WHAT IS VALUE ADDED TAX IN SAUDI ARABIA?
VAT in Saudi Arabia refers to the indirect tax that consumers pay on specific goods and services. When a VAT registered business sells a product or service, consumer need to pay 15% VAT.
WHAT IS THE VAT REGISTRATION THRESHOLD IN SAUDI ARABIA?
- Under KSA VAT, companies whose yearly supply value exceeds SAR 375,000 are required to file for VAT registration by the deadline.
- Businesses may request a voluntary registration if their yearly purchases, expenses, and supplies total more than SAR 187,500 but less than SAR 375,500.
Value Added Tax (“VAT”) is an indirect tax which is imposed on the importation and supply of goods and services at the production and distribution stages, with certain exceptions. VAT is implemented in more than 160 countries around the world.
VAT is a tax on consumption that is paid and collected at every stage of the supply chain, starting from when a manufacturer purchases raw materials until a retailer sells the end-product to a consumer. Unlike other taxes, persons subject to VAT will both:
- Collect VAT from their customers equal to a specified percentage of each eligible sale; and
- Pay VAT to their suppliers, if any, from whom they have received the goods or services, equal to a specified percentage of each eligible purchase.
When Taxable Persons sell a good or service, a 15% VAT charge – assuming a standard case – is assessed and added to the final sales price. The Taxable Persons will account for that 15% that they have collected from all eligible sales separately from its revenue to later remit a portion of it to the authority. The VAT that Taxable Persons collect on their sales is called Output VAT. The same will apply to purchase transactions done by Persons subject to VAT, in that VAT will be added at the rate of 15% to purchases of goods or services done by Persons subject to the VAT (on the assumption that the basic rate applies to those supplies). The VAT a business pays to its suppliers is called Input VAT.
HOW TO IMPLEMENT VAT IN A COMPANY- WHAT ARE THE KEY STEPS?
Implementing VAT in a company involves several essential steps to ensure compliance with tax regulations and smooth integration into business operations. Here are the essential steps:
Start by educating key stakeholders within the company, including management, finance, accounting, and procurement teams, about VAT regulations, implications, and requirements.
Evaluate the impact of VAT on the company’s operations, finances, pricing strategies, and cash flow. Develop a comprehensive implementation plan outlining key milestones, timelines, and responsibilities.
Determine whether the company meets the threshold for VAT registration in the applicable jurisdiction(s). If required, register for VAT with the relevant tax authority and obtain a VAT registration number.
UPDATE SYSTEMS AND PROCESSES:
Modify accounting, invoicing, and reporting systems to accommodate VAT requirements. Ensure that systems can accurately calculate VAT on sales, purchases, and transactions.
TAX CODING AND CHART OF ACCOUNTS:
Update tax coding and chart of accounts to include VAT-specific codes and categories for tracking VAT-related transactions separately from other income and expenses.
CUSTOMER AND SUPPLIER COMMUNICATION AND AMENDMENT IN AGREEMENTS:
Inform customers and suppliers about the implementation of VAT, including changes in pricing, invoicing formats, and payment terms. Provide clear guidance on how VAT will be applied to transactions.
Revise invoice templates to include VAT details, such as VAT registration number, tax identification numbers, VAT rates, and amounts. Ensure that invoices comply with VAT invoicing requirements set by the tax authority.
Provide training to relevant staff members on VAT compliance, including record-keeping obligations, invoicing rules, input, and output VAT calculations, and filing requirements.
VAT ACCOUNTING AND REPORTING:
Establish procedures for VAT accounting, including the treatment of input VAT (VAT on purchases) and output VAT (VAT on sales). Set up processes for VAT reconciliation, reporting, and filing VAT returns with the tax authority.
Maintain accurate records of all VAT-related transactions, invoices, receipts, and VAT returns in compliance with record-keeping requirements. Implement a robust document retention system to ensure easy access to records during audits.
INTERNAL CONTROLS AND AUDITS:
Implement internal controls to monitor VAT compliance, detect errors, and prevent fraud. Conduct regular internal audits to review VAT processes, identify areas for improvement, and ensure ongoing compliance.
MONITOR CHANGES IN VAT REGULATIONS:
Stay informed about changes in VAT regulations, rates, and exemptions. Update internal processes and systems accordingly to reflect any changes in VAT law.
SEEK PROFESSIONAL ADVICE:
Consult with tax advisors or VAT specialists in Saudi Arabia to ensure that the company’s VAT implementation complies with applicable regulations and best practices.
By following these essential steps, companies can successfully implement VAT into their operations, achieve compliance with tax regulations, and effectively manage VAT-related risks and opportunities.
KEY AREAS TO FOCUS:
- Analysis of sales, purchase transactions and amendment of agreements with parties.
- Corporate structuring and grouping for vat purposes to optimize over all VAT burden of group.
- Products and pricing review considering any change in cost structures.
- Amendment of Financial modelling of impacts upon business for new/upcoming projects.
- Tax issues to address or clarify business-specific VAT issues.
- Identification of process owners and documentation of performance obligation.
- Training of staff on the processes.
- Business process reengineering to ensure accurate execution of VAT documentation throughout supply chain.
- IT systems changes.
- Project management.
TAKEAWAY
An efficient VAT implementation planning will enable groups and companies to reduce their VAT cost. Whereas improper planning will not only increase VAT cost to huge extent but also may lead toward non compliances and can cause imposition of huge penalties by tax authorities. It needs in depth knowledge and understanding of VAT laws to ensure complete, accurate, and efficient implementation of VAT in your business. VAT implementation with half cooked knowledge, improper VAT strategies may lead failure of company in VAT implementation.
For more information regarding how Creation can assist with tax advisory and services, contact us today!
Email: [email protected] | UAE: +971 4 878 6240 | Saudi Arabia: +966 54 511 2494
