Saudi Arabia: VAT Rate and Customs Duty Changes

SAUDI ARABIA VAT RATE AND CUSTOMS DUTY CHANGES 25 June 2020

AGENDA

• VAT rate change • Overview • Transitional rules

• Customs duties • Overview • Impacts and planning

Topics

• Impact on projects and investment • PPP, construction and infrastructure • Contracts, planning and next steps

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VAT RATE CHANGE

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OVERVIEW

• VAT Rate will rise from 5% to 15% on 1 July 2020 • No exceptions • Announcement 11 May 2020 • Guidance issued on 20 May 2020 • Transitional period from 11 May 2020 and 30 June 2021 • Transitional rules for contracts and invoices issued before 11 May 2020 • Amendments to regulations issued (Arabic only)

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TRANSITIONAL RULES

Special rules for:

1. Contracts signed before 11 May 2020 with  Governmental bodies; and  VAT registered businesses that can reclaim VAT in full on the contract services

2. Invoices issued before 11 May 2020

In both cases, 5% rate applies until 30 June 2021

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TRANSITIONAL RULES

Contracts signed before 11 May 2020 with Governmental bodies and VAT registered businesses

5% applies until the earlier of: • 30 June 2021

• Expiry of contract • Renewal of contract Note: amendments to contracts might be seen as expiry or renewal

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TRANSITIONAL RULES

Contracts signed before 11 May 2020 with VAT registered businesses

• Supplier must have evidence customer can reclaim VAT on the contract • Suppliers responsibility (GAZT webinar) • Obtain written confirmation from customer (no official form)

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ONGOING CONTRACTS

Transitional rules example – VAT registered customer

Contract 1 Jan 2019

1 July 2020

30 June 2021

15%

5%

5%

The Customer must certify that it can fully recover VAT on the contract

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ONGOING CONTRACTS

If transitional rules do not apply

1 July 2020

Completed work 5%

Completed work 15%

• Potential issues • Proving work is completed or delivered • Invoices issued after 30 June for goods or services delivered before 1 July 2020

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TRANSITIONAL RULES – INVOICES

Invoice issued before 11 May 2020 (assumes no contract in place)

• Delivery of supply will take place after 30 June 2020 and before 30 June 2021 - Subject to VAT at 5% • If the delivery of the supply is after 30 June 2021 – 15%

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IMPACT – TRANSITIONAL ISSUES

Example Advance invoice issued for services from 1 January 2020 until 31 December 2020 .

Service terminates 31 December 2020

Invoice 1 Jan 2020

1 July 2020

• VAT (5%) was collected when the invoice was issued. • No additional VAT– as the invoice was raised before 11 May 2020

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CUSTOMS DUTIES

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CUSTOMS DUTIES - OVERVIEW

• Tariff increases now in effect • New rates of Up to 20% • Wide range of products • Over 500 product items affected

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CUSTOMS DUTIES - OVERVIEW

• Real cost – duties are not refundable • Cashflow/financing costs • Makes imported goods more expensive • Increases VAT cost at import – VAT calculated on duty paid price

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CUSTOMS DUTIES – PRODUCTS (EXAMPLES)

 Foodstuffs  Chemicals  Plastic  Rubber Leather  Textiles  Metals  Building materials  parts  Appliances

Broad range of items affected Varying rates.

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CUSTOMS DUTIES – PLANNING AND EFFICIENCY

Duty management – best practice  check product classification/HS codes

 check reliefs available  valuation for customs

 unbundling non-dutiable items  make use of bonded facilities

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IMPACT ON PPP AND OTHER PROJECTS

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PROJECTS - BACKGROUND

• Many real estate and infrastructure projects underway or in the pipeline in KSA • Concession-based and project financed PPPs widely used • Relatively low impact from VAT in the past  low rate  short term cash-flow • Relatively low impact from customs duties  low rates  manageable cost

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PROJECTS– IMPACTS AND ACTIONS

• Customs duties

Do exemptions apply?

 Can duties be reduced (e.g. use of tariff codes; alternative sourcing)?  What is the cost impact for goods sourced within the Kingdom?

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PROJECTS – IMPACTS AND ACTIONS

VAT EXAMPLE – INFRASTRUCTURE

Development costing US$ 500 million

At 15%

At 5%

VAT COST TO BE FINANCED

VAT COST TO BE FINANCED

US$ 75

US$ 25

• Refunds (if possible) can take four months or more

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PROJECTS– IMPACTS AND ACTIONS

VAT

 Revisit financial models  Consider whether the project company cash-flow positions are protected  Consider short term and long-term funding requirements  Does any residual liability remain with the project co?

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PROJECTS– IMPACTS AND ACTIONS

EPC Contracts

 Customs Duty Events  Change in Law  Who will pay VAT and customs?  Invoice procedure to avoid double-charging

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FINAL THOUGHTS- THE WIDER IMPACT

May affect demand for some items – pricing decisions to be made Impacts both Saudi businesses and businesses selling into KSA ERP and point of sale systems need to be updated and compliant Accounting systems need to be able to cope with 5% and 15% rate Changes to the Saudi VAT return system are required to accommodate two rates

1

2

3

4

5

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KEY TAKEAWAYS

CUSTOMS

PROJECTS

VAT

• Review internal policies • Ensure tariff classification is correct • Check value for customs is correct • Consider impact on costs and prices

• Special rules for pre-11 May 2020 contracts and invoices • Contract reliefs only for governmental bodies and VAT

• Review models and bids in progress • Is the project exempt from customs duties? Can duties be reduced? • Review short and long-term funding requirements for VAT • Consider and review

registered businesses • VAT registered

businesses must be able to claim VAT

• Suppliers

contractual protections

responsibility to obtain proof

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QUESTIONS

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CONTACT DETAILS

Brian Conn Partner – Tax Advisory Services Tel: +971 4 436 3500 Mobile: +971 52 152 5521 Email: brian.conn@bdo.ae

Andrej Kormuth Partner

Tel: +971.4.350.6817 Mobile: +971.56.682.9297 Email: Andrej.Kormuth@bracewell.com

Mohammed Madbouly Senior VAT Manager Riyadh

Tom Swarbrick Partner

Tel: +971.4.350.6820 Mobile: +971.56.401.8744 Email: tom.swarbrick@bracewell.com

Mobile: +966 541 134 103 Office: +966 11 278 0608 Ext.: 1724 Email: m.madbouly@bdoalamri.com

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