VAT in Saudi Arabia | Tax Essentials

Value-Added Tax is the leading tax on most goods and services, affecting pricing, cash flow, and legal compliance that businesses face. So it does not matter whether it is a startup or an international company; only knowing Value-Added Tax will guarantee a smooth operational process and protection against penalties for individuals. This is a brief discussion on what you need to know:

1. Introduction

The role of VAT in Saudi Arabia is very pivotal in the modern tax system of the country. VAT appeared as one of the economic reforms under Vision 2030; it has now become one of the key streams of non-oil revenues for the Kingdom.

Familiarity with VAT is vital for new investors and companies contemplating a business setup in Saudi Arabia. From compliance and registration to pricing strategies, KSA VAT affects nearly all financial decisions made by a company.

2. What is VAT in Saudi Arabia?

Under VAT, it is an indirect tax which gets applied at every level of the supply chain where the value is being added. Finally, the consumers are expected to pay the costs incurred for the VAT. The businesses then collect the VAT from the end consumers and remit it to the government.

Saudi Arabia introduced VAT on 1 January 2018 at a rate of 5%. In July 2020, the tax was raised to 15%, primarily in order to boost the economy and diversify sources of income from oil. Therefore, the VAT is an important contribution to the Saudi Arabia strategy of non-oil revenue, which makes a steady contribution to the kingdom’s investment in infrastructure, healthcare, and education.  

3. VAT Registration in Saudi Arabia

VAT Registration in Saudi Arabia becomes compulsory once a business meets the following turnover revenue thresholds:

• Mandatory Registration: Companies with taxable annual turnover exceeding SAR 375,000
• Voluntary Registration: Such turnover ranges between SAR 187,500 and SAR 375,000

Steps for VAT registration:

1. Set up an account on the ZATCA (Zakat, Tax and Customs Authority) portal
2. Fill the VAT registration form
3. Attach the mandatory documents (CR, financials, bank account info)
4. Receive a VAT registration certificate

It is necessary for taxpayers in the Kingdom of Saudi Arabia to sign into the ZATCA portal to pay VAT and use the SADAD payment system. Generally, all input VAT and output VAT must be recorded for any VAT liability or claims for refunds.

4. VAT Rates in Saudi Arabia

The standard VAT rate in Saudi Arabia is 15 percent, and it is applied to most goods and services. However, two VAT treatments actually make an exception to this:

• Zero-rated supplies: Here, VAT is charged at a rate of zero, while input VAT, however, may be recovered. The most common cases included in zero rating include:
• Exported goods and services
• Specific medical equipment and medicines
• International transportation
• Education services and certain health care
• Exempt supplies: No VAT is charged, and input VAT is not reclaimable. For example:
• Certain financial services (e.g., loans, insurance)
• Transactions in certain residential real estate

It is essential to comprehend the differences between zero-rated, exempt, and standard-rated supplies for proper VAT accounting and claiming of input credits.

5. Filing VAT Returns and Compliance

VAT in Saudi Arabia requires regular filing with ZATCA. The frequency depends on a business’s annual turnover:

• Quarterly: For business turnover below SAR 40 million
• Monthly: For business turnover above SAR 40 million

Key compliance points:

• It is important to use invoices that meet the required VAT compliance and VAT number, and to break down the VAT appropriately
• Keep accurate financial records for 6 years at a minimum
• Return or file within the time prescribed to avoid incurring penalties

The penalty for late returns or under-reported filings could go as high as 25% of the unpaid tax, exclusive of other administrative fines.

6. Input VAT vs Output VAT

These concepts must be understood if the business is to grasp VAT in KSA:

• Output VAT: VAT received from customers on taxable sales
• Input VAT: VAT paid to suppliers on purchases incurred by the business

Net VAT Payable = Output VAT – Input VAT

In a scenario wherein input VAT surpasses output VAT, a business can claim a VAT refund.

For example: A software company collects SAR 15,000 in output VAT from clients, pays SAR 10,000 in input VAT for equipment and services, and pays SAR 5,000 to ZATCA.

7. VAT Refunds and Adjustments

Under certain conditions, a business can make a VAT refund claim in KSA:

• When input VAT exceeds output VAT during a tax period
• If excess input VAT continues across periods
• After ZATCA reviews and approves the claim

Foreign companies incurring VAT in KSA while not being domestically registered for VAT may be granted a refund after meeting the levels set forth by ZATCA.

The refund process requires submitting a request through the ZATCA portal with all supporting documents. Depending on the complications of the claim, it may even take several weeks.

8. Impact of VAT on Businesses in Saudi Arabia

VAT in Saudi Arabia affects not only tax compliance but also business operations, pricing, and profitability:

• Pricing strategy: Companies should decide whether to absorb VAT or pass it to customers
• Cash flow: Timing of VAT payments and refunds could influence liquidity
• Accounting systems: The input/output VAT report should be tracked accurately
• SMEs vs. large corporations: Large organizations may have in-house VAT teams, while SMEs generally rely on consultants

Improper VAT accounting may result in substantial margin and tax liabilities.

9. VAT and Foreign Investors

Foreign companies operating in Saudi Arabia must comply with the KSA VAT. Some important matters to keep in mind involve:

• VAT applies to all goods and services being sold inside the Kingdom
• Zero-rated VAT for exports
• Different VAT treatment for GCC investors, depending on the unified agreements among Gulf countries

Having an early understanding of VAT obligations will prevent problems when setting up a business, particularly during contract signing and customer invoicing.

10. How Arnifi Can Help

At Arnifi, we provide comprehensive support for VAT in Saudi Arabia:

• Registering for VAT with ZATCA
• Preparation and submission of VAT returns
• Advice for the recovery of input VAT and zero-rated or exempt supplies
• Assistance with VAT audits and compliance reviews

From a startup to SMEs and even foreign investors, Arnifi simplifies VAT compliance so you can now focus on growing your enterprise in KSA.

11. FAQs

Q1. What is the current VAT rate in KSA?

VAT rate in Saudi Arabia is currently 15%.

Q2. How to pay VAT in Saudi Arabia?

The VAT can be paid via the ZATCA online portal or directly under the SADAD payment system.

Q3. Is VAT mandatory for all businesses?

All businesses with taxable turnover exceeding SAR 375,000 should register. Those with earnings above SAR 187,500 should voluntarily register.

Q4. How do I file VAT returns in Saudi Arabia?

VAT returns are required to be filed monthly or quarterly via the ZATCA Portal on the basis of the revenue scale.

Q5. Can foreign businesses claim VAT refunds?

Yes, foreign entities qualify under certain conditions to apply for VAT refunds in Saudi Arabia if they were incurred by such foreign entities.

12. Conclusion

VAT in Saudi Arabia is something more than just a tax; it is somewhat like an anchor that all businesses’ operations in the Kingdom lean against. So registration and filing, along with refunds and compliance, will ensure smooth operations, better cash flow management, and a healthier future.

Need help with VAT and business setup in KSA? Contact Arnifi today for expert VAT solutions tailored to your business needs.