VAT Transitional Rules - KSA

If you’re a business owner, the new taxation regime will probably raise a lot of questions in your mind. Here, we’ll discuss the important transitional provisions that the Zakat, Tax and Customs Authority (ZATCA) has introduced for the levy of VAT on contracts and supplies of goods/services. This section will cover the following topics:

• What are transitional provisions?
• Transitional provisions for the supply of goods and services
• Transitional provisions for contracts

What are transitional provisions?

The introduction of VAT is the first time an indirect taxation method is being implemented in Saudi Arabia. Therefore, ZATCA has established certain provisions to make it easy for businesses to adapt to the VAT regime and have a smooth transition process. 

Transitional provisions for the supply of goods and services

When a taxable business owner in KSA supplies goods and services to business owners located in other GCC states, certain transitional provisions apply. This is because Saudi Arabia and the United Arab Emirates are the only GCC member states to have implemented VAT at present. 

Supplies of goods/services from KSA to other member states that haven’t yet implemented VAT will be treated as exports. These supplies will be considered zero-rated, and input VAT can be deducted for them.

Transitional provisions for contracts

2018 will be treated as a transitional period for business owners. For this year, supplies of goods and services delivered under certain pre-VAT contracts will be treated as zero-rated, provided the contracts meet ZATCA’s guidelines. During this transitional period, suppliers and business owners who have previously signed long-term contracts can renegotiate the contracts to suit the new tax regime.

For contracts signed before May 31, 2017, and contracts that are exclusive of VAT, the supply of goods and services can be treated as zero-rated until the end of the contract or December 31, 2022 (whichever comes first). The taxpayer should deduct any VAT incurred on the supply of goods and services made after the deadline.

Contracts that contain VAT-related provisions, and contracts where the price of goods and services can be adjusted legally to include VAT, are exempt from transitional provisions.

A contract must meet the following requirements to qualify for transitional provisions:

• The contract must have been signed before May 1, 2017.

• The taxable supplier must be able to completely deduct the input tax on the supply (or refund the tax).

• The customer must submit a written letter to the supplier confirming their eligibility to deduct and refund the input tax completely. 

Any supply made after December 31, 2018 will be taxable under the VAT regime.

According to a recent announcement from ZATCA on VAT rate increase from 5% to 15%, new transitional guidelines have been introduced. These guidelines have been effective since 1 July 2020 and will be applicable on contracts and tax invoices.