KSA VAT: WHAT ARE ZERO RATED SERVICES AND HOW CAN I ENSURE THAT I AM NOT CHARGING TOO MUCH TAX?

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The tax treatment of services provided by registrants under the UAE VAT and KSA VAT legislation is often a complex area, with both sets of tax laws providing strict rules on when such services can be subject to the zero rate of VAT. In KSA, in particular, the law requires suppliers to assess a number of factors prior to zero-rating services. Article 33 of the KSA VAT Implementing Regulations set out the conditions in which services can be subject to the zero rate of VAT. To qualify for zero rating, all the below conditions must be satisfied;
  • The supply of services must not take place in any GCC Member State* under the ‘special cases’ set out in the VAT laws,
  • The supplier must not have any evidence that the customer is resident in any GCC Member State and must have evidence that the customer is resident outside the GCC Member States,
  • The benefit of the services must not be received by the customer or any other person when that person is situated in KSA,
  • The services must not be related to any tangible goods or property (including real estate) situated within the GCC Member States,
  • The supplier must intend for the services provided to be consumed by the customer outside the GCC Member States, and
  • The supplier must have no evidence that the benefit of the services will be enjoyed within the GCC Member States.
* Note that, as the GCC states have not fully implemented the terms of the Unified Agreement on VAT, for the time being the term ‘GCC Member States’ solely refers to KSA for the purposes of the above. i.e. if the supplier has evidence that the customer is resident outside KSA, for the purposes of point 2 above he will be treated as having evidence that the customer is resident outside the GCC Member States for the purposes of the KSA VAT legislation. In practice, determining whether a service to a particular customer satisfies the above conditions for zero rating can be a complex affair. Service providers may need to consider matters including;
  1. Whether the non-resident customer has a presence in KSA, even if temporary, that may result in them not satisfying condition 3 above,
  2. Whether the services concern activities being undertaken in KSA, and
  3. Whether the ultimate recipient of the service is benefiting from the service in KSA.
In light of the above, certain service providers are adopting a strict approach whereby they are by default charging VAT at the standard rate irrespective of whether their services to a particular customer satisfy the above conditions. Such an approach can result in adverse consequences, and in particular, may impose an unnecessary KSA VAT burden for non-resident customers who may not be able to recover such VAT. It is important for suppliers to fully understand the conditions as set out by Article 33 to follow the correct VAT treatment of services provided to clients outside KSA. The GAZT is constantly issuing new guidance to assist registrants in determining the correct tax treatment of their supplies and you should seek advice if you are uncertain of the applicability of KSA VAT on your supplies as appropriate.

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