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Value Added Taxation, or ‘VAT’ is a form of indirect tax and is levied on the supply of goods and services over the whole value chain from production to distribution, and is eventually passed to, and paid by, the final end-use consumer of those goods and services.
It is collected in a multi-staged process on the ‘value added’ at each stage throughout the supply, or value, chain from raw materials to final products or services at retail.
The collection is performed by each participant in the chain in their capacity as a ‘VAT-registered’ business, but ultimately, it is designed to be ‘shifted forward’ in the chain to the point of final use of ‘consumption.’
As a consumption tax, VAT is borne ultimately by the final consumer, and is, generally, not a tax on the business, but is paid to the Government tax authorities by the seller of goods or services.
VAT is charged as a percentage of price net of discounts and rebates. The six countries of the Gulf Cooperation Council (GCC) have agreed on a general rate of VAT at 5%, which was implemented on January 1, 2018.
In this website, we will examine the situation for Saudi Arabia and the United Arab Emirates (UAE), the locations of Abdul Latif Jameel’s corporate headquarters.
All businesses within each GCC country must register for VAT.
There is a mandatory requirement to register where a business’ annual sales reach or exceed SAR/AED 375,000, and an optional registration threshold where annual sales are between SAR/AED 187,500-374,999.
A registered businesses is seen as a ‘Taxable Person’. A Taxable Person is a defined as a natural or legal person, public or private, or any other form of partnership who performs an economic activity independently for the purpose of generating income.
Non-residents making taxable transactions in Saudi Arabia or the UAE for which they are liable to pay VAT, regardless of the value, must register as Taxable Establishment in Saudi Arabia or the UAE as appropriate.
Once registered, the VAT-registered business is required to submit periodic VAT returns, showing:
Most VAT-registered businesses are able to deduct the Input Tax incurred on purchases of goods, services and operating expenses, which means that VAT does not usually represent an actual cost to VAT-registered businesses.
This process can be illustrated diagrammatically as shown below:
As a general rule all supplies of goods and services across the GCC countries are subject to VAT at 5% from January 1, 2018. However, there are two categories of exceptions:
In both Saudi Arabia and the UAE: exports, international transport, supply of investment precious metals, medicines & medical equipment, international transport of goods and passengers including related means of transport and services, although subject to VAT are rated at zero percent (0%).
Also in the UAE: the first supply (first sale or first lease) of property used for residential and charitable purposes; and the supply of crude oil, natural gas, educational services, and healthcare services are also zero rated.
Also in Saudi Arabia: the supply of private education, private healthcare and first sale of house to Saudi Citizens
In both Saudi Arabia and the UAE the provision of financial services, and supply of residential property through lease are exempt from VAT.
Additionally in the UAE, the supply of ‘bare’ land, local passenger transport, residential property through sale are also exempt.
The ‘Time of Supply’ rules are designed to determine when VAT becomes due on the provision of goods or services, or when the supplier must account for VAT.
The basic Time of Supply rule is that VAT becomes due on the earliest of the following dates:
For down-payments or deposits, VAT is due on receipt of down-payment where it forms part of the consideration.
The ‘Value of Supply’ is defined as the financial value upon which VAT is payable, also called the ‘Taxable Base’ (the Taxable Base is defined as the consideration received or receivable in monetary terms, or the amount on which VAT needs to be calculated)
The taxable base (or the Value of Supply) can be adjusted with the following:
Adjustments to decrease the Value of Supply should be made by issuing credit note, with reference to original invoice issued. Adjustments to increase the value of supply should be made by issuing another tax invoice.
The new regulations prescribe a number of mandatory contents that must be included in a VAT invoice.
The tax Invoice should be issued electronically and sequentially, and the following details must be in Arabic for Saudi Arabia, in addition to any other language as a translation. In the UAE, there is currently no specific requirement for these details to be in Arabic:
Invoices issued and payments received before the VAT implementation date will not be considered in determining the Time of Supply.
Time of supply will be the actual date when the goods are delivered or services are performed. All supplies which are made on or after January 1, 2018, will be subject to VAT.
In other words:
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