Here are some important information on VAT that specifically concern SMBs. Please note that you can always refer to all formal and full information on VAT @:
GCC VAT agreement was approved in June 2016. Both Saudi Arabia and UAE have implemented VAT on January 1st, 2018. Bahrain is gradually implementing VAT starting from January 1st, 2019. Kuwait, Oman & Qatar are expected to implement in 2020.
Important Information on VAT:
VAT is an indirect tax imposed on the supply of goods and services. The burden of paying this tax will be on the end consumer of goods and services, who is going to pay the merchant or company from which he received these goods/services, the later -which work as a tax collector- collects these taxes from its clients "called Output Tax for the company/merchant" and deliver to Tax authority after deducting (subject to specific conditions) the tax which it paid earlier as expenses of buying goods/services in order to deliver its products to its clients "called Input Tax for the company/merchant".
According to legislations (GCC VAT agreement and each GCC country jurisdictions), the supply of all goods/services is subject to VAT with some certain exemptions. Most goods/services are subject to the basic VAT rate of 5% (basic rate raised to 15% in Saudi starting July 01st, 2020), whereas a few are subject to VAT rate of 0% (e.g. international transport, export, investment metals mining, special list of medicines/medical equipment..), and a few are exempted (e.g. residential rentals, some financial services). Out of VAT scope is whatever none of the above applies to it (e.g. a company transfers goods to one of its branches within the country or to a sister company "registered with the company under one VAT group and has the same VAT number".
It is important to know the difference between Zero rated and Exempt supplies:
For the end consumer, there is no apparent difference as the invoice he receives from supplier doesn't include VAT value (zero).
For suppliers, there is a big difference, which is related to the definitions of Input and Output tax above. If the good/service supplied is subject to Zero rate, then supplier is eligible to refund Input VAT related to this good/service (can deduct the Input tax from the Output tax received from clients before paying balance to Tax authority). While, if the good/service supplied is Exempted, then he IS NOT eligible to deduct related Input tax (being responsible for its payment).
Below is a list of VAT rates and their effects on businesses:
|Output Tax||Deductible Input Tax|
|Basic rate taxable goods/services||5%||Yes|
|Zero rate taxable goods/services||0||Yes|
|Exempted goods/services||Not applicable||No|
|Out of Scope||Not applicable||Not applicable|
1- Registration:VAT implementing regulations specify end-dates for voluntary registration in VAT, which is a different registration than any other previous registration with Tax authorities, depending on business size (annual supplies). Worthy to note that annual supplies include IN/OUT supplies depending on actual company records "or forecasts for new companies". Also, consider if the company has to register as a single entity or as a (VAT group) combining other sister companies, and the consequences of this choice. Accounting system (accrual/cash) should also be determined.
However, tax authorities may register businesses who fail to voluntary register in time (there are big fines for this). In addition to that not registering will NOT exempt the company from legal obligations imposed on registered "or required to register" companies like filing VAT returns in time and paying taxes due on its supplies….etc.
2- All advertised prices for goods/services should include VAT. This implies accurate revision of prices taking into consideration taxes imposed on purchases. It may also implies "changes to printed menus" or that announced otherwise, like signage or displays inside show rooms or internet…etc.
3- Issuance of specifically designed VAT invoices starting on registration/ implementation date, which should at least include (among others) the Tax Identification Number "TAN" of the supplier (most require client TAN as well). It should specify amount and type of VAT imposed on client (special invoices exempted in condition that they clearly state that due amount includes VAT). However, if the supply involves cross-border transaction (any imports/ exports) or any of the Zero rated or Exempted supplies, there are many other details to be included in the VAT invoice.
4- VAT calculations for all supplies (IN/OUT) which is a very sophisticated task (even for a small business) due to the special nature of VAT. The preciseness in these calculations is fatal to company operation and shouldn't be underestimated as it might lead to catastrophic consequences.
5- Making required Input Tax adjustments where necessary (this might be frequent, but should be carried out at least once each tax period).
6- Issuance, filing and submitting tax returns "in specific formats" at the end of each Tax Period "usually one/three months depending on registration". This also requires ultimate preciseness, as any in-accurate/in-correct information may put the company under "tax evasion" suspects, which have fatal financial/legal consequences, and the company will always remain under tax authority's focus even if it submits more precise tax returns later on.
7- Correction of previous tax returns once amendments occur or a mistake is discovered.
8- Payment of due tax to the authority in time (28 days or a month maximum). This requires pre-assessment and continuous monitoring of the company cash flow to fulfill its obligations towards tax authority and towards its suppliers on the other hand.
9- Keeping all accounting records (including invoices) in Arabic language -some countries permit English language too- for around 6 years "normal supplies", 11 years "supplies that include assets like equipment" and more than 20 years for real estate. These relatively long periods require saving these documents electronically on a computer system and regularly back it up to ensure it is safe and retrievable once required for tax audit.
1- Understand VAT system and how it works at the administration level, financial, sales, purchases and operations "whatever the nature of business is" and assessing the impacts of VAT on business operations.
2- Prepare accounting personnel for the new tasks.
3- Update (or change) computer systems to ensure compliance to VAT regulations (e.g. issuing VAT invoice as specified, accurately calculate input & output tax, filing required "specific" tax returns in time and keeping accounting records (in Arabic) for long years with the readiness to retrieve once required for tax auditing).