Following on from the release of the GCC VAT framework, Saudi Arabia’s General
Authority of Zakat and Tax (GAZT) has released a draft version of the law as well
as a bilingual version of its VAT implementing regulations. All businesses must
now be actively preparing for VAT - 1 January 2018 is less than 100 working days away.

 

What is VAT?

  • VAT is a tax on consumption, not income or profits.
  • The GCC countries have agreed a standard VAT rate of five percent.
  • Goods and services can be exempt, zero-rated or standard-rated.
  • Registered suppliers will add VAT to the price of a good or service they supply, collect the tax and pay it to the tax authority on a regular basis.
  • Registered businesses should (where the supplies they make are either standard or zero-rated) be able to recover the VAT they have incurred in the course of making those supplies.
  • Registered businesses that make supplies that are exempt from VAT will not be able to recover the VAT they have incurred in the course of making those supplies.
  • Registered businesses that make supplies that are predominantly zero-rated will usually be in a refund position.

How will VAT affect the real estate and construction services sector?

  • Under the GCC framework, each GCC country has the right to either exempt or zero-rate real estate supplies.
  • Articles 15 and 16 of the Saudi VAT law state that the VAT regulations will specify the goods and services that will be exempt and those that will be zero-rated.  The Saudi VAT implementing regulations have not yet been released. 
  • In other VAT jurisdictions, it is common for residential property to be either exempt or zero-rated. 
  • New residential property is likely to be zero-rated, allowing property developers to claim input tax credits on their purchases. 
  • Construction services are likely to be standard rated (five percent). 
  • Commercial property is likely to be standard-rated (five percent).
  • Leasing of residential property is likely to be zero-rated while leasing of commercial property is likely to be standard-rated.
  • Exemptions will add costs to supply chains (possibly for both the developer and the real estate owner) as VAT paid by registered businesses that make exempt supplies will not be recoverable. 
  • Businesses that are developing both commercial and residential real estate will need to correctly identify and allocate input costs to maximise their claim for input tax credits. 
  • Long-term contracts (both construction and leasing) that span the introduction date of VAT will need to be reviewed to ensure VAT can be passed on to the customer. 
  • The timing of accounting for VAT could pose a significant cash flow issue. Typically, VAT is accounted for at the earlier of the supply being made or invoice date – so VAT may be payable to the tax authority a long time before payments are collected from customers. 
  • Special rules may apply to the construction sector in relation to progress claims that a constructor or developer demands from their customers. 
  • Different VAT treatments may be  applied to mixed use – both commercial and residential – properties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What should real estate businesses be doing now?
  • Long-term contracts (both construction and leasing) that span the introduction date of VAT will need to be reviewed to ensure ascertain the eligibility to zero-rate such contracts or if VAT can be passed on to the customers.  
  • The timing of accounting for VAT could pose a significant cash flow issue. The amount of working capital needed should be considered as VAT may be payable to the tax authority before payments are collected from customers.
Important note
These briefs are based on a translation of Saudi Arabia’s draft VAT laws and general VAT principles and are provided for information purposes only. This document is not a substitute for professional advice. You should seek appropriate professional advice from a tax advisor before making any decision relating to your particular circumstances.

Mubeen Khadir
Head of Tax Consulting
mubeen.khadir@keypoint.com

+973 17206879

+973 3222 6811


George Campbell
Associate Director
george.campbell@keypoint.com

+973 17206872

+973 3833 8641