VAT in Detail

Some basic principles

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.

Registering a business for VAT

Who should register?

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:

• the VAT charged on the goods or services it supplies to others, this is called the ‘Output Tax’, and
• the VAT incurred by that business on its own purchases and expenses, this is called the ‘Input Tax’.

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:

What is the scope of VAT?

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:

1. Zero-rated goods and services
2. Exempt goods and services

Exceptions to the general rule: zero–rated goods and services

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

Exceptions to the general rule: exempt good and services

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.

When is the payment of VAT due?
The ‘Time of Supply’ rules

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:

1. Date when the goods are delivered or services are performed, or
2. Date of issuing the tax invoice, or
3. Date when payment is received to the extent of amount received.

For down-payments or deposits, VAT is due on receipt of down-payment where it forms part of the consideration.

Value of Supply

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:

• Cancellation/termination, in whole or in part (e.g., sales returns);
• Discount offered

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.

Invoicing requirements

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:

1. The full legal entity name and address of supplier and customer,
2. The date of issue,
3. A sequential number uniquely identifying the invoice,
4. The VAT number of the supplier and customer (for business-to-business (B2B) transactions),
5. Date of supply (if different from the date of invoice),
6. Due date of the invoice,
7. The quantity and nature of the goods and services provided,
8. The taxable amount per rate or exemption,
9. The rate of VAT applied,
10. Explanation of tax treatment in case of non-standard rate, and
11. The VAT amount payable, shown in Saudi Arabian Riyals (SAR) or Arab Emirates Dirhams (AED).

Example invoice format for Saudi Arabia

Transitional provisions

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:

• Delivery of goods or performance of services in 2017, invoice and payment in 2018 — not subject to VAT.
• Invoice issued/payment received in 2017 but delivery of goods or performance of services is in 2018 – subject to VAT.