VAT on Imports and Exports in Saudi Arabia (KSA)

The Kingdom of Saudi Arabia (KSA) introduced its Value Added Tax (VAT) system in January 2018 as part of the Unified VAT Agreement of the Cooperation Council for the Arab States of the Gulf. VAT applies to most goods and services, with specific provisions for imports and exports. The Zakat, Tax and Customs Authority (ZATCA) oversees VAT implementation, compliance, and collection.

This article provides a detailed exploration of how VAT is applied to imports and exports in KSA, covering standard procedures, special exemptions, documentation requirements, and the zero-rating mechanism for exports.

VAT on Imports of Goods

In Saudi Arabia (KSA), Value Added Tax (VAT) is imposed on the import of goods as a separate event from the supply of those goods. All goods imported into the Kingdom are subject to VAT, regardless of whether the supply of those goods happens before or after the formal customs clearance. This ensures that VAT applies to the import of goods independently from any domestic supply transactions.

Key Points:

1. VAT on Imports: VAT is imposed on all imports at a rate of 15%, as per the VAT Law and its Implementing Regulations, even if the goods are exempt from customs duties. However, certain exceptions may apply, such as specific goods.
2. Import vs. Supply of Goods: The supply of goods within KSA before formal customs clearance is not subject to VAT, whereas the supply made after clearance is subject to VAT. This means that VAT is applied at the importation stage and again on the supply of those goods within the Kingdom.

For example, a Saudi company importing goods from outside the GCC region will pay VAT on the total customs value of the goods, including insurance and freight costs (CIF value). This VAT can be later claimed as input VAT if the goods are used for taxable business activities.

Valuation and Declaration of Imports

VAT on imports is calculated based on the customs value, which includes the CIF price (Cost, Insurance, and Freight), along with any other duties such as excise taxes and customs fees. Importers must file a Customs Declaration Form (Bayan), which includes accurate details about the imported goods, including the tariff code, value in SAR, and origin.

If an error is discovered in the customs declaration, importers must rectify it with Saudi Customs before paying the VAT. Overpayments are typically not refunded but can be claimed as input tax credits.

Exemptions on Goods Imports in KSA

Certain imports are exempt from VAT, such as:

• Goods subject to zero-rating in their final destination (e.g., qualifying medical supplies and investment metals).
• Goods exempt from customs duties, including diplomatic and military imports, personal belongings of citizens or expatriates relocating to Saudi Arabia, and returned goods.
• Personal items valued at less than SAR 3,000 brought by travellers.

Temporary Imports

Goods imported temporarily for processing or repair and later re-exported are subject to VAT only on the value added during their time outside KSA. In such cases, the VAT is levied only on the incremental value when goods are re-imported​.

Suspended Goods and Free Zones

Goods placed in customs warehouses, duty-free zones, or under transit procedures are not subject to VAT until they are released into free circulation. VAT is only payable when these goods are released​.

Payment of VAT via Tax Returns

In some cases, businesses that import goods frequently may apply to pay VAT on their imports through their VAT returns instead of paying directly to Customs at the time of import. This process, if approved by GAZT, is only available to companies that have met all VAT obligations in the previous 12 months​.

VAT on Import of Services

Unlike goods, the import of services does not involve a formal customs procedure in Saudi Arabia. Instead, VAT is applied to services received from non-resident suppliers through the reverse charge mechanism. This means that when a taxable person in KSA receives services from a supplier outside the GCC, the recipient is considered to have supplied the services to themselves and is responsible for paying VAT on the transaction.

Example: A UAE company providing online security services to a KSA bank will have its head office (in the UAE) deemed responsible for the supply, even if the company has a registered branch in KSA. Therefore, the reverse charge mechanism applies, with the KSA bank reporting VAT on the services received.

Place of Supply of Services

In most cases, services received by a taxable person in KSA are considered supplied within KSA for VAT purposes. However, special rules exist for certain services, such as leasing transportation or providing real estate-related services, as outlined in the Unified VAT Agreement.

Example: If a KSA company holds an event in Riyadh and hires an international guest speaker, the service is considered supplied in KSA for VAT purposes, regardless of where the speaker or service provider is established.

Reverse Charge Mechanism

Under the reverse charge mechanism, the recipient of the service must report the VAT as if they provided the service themselves. This requires the recipient to account for output VAT, while also deducting input VAT, provided the standard deduction criteria are met. VAT from reverse charge transactions is reported in Box 9 of the VAT return, and adjustments may be made based on deductible input VAT.

Example: A KSA bank receiving legal services from a UK firm for SAR 100,000 would apply the reverse charge mechanism, entering this amount into Box 9 of the VAT return. If 30% of the VAT is non-deductible, the bank would adjust the VAT amount accordingly.

Receipt of Services by Non-Taxable Persons

When a non-taxable KSA resident receives services from a non-resident supplier, VAT is not applied through the reverse charge mechanism. However, if a non-taxable person regularly receives services that contribute to an economic activity, they may be required to register for VAT if they meet the mandatory registration threshold based on their receipt

VAT on Export of Goods

Exports of goods outside the GCC territory are generally subject to VAT at the zero rate. This means that while VAT is charged at 0%, exporters can still recover any input VAT incurred on related costs​.

For a supply to qualify as an export, it must involve:

• An export declaration with Saudi Customs.
• Movement of goods outside the GCC territory.

Additionally, during the transitional phase of the VAT system, supplies to other GCC member states are treated as exports and may qualify for zero-rating if no VAT system is operational in those states​.

Example: Under the Delivered at Place (DAP) terms, where the supplier arranges transport to a destination outside the GCC, it suggests that both parties agree that the goods will be exported, allowing the zero-rate to apply.

Direct and Indirect Exports

• Direct exports occur when the supplier handles the export process and arranges for goods to be transported out of KSA. The zero-rate applies in these cases if appropriate documentation is provided​.
• Indirect exports involve a non-resident customer arranging the transport of goods. In this case, the supplier must ensure that the goods are exported and retain evidence to apply the zero-rate​.

Documentation Requirements

Exporters must retain several key documents to evidence the export of goods, including:

• Export documentation issued by Customs.
• Commercial documents identifying the customer and delivery address.
• Transportation documentation showing goods have left GCC territory​. If documentation is not secured within 90 days of the supply, the export may be treated as a domestic supply and subject to the standard VAT rate​.

Supplies Made After Export Clearance

Goods cleared for export may be resold during international transport, even while still in KSA's territorial waters. These transactions are also considered exports and qualify for the zero-rate.

Example: KSA Refinery sells bitumen to an Italian customer, and after export clearance, the customer resells the goods to a Swiss trader. Both transactions are zero-rated for VAT.

Export of Goods Without Sale

Goods moved outside of KSA without a sale, such as personal shipments or transfers of a company’s own goods, do not qualify as exports for VAT purposes. In these cases, the zero-rate does not apply since no supply of goods is made.

Special Cases

Supplies Under Customs Suspension: Goods supplied in customs suspension zones (e.g., warehouses, duty-free shops) are zero-rated, provided the supplier retains evidence of the goods' location during supply.

Re-exports of Imported Goods: The zero-rate also applies to re-exported goods that were temporarily imported for repairs, refurbishment, or processing. While customs procedures for re-exports differ from standard exports, the VAT conditions for applying the zero-rate remain the same.

VAT on Export of Services

The export of services to non-GCC (Gulf Cooperation Council) residents, or to recipients in GCC states that have not yet implemented VAT, may be subject to zero-rating if certain conditions are met. These transitional provisions apply until all GCC states implement VAT systems and establish an Electronic Services System for intra-GCC VAT transactions. 

Below is an explanation of the key aspects.

Place of Supply for Services

VAT is only charged in KSA when the "place of supply" for the service is determined to be within the country. By default, if a KSA resident provides services, it falls under KSA VAT. However, there are exceptions:

1. Supplies to Taxable Customers: If services are supplied to a taxable customer (someone registered for VAT) in another GCC state, the place of supply is that customer's country, assuming the state has implemented VAT.
2. Exceptions for Special Cases: Certain services, even if provided to non-residents, follow special rules and are still subject to VAT in KSA. These exceptions include services related to real estate in KSA, or other cases where the services directly involve property or activities within KSA. 

Zero-Rating for Services to Non-GCC Residents

In most cases, services provided to a customer outside the GCC can be zero-rated, provided the customer benefits from the service outside the GCC and the criteria under the Implementing Regulations are met. Key examples include:

• Services to non-residents where there is no tangible connection to KSA, such as intellectual property rights or consultancy, can be zero-rated.
• However, if the service directly benefits someone or something within KSA (such as a repair done on goods in KSA), VAT at 15% is charged.

Input VAT Deduction

A VAT-registered person in KSA can deduct input VAT on goods and services related to their economic activity. Key points:

• General Provisions: Input VAT can be deducted on VAT charged by KSA suppliers, self-accounted VAT under the reverse charge mechanism, or import VAT. Input VAT is non-deductible for exempt activities or non-business-related costs (e.g., entertainment, cultural services, etc.).
• Proportional Deduction: If a person makes both taxable and exempt supplies, only VAT related to taxable supplies can be deducted. General expenses shared between taxable and exempt supplies are proportionally deductible.
• VAT on Imports: Only the importer, as per customs law, can deduct VAT on imported goods. If someone else imports the goods, they cannot claim VAT deduction.
• Reverse Charge Mechanism: VAT paid under this mechanism is deductible if used for taxable economic activities.
• Zero-rated Exports: VAT incurred for making zero-rated exports is deductible, often leading to refund claims for excess input VAT.

Conclusion

The VAT system on imports and exports in KSA is comprehensive, ensuring that tax is applied uniformly to all imported goods and services while providing relief for exports through zero-rating mechanisms. Compliance with documentation and procedural requirements is critical for businesses to avoid penalties and ensure they can reclaim any input VAT. Understanding the special rules, such as those for re-imported goods and indirect exports, is also essential for businesses involved in international trade.