The government of the Kingdom of Saudi Arabia (KSA) passed a new law increasing the Value-Added Tax (VAT) on goods and services from 5% to 15%.
The VAT rate increase was announced on 11 May 2020, and entered into effect on 1 July 2020, with a transitional period extending to 30 June 2021.
Background
The VAT law is based on the VAT unification agreement of the Gulf Cooperation Council (“the GCC agreement”), published on 21 April 2017. A 5% VAT rate had been agreed to by all GCC member states with an implementation deadline initially set for 1 January 2019, but which was postponed to early 2021. At this point, the 5% VAT rate has only been implemented in KSA, United Arab Emirates and Bahrain.
KSA VAT applies to all goods and services that have not been specifically exempted. While it applies to insurance premiums, such as medical and accident insurance, there is a specific exclusion for life insurance premiums.
Key details
The VAT rate increase provision was announced along with other measures aiming to counter COVID-19 financial and economic impacts and to boost government revenue following the drop in oil prices.
The General Authority of Zakat and Tax (GAZT), responsible for the administration and implementation of the VAT in KSA, issued transitional provisions guidance to help businesses and taxpayers better implement the VAT rate increase.
Insurance contracts (Takaful)
When insurers are providing cover over a period extending past 1 July 2020, the premium portion prior to 1 July 2020 is subject to a 5% VAT rate while the premium portion after 1 July 2020 is subject to a 15% VAT rate. However, this rule doesn’t apply if the insurer issued a tax invoice prior to 11 May 2020 for the performance of insurance services ending before 30 June 2021.
For example, if an insurer issued a tax invoice on 1 January 2020 at a 5% VAT rate for the entire annual premium on a health insurance policy which was paid in advance and in full, the insurer doesn’t need to charge additional tax for the portion extending from 1 July 2020 to 1 January 2021.
Implication for the GCC
Article 25 of the GCC agreement states that the VAT rate should be agreed upon by all the GCC member states. Instead of complying with article 25 of the GCC agreement, KSA determined a new VAT rate individually. Therefore, the future of VAT in the region is unknown. While United Arab Emirates’ national news website announced that they would not be increasing their VAT rate, it remains unknown whether the other GCC countries will match KSA’s new VAT rate.
It is also unknown if KSA’s VAT rate increase is a temporary measure to counter the economic impact of COVID-19, justifying the noncompliance with the GCC agreement.
Useful resources
GAZT transitional provisions guidelines (opens a new window)