a customs' duty suspension regime ("in bond"), the import shall be deemed to have taken place when they are released from that regime in the KSA.

The value of imported goods for calculating VAT is determined in accordance with the provisions of the UAVAT which shall be the value of the goods plus the amount of any excise duty levied on those goods. The Regulations will specify which imported goods shall be exempt from VAT.

Calculation of VAT

Chapter 9 of the Draft Law deals with the calculation of VAT at either a zero rate or the standard rate. The Regulations shall specify the rate of VAT applicable to taxable supplies and imports and may also provide for other applicable rates in respect of specific supplies of goods and services. The UAVAT has determined the initial standard VAT rate to be 5%. Articles 25 and 26 distinguish between "invoiced based" and "cash based" accounting mechanisms. Invoiced based accounting is where the supplier invoices for the goods or services supplied and reflects the applicable VAT on the invoices, then deducts the total of VAT reflected in his supplier's invoices from the total of the VAT reflected on his invoices for any VAT period, and the difference between the two is either paid to or claimed from the GAZT. The deduction of VAT paid by a supplier ("Input VAT") will be subject to the provisions of Article 29 of the Draft Law and the Regulations. The liability to make payment of the net VAT amount arises on the date of invoice and not the date of receipt of payment, a provision for which institutions must be aware as it can cause serious cash flow implications. Provided certain criteria are met, as will be prescribed by the Regulations, a cash based accounting regime may be applied for.

There will be special rules available for the supply of used goods which will be determined in the Regulations. These rules are believed to include rules regarding the exemption of reflecting VAT on the supplier's invoices when dealing with second hand goods as VAT will only be charged on the difference between the purchase price and the sale price of second hand goods (as defined in the Regulations).

Tax Invoices, Credit and Debit Notes

The Regulations will provide for time limits within which taxable persons are required to issue a tax invoice. They may also specify the format and contents of a tax invoice and allow the issuing of electronic invoices. It is submitted that invoices must be issued within 14 days of the date payment, the date of delivery of goods or the date of completion of supply of services, whichever is the earlier, if the indications are correct judging from what the UAE have released publicly. Article 31 of the Draft Law contains provisions relating to credit and debit notes which will be supplemented by the Regulations.

Tax Period, Filing of Tax Returns and Payment

Chapter 10 of the Draft Law deals with procedures and administration of VAT and deals with the tax period in Article 37 for which tax returns must be submitted. The length of the periods for which tax returns must be submitted will be determined in the Regulations however it is anticipated to be for three month periods commencing from 1 January 2017 or the date of registration for VAT and taxable persons must file their tax returns with the GAZT within this time frame. It is assumed that as for the UAE, that the tax returns will be due 28 days after the closing date of the tax period. Tax returns shall be in the format prescribed by the GAZT and specify the amount of tax payable and any other matters as may be prescribed by the Regulations from time to time. The tax period and the payment date may be further regulated in the Regulations. Failure to submit a tax return and failure to make payment of the amount of VAT due will result in penalties and the GAZT being able to independently assess the taxable person for what the 

The general rules determined in Article 39 of the Draft Law that tax shall be payable in accordance with the following timelines:

  • in the case of a taxable supply: - by the date the tax return for a given tax period must be filed;
  • in the case of an assessment of additional tax payable to the GAZT as a result of a tax assessment: - on the date specified in the notice of assessment; and
  • in any other case: - on the date the taxable transaction occurs.

The GAZT may grant a taxpayer an extension of time to pay the tax in terms of Article 40 of the Draft Law, if the person presents evidence that he is unable to pay VAT when due or evidence showing that payment of VAT in one amount would cause him undue hardship however this concession may be revoked and will not suspend the liability for the payment of penalties due to the amount not being paid on time.

Tax Records

Article 41 of the Draft law makes it mandatory for taxpayers to maintain tax invoices, books, records and accounting documents relating to their taxable activities. These documents include but are not limited to the following:

  • Tax invoices, credit notes, and debit notes received by the taxpayer;
  • Tax invoices, credit notes, and debit notes issued by the taxpayer; and
  • Customs documentation relating to imports and exports made by a taxpayer.

The length of time that the above records will need to be retained will be determined in the Regulations however the prediction is that the retention period shall be no less than 5 years.

Reviews and Appeals

Article 53 of the Draft Law grants taxable persons the right to have any assessment for VAT issued by GAZT reviewed and may appeal any decision made by GAZT thereafter. The Regulations will determine the procedures and time periods pertaining to the lodgment of reviews or appeals and also restrictions that may be imposed.

Penalties and Fines

In summary of Chapter 11 of the Draft Law, taxpayers who fail to register or pay VAT in accordance with the provisions of the Draft Law and the Regulations, shall be liable to the following penalties and fines, of which we highlight the following:

  • failure to register for VAT purposes: SAR. 10,000 (Ten Thousand Saudi Riyals);
  • errors in tax returns: fifty percent (50%) of the under reported tax;
  • overstated claims for refund: fifty percent (50%) of the amount by which the claim to tax refund is overstated;
  • failure to pay VAT when due: SAR. 1000 (One Thousand Saudi Riyals) plus an amount calculated as follows:
    • five percent (5%) of the unpaid tax if the delay does not exceed thirty (30) days from the time limit specified in the Draft Law and the Regulations;
    • ten percent (10%) of the unpaid tax if the delay exceeds thirty (30) days and does not exceed ninety (90) days from the time limit specified in the Draft Law and the Regulations;
    • twenty percent (20%) of the unpaid tax if the delay exceeds ninety (90) days and does not exceed three hundred sixty-five (365) from the time limit specified in the Draft Law and the Regulations;
    • twenty five percent (25%) of the unpaid tax if the delay exceeds three hundred sixty-five (365) days from the time limit specified in the Draft Law and the Regulations.
  • failure to file tax returns: SAR. 1000 (One Thousand Saudi Riyals) plus an amount equal to two percent (2%) of his average monthly taxable supplies calculated in accordance with the Draft Law and the Regulations, with a maximum of SAR. 20,000 (Twenty Thousand Saudi Riyals) per occurrence;
  • issuing of invoices by unauthorized persons: a penalty equal to the higher of SAR. 1,000 (one Thousand Saudi Riyals) or double the amount of VAT;
  • failure to maintain books and records: SAR. 1,000 (One Thousand Saudi Riyals) and two percent (2%) of his average monthly taxable supplies calculated in accordance with the Draft Law and the Regulations, provided that the penalty does not exceed SAR. 20,000 (Twenty Thousand Saudi Riyals) per occurrence.

Joint Liability for Penalties

The Draft Law talks about the appointment of a responsible person by the taxable person who shall be responsible for the tax matter of the taxable person. Article 71 of the Draft Law provides that the responsible person shall have joint and several responsibility with the taxable person for all the tax responsibilities and obligations which shall include the responsibility for the payment of any taxes and any penalties imposed upon the Taxable person. The is an extremely onerous provision and imposes the penalties on the basis of personal liability. 

Transitional Provisions

The Draft Law makes provision for "grandfathering" provisions which will be determined in the Regulations and which are to ensure a smooth transition into the VAT implementation whereby dealing with transactions which span the imposition date on 1 January 2018 and thereafter. Issues that are anticipated to be dealt with by these provisions are rental leases which have been entered into prior to the implementation date and only expire after the said date. It is believed that in the case of commercial leases which span the implementation date and that are silent regarding the provision of VAT will allow the landlord to charge VAT on the lease if the tenant is also registered for VAT, while in the event that the tenant is not registered for VAT the rental will be deemed to be VAT inclusive, however we will eagerly await the publication of the Regulations in this regard.

Next Steps

The GAZT is set to release the Regulations once the Draft Law has been finalized (expected around the end of September 2017) and to implement both texts on January 1st, 2018 save for Article 4 (Registration), Article 5 (VAT Group Registration) and Article 6 (Deregistration) of the Draft Law.

Individuals and corporations are urged to immediately take the necessary actions to prepare themselves and not be caught out by the provisions of the Draft Law and the Regulations once it is implemented. There are numerous financial implications for persons and corporations that have not familiarized themselves with this legislation and obtained the necessary assistance from their lawyers, accountants as well and from VAT consultancy firms that are capable of  giving strategic advice to avoid that VAT become a cost to the enterprise.

Originally published by Lexis Nexis Middle East.

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.