The Zakat, Tax and Customs Authority (ZATCA) in Saudi Arabia has issued new transitional guidelines on the increase of the VAT rate from the current 5% to 15%, taking effect from July 1, 2020. The transitional measures began on the day of the announcement of the new VAT rate, which was May 11, 2020.

To prepare the taxpayers for the VAT increase, the ZATCA has published information on transitional provisional guidelines that clearly summarizes how the transitional rules will apply to the KSA VAT rate change. According to the guide, the transitional period for the rate to be fully effective is from July 1, 2020 to June 30, 2021.

In this guide, we will take a look at what you need to do with your contracts and tax invoices, based on whether they were filed before or after the VAT rate increase.

For contracts signed between VAT-registered business and government bodies

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CASE 1 - If the contract was signed prior to May 11,2020

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If a VAT-registered business and a government body signed a contract before the transition date, then VAT of 5% will apply on supplies made under that contract from July 1, 2020 until the contract renewal date, contract expiry date or June 30, 2021, whichever comes first.

Example: Let us suppose that your company signed a contract with a government body on February 10, 2020 to supply office equipment until September 2020. The VAT rate applicable on that supply is 5% as the contract was signed before May 11, 2020.

CASE 2 - If the contract was signed between May 11, 2020 and June 30, 2020

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If a VAT-registered business signed a contract with a government body on or after May 11 and before July 1, there are two scenarios depending on when the supply is completed.

1. If the supply was completed before July 1, 2020, then the VAT rate applicable will be 5%
2. If the supply was completed on or after July 1, 2020, then the VAT rate applicable will be 15%

Example: Let us assume a company has signed a contract with a government body for supplying laptops and delivering them on May 17, 2020. The VAT rate applicable will be 5% of the total amount of the supplies.

If the same contract is extended for some reason, and the supplies are delivered on July 30, then the VAT rate applicable will be 15%.

For contracts signed between two VAT-registered business

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This condition is similar to the conditions set for contracts signed between VAT-registered businesses and government bodies. The agreement determines the value of VAT that will apply on supplies made before or after July 1, 2020.

CASE 1 - If the contract was signed prior to May 11,2020

If two VAT-registered businesses sign a contract before May 11, 2020, and supply continues on or after July 1, 2020 (the last date to transition to the new rule), then the customer has the right to deduct full input tax.

In this case, the VAT rate applicable will be 5% on supplies that will take place on or after July 1, 2020 and until the contract renewal date, the contract expiry date or June 30, 2021, whichever comes first.

Example: Let us assume that two VAT-registered businesses sign a one-year contract, on March 2020, for provision of office supplies to be carried out in a phased manner, continuing after July 1, 2020. This supply will be subjected to 5% VAT.

CASE 2 - If the contract was signed between May 11, 2020 and June 30, 2020

If the two VAT-registered businesses signed a contract between May 11, 2020 and June 30, 2020, then a standard rate of 5% VAT will be applicable if the supply is delivered before July 1, 2020. If the supply will be delivered on or after July 1, 2020, the applicable VAT rate will be 15%.

When the supply is taking place in phases, then the person filing the tax should allocate 5% VAT for the portion of the supply that is made before July 1 and 15% VAT on the portion of the supply made on or after July 1.

Example: Let us assume that two VAT-registered businesses signed a contract on May 25, 2020 for delivery of construction material. If all the materials are delivered before July 1, 2020, then the VAT rate applicable on the materials will be 5%. If all the materials get delivered after July 1, then the VAT rate applicable will be 15%.

Now suppose there are two parts to the supply, Part A and Part B. Part A is scheduled to be delivered before July 1, so the VAT applicable on it will be 5%. Part B will get delivered on or after July 1, so the VAT rate will be 15% on Part B.

For tax invoices

The ZATCA has come up with special guidelines to determine the VAT rate applicable on tax invoices.

CASE 1 - If tax invoice is issued before May 11, 2020

If the invoice is issued prior to May 11, 2020 and the actual supply takes place between July 1, 2020 and June 30, 2021, the VAT rate applicable on the supply will be 5%.

Examples:

Situation 1: Let’s assume that you purchased a 3D printer in April 2020 and an invoice was issued with the due date of July 30, 2020. The VAT rate applicable will be 5% as the tax invoice for the printer was issued before May 11, 2020.

Situation 2: Now let’s assume that you are purchasing 100 such printers and the delivery is supposed to take place after July 1, 2020. The VAT rate applicable will still be 5%, provided the delivery is completed before June 30, 2021.

CASE 2 - For periodic tax invoices issued on continuous supplies

If a tax invoice is issued before May 11, 2020 and is executed in parts then the part of the supply completed before July 1, 2020 will be charged 5% VAT and the part completed after that date will be charged 15% VAT.

Example: Let’s say you signed a contract with a printer maintenance company on April 25, 2020 for two years and the invoice has been issued on the same date. A 5% VAT rate will be applicable on tax invoices for services provided from April 25, 2020 to June 30, 2020. For services provided on or after July 1, 2020, the invoices will be charged at 15% VAT and the printer maintenance company must issue a new invoice showing the new tax rate.

CASE-3 If the tax invoice is issued between May 11, 2020 and June 30, 2020

In this case, if the actual supply is made on or before June 30, 2020, then the applicable VAT rate will be 5%. For supplies actually taking place on or after July 1, 2020, the VAT rate applicable will be 15%.

Examples:

Situation 1: Let’s say you purchased a laptop on May 15, 2020 and an invoice was also issued that same day, with delivery scheduled to take place on June 15, 2020. The VAT rate applicable will be 5% as the supply was delivered before July 1, 2020.

Situation 2: If the same product is actually delivered after July, 1, 2020, then an additional 10% VAT will be charged on the laptop because the delivery date crossed the VAT rate increase date. The seller must issue a tax invoice indicating the correct tax due on the laptop as the VAT rate applicable now will be 15%.

CASE-4 For tax invoices on imported shipments

This case refers to invoices on products that were purchased before May 11, 2020 and have to arrive in Saudi Arabia via customs. If the import happens on or before June 30, 2020 then the VAT rate will be 5%. If it happens after July 1, 2020, then the VAT rate will be 15%.

Example: Say you purchased a tablet for your office on May 9, 2020 via a global e-commerce website. If the product arrives at customs on or before June 30, 2020, then customs will apply 5% VAT on the tax invoice. If the product gets delivered to customs after June 30, the VAT rate will be 15%.

Important Note

These transitional guidelines published by the ZATCA will be strictly applicable from July 1, 2020. Hence it would be a good time for taxpayers and businesses to review their contracts and invoices to understand the impact of this change before that date.

Source: Zakat, Tax and Customs Authority