GCC Indirect Tax Weekly Digest - 2 June 2020

This is the GCC Indirect Tax Weekly Digest, reporting news of Indirect Tax developments in the Middle East region as soon as they happen. The digest is also available in Arabic on the following link.

KSA developments

Customs duty rates to increase significantly

The Kingdom of Saudi Arabia (KSA) will significantly increase the Customs duty rates on a number of commodities with effect from 10 June 2020. Businesses within the Fast-Moving Consumer Goods (FMCG), Automotive, Construction, and Oil & Gas sectors may be affected.

Foodstuffs, textiles, steel, building materials, vehicles and spare parts will be hit with a rate increase of 5% - 25% of their dutiable value. The full list of affected commodities has been released and is currently available in Arabic only.

These changes are the latest in a series of responses to the COVID-19 crisis in KSA. With the Value Added Tax (VAT) rate increase to come into effect from 1 July 2020, it is notable that the Government has sought to balance its budget by introducing higher transactional taxes that are traditionally easy to implement and are also efficient in their revenue raising impact. 

We would advise businesses to carefully consider the impact on their supply chain. Unlike VAT, Customs duties cannot be recovered or deducted and are likely to present a sticking cost to the business unless they can be passed on to customers. Now is a good time to review the terms and conditions as stated in contracts, and the tariff classification for imported goods to ensure that the correct Harmonized System (HS) code is being use. In addition to this, careful consideration should be taken around the underlying valuation, especially between connected parties (this may also affect the transfer pricing) and the origin of the products. It should be noted that Customs audits can be applied retrospectively up to 15 years after the declaration has been made.

VAT rate increase: transitional rules published

The KSA General Authority of Zakat and Tax (GAZT) has published a guideline in Arabic providing examples of how its transitional rules will apply to the Value Added Tax (VAT) rate change in the Kingdom of Saudi Arabia (KSA).

This follows the announcement of the increase of the VAT rate from 5% to 15%, which will take effect from 1 July 2020.

Although the law around the VAT rate change is yet to be published, the initial set of guidelines should be positively received by taxpayers as they allow what appears to be a reasoned approach to dealing with the VAT accounting issues associated with such changes. In particular, those businesses engaged with the Public Sector will be pleased to note that VAT at 5% will still apply for contracts that were entered into prior to May 11 2020 (when the VAT rate change was announced) up until the end of June 2021.

The Guideline summarizes the transitional rules governing the impact of the VAT rate increase on:

1. contracts signed before the announcement of the VAT rate increase;
2. contracts signed after the announcement of the VAT rate increase; and
3. tax invoices relating to supplies taking place before and after the VAT rate increase.

In this respect, the transitional rules refer to 11 May 2020 as the date on which the VAT rate increase was announced – as a result, this is the key date to consider for transitional contracts.

Kuwait developments

Customs update

To counter the effect of COVID-19 and to further promote foreign direct investment into Kuwait, the Kuwait Direct Investment Promotion Authority (KDIPA) have adopted new fiscal measures including certain customs duty exemptions for a period of one year.

Per the new rules, companies would be entitled to customs duty exemption on importation of goods required for direct investment purposes by the company, for a period of one year, provided that they apply for investment license until 31 December 2020 and receive a scoring from 30% to 80% as per evaluation scoring scheme.

Companies already recognized as investment entities by KDIPA would also be exempt from the payment of customs duties on imported goods required for investment purposes for a period of one year. The list of imported products shall be submitted to KDIPA during 2020 to avail the exemption as well as further conditions are also stipulated in the new rules.

In both of the above cases, the value of exempted imports cannot exceed the total investment value.

COVID-19 Indirect Tax management

Cash generation: Import VAT in KSA

Owen Griffiths

Director, Indirect Tax

Kingdom of Saudi Arabia

Since VAT was introduced in the Kingdom of Saudi Arabia (KSA) on 1 January 2018, Article 44 of the KSA Value Added Tax (VAT) Regulations has provided for taxpayers who import goods to both pay and simultaneously recover VAT through their VAT return, subject to authorization from the GAZT. However, that was not the position in practice, meaning that taxpayers had to pay VAT to Saudi Customs on the value of their imports at the point of entry into the KSA in order for those goods to enter into free circulation. Clearly for businesses importing significant amounts of goods on a monthly basis, the requirement to pay VAT immediately had a major impact on cash flow. 

Furthermore, Article 44 of the KSA VAT Regulations contains a number of conditions that need to be met in order for the GAZT to consider authorizing an application. These include the requirement for the taxpayer to be submitting monthly VAT returns and make imports of goods on a monthly basis; that in the previous 12 month period from the application date the taxpayer made all VAT return submissions and payments on time, as well as meeting all other VAT obligations; and finally that sufficient evidence is provided of the taxpayer’s continuing financial stability. The VAT Regulations provide for the GAZT to refuse applications where they deem there is a risk that VAT will not be paid, and until recently our understanding is that the majority of applications were still pending. 

However, with effect from 18 March 2020, as part of the extraordinary measures announced by the KSA Government to support taxpayers during the current economic climate, it has been possible for taxpayers importing goods into the KSA to pay and recover the import VAT through their VAT returns, rather than paying the VAT due at the point of entry. In practice this means that the VAT is not paid across to the Customs Authorities but instead entered into box 9 of the VAT return, enabling the reverse charge mechanism to apply. Immediate benefits to the taxpayer include a positive cash flow impact, less risk of erroneous import VAT recovery and VAT return errors, while minimizing compliance obligations on the taxpayer. 

So while this suspension is currently providing major cash flow and administrative savings to businesses importing goods into the KSA, as set out in the recent measures by the KSA Government, the window is only open until 30 June 2020. It is not yet clear what the position will be on 1 July 2020, but on the assumption the suspension window closes, taxpayers will again need to start paying VAT on imports at the point of entry into the KSA until their approval requests under Article 44 are authorized. Therefore the cash flow benefits to taxpayers from a VAT perspective to maximizing imports into the KSA during the months of May and June are clear. 

Focus on: the Life Sciences and Healthcare sector

Kate Bacon

Director, Indirect Tax

GCC Indirect Tax Healthcare and Life Sciences industry lead

Businesses operating in the Life Sciences and Healthcare industry have been at the frontline of the COVID-19 effort, providing essential healthcare services to world populations and supplying vital equipment, drugs and medical supplies to healthcare workers, employees in public-facing roles, and the population at large.

Given the urgency of the pandemic and the need for swift action to mobilize equipment and medical support, it’s important to focus on the VAT implications of new activities, supplies or contracting arrangements. However, the provisions of VAT reliefs related to healthcare goods and services across the GCC are strictly interpreted and tightly drafted. Businesses in the Life Sciences and Healthcare sector need to be mindful that certain COVID-related activities may not necessarily qualify to be zero-rated in the UAE, Bahrain, or in KSA where special rules equivalent to a zero-rating for healthcare apply in certain cases.

For example, the zero-rating for medical equipment is prescriptive and requires evidence to be available in order for the zero-rating to apply. In particular, in countries like the UAE where a list of confirmed zero-rated equipment is not available, businesses are required to make their own assessment as to whether goods qualify to be supplied at the zero-rate. Where the conditions for zero-rating are not met, then equipment must be supplied at the standard rate of 5%. In a scenario where new forms of Personal Protective Equipment (“PPE”) are being sourced, imported or manufactured at short notice, it is possible that the requirements for zero-rating may not be met (e.g. in the UAE, this would require either MOHAP registration of the product, or an import permit covering the specific shipment of goods).

Similarly, in an environment where employers are frequently agreeing with medical providers to provide COVID-19 testing to their employees, under arrangements where the employer will pay for the testing, it’s important to consider whether the criteria for zero-rating are met in practice. The nuances of the arrangements, including contractual and payment relationships, will significantly influence the availability of zero-rating in practice.

Note: This digest is for information purposes only and should not be construed as an advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.