On the date of 11 May 2020, the Government of the Kingdom of Saudi Arabia announced a variety of unique measures to reduce the financial and economic impact of COVID-19 on the government budget. One of the announced measures was an increase in VAT percentage to 15% will will be applicable from 1 July 2020 onwards. With a view to assisting and helping taxpayers prepare for this increase in VAT percentage rate to 15%, the General Authority of Zakat and Tax (‘GAZT’) issued a special guidance on the transitional measures that need to be considered by supplies that are made during the transitional period.
The guidance from GAZT sets out a transition period for the VAT percentage rate increase from 11 May 2020 to 30 June 2021. The guidance provides specific guidance on government contracts, agreements signed before and after 11 May 2020 and the VAT treatment of supplies made after 1 July 2020, where the tax invoices have been respectively issues before this date.
To determine the tax rate of VAT that would apply on supplies made during the transitional period, taxpayers would have to consider several factors, such as the date on which contracts have been signed, whether a specific customer has the entitlement to the entire input tax recovery and whether a tax invoice has been issued before 1 July 2020.
Handling VAT on government contracts in Saudi Arabia (Saudi VAT government supplies)
The guidance by GAZT specifies that in order to determine the VAT treatment of supplies that have been made after July 1, 2020, to a government entity, the taxpayer will have to consider the date on which the agreement was signed between both parties.
Given below is the treatment for government contracts:
If the contract was signed before 11 May 2020:
VAT at 5% for all the supplies made after 1 July 2020 until the earlier of:
-Contract expiry date
-Renewal date of the contract
-June 31 2021
If the contract was signed between 11 May 2020 and 30 June 2020:
- If the actual supply is made on or before 30 June 2020, then VAT is 5%
- If the actual supply is made on or after 1 July 2020, then VAT is 15%
The guidance also spelt out that in the case where a tax invoice has been issued for 5% for supplies that would be subject to VAT at 15%, the taxpayer would be required to issue a tax invoice for the additional VAT due.
The guidance also put out special applicable rules, transitional in nature, that would apply for supplies made on or after July 1 2020, and wherein the tax invoice has been issued prior to this date. According to the guidance:
Date of issue of tax invoice is prior to 11 May 2020:
- VAT treatment is that any supplies made on or after 1 July 2020 but before 30 June 2021, the VAT applicable would be 5%
Date of issue of tax invoice between 11 May 2020 and 30 June 2020:
- If the actual supply is made on or before the date of 30 June 2020, the VAT chargeable is at 5%
- If the actual supply is made on or after the date 1 July 2020, the applicable VAT is 15%
The guidance also clarifies
- When a tax invoice is issues before 11 May 2020 for supplies which go further beyond 30 June 2021, the value of the supplies made till 30 June 2021 are subjected to VAT at 5% and the value of supplies that are made after this date are subjected to VAT at 15%.
- In specific kind of instances wherein a contract is entered into before 11 May 2020, and under the said contract’s terms, a monthly payment or premium is made by the customer and tax invoices are issued by the supplier every month, the supplies made on or after 1 July 2020 would be subjected to a VAT percentage rate of 15%. The tax invoices that are issued after this date should also be at 15%.
- Wherever a tax invoice has been issued at 5% VAT for a supply that would typically be subjected to a 15% VAT rate based on the GAZT guidelines, the taxpayer would have to generate an additional tax invoice for the same supply for the VAT difference that is due.
