As a result, all KSA companies and corporate groups holding an entity within their KSA structure ought to study how the VAT rate increase will affect and have an impact on their business overall. Areas to examine carefully include the following:
- those businesses and taxpayers affected by the rate increase need to ensure their accounting systems are compatible and can issue invoices and charge VAT at the new rate of 15% from 1 July 2020.
- timing of invoice issuance and receiving payment: Businesses and taxpayers must consider how to treat the sales of services or goods that are supplied before 1 July 2020 at the same time as the invoice is issued or payment is given after 1 July 2020 and or vice versa. Even though no specific transitional provisions may even be announced and released to refer to grey areas and resolve issues, the Implementing Regulations for KSA have transitional provisions enlisted for similar situations resulting from the introduction of VAT on 1 January 2018
- businesses and taxpayers that supply services and goods to the end-customers or end-client will need to start factoring the new VAT rate increase into their fees or pricing. Now is a good time for businesses to prepare and start updating prices lists, amend future proposals, update marketing material that includes pricing and other relevant documentation.
- for those taxpayers that are unregistered companies for example a passive holding company or companies that are part exempt that are not permitted to recover their input tax in full will incur a major increase in the cost of doing business in the kingdom of Saudi Arabia.
- taxpayers that provide exempt or zero rate supplies must have adequate proof in place to justify this VAT treatment. Any error in this treatment will lead to a significant VAT payment that might not be recoverable from the client or customer. Furthermore, it might also lead to a hefty penalty of up to 50% of the unpaid VAT (therefore this would in fact increase the rate to 22.5%). For that reason, it is extremely relevant for those companies that are providing zero rated export services, an area where the tax authority has and will always be very active and strict.
- some companies or taxpayers may need to reassess their current group, its structure and transaction flows to minimise the impact of the newly increased VAT rate.
WILL OTHER GCC COUNTRIES INCREASE VAT RATES?
The GCC VAT Framework Agreement currently consists of the 6 GCC countries / 6 member states and specifies 5% VAT rate. To date the 5% VAT rate has been rolled out and implemented by 3 countries including: the United Arab Emirates, Kingdom of Saudi Arabia, and Bahrain. Within KSA VAT Law or its Implementing Regulations it does not include or reference to the 5% VAT rate. Therefore, the GCC VAT Framework Agreement can only be amended by agreement of all the 6 GCC countries. At this time, it is unclear if the rate increase would require amending the GCC VAT Framework Agreement or if KSA will amend its current KSA VAT Law.
The United Arab Emirates Ministry of Finance has announced that it has no plans to follow the Kingdom of Saudi Arabia by increasing its current VAT rate. Younis Haji Al Khoori, undersecretary of the UAE’s Ministry of Finance has confirmed that UAE’s VAT rate is to remain the same. He further mentioned that the Ministry of Finance are studying their financial systems to ensure their readiness to manage the next stage and support all vital sectors.
The ministry is devising several programs and projects to enhance their ability to continue the development process and to put people as their top priority. This is essential to build a secure future and achieve the well-being and stability of the UAE.
This is reassuring to many and displays the UAE’s efforts to support its people. One support measure we have already witnessed is the extension for the due date for payment of VAT from 31 March 2020 until 28 May 2020, this will certainly aid the country’s economy during the current economic crisis.
CONCLUSION
As the UAE has confirmed it will not increase its current VAT rate it is uncertain which direction Bahrain will follow. The effects of an increase of VAT will be far reaching for most clients. Issues such as cashflow management, system amendments and transitional treatment of taxable transactions are all items that should be on every affected business’s agenda.
If your company needs any assistance discussing the impact of this change, Creation tax consultants would be happy to talk through some of the options available to minimise the disruption to company’s operations. To reserve your free consultation visit our website www.creationbc.com email info@creationbc.com or call +971 4 878 6240.
