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Tripling of the VAT rate and increase of customs duties in Saudi Arabia

The Kingdom of Saudi Arabia increases customs duties and from 1 July 2020 triples the VAT rate. How are Swiss exporters affected and which role does the EFTA-GCC free trade agreement play?

Kingdom Tower, Saudi Arabia

Increase of customs duties in Saudi Arabia

TThe Saudi Cabinet decided to raise the customs tariff for 575 commodities, to be in accordance with the ceilings that Saudi Arabia committed to in the World Trade Organization. According to new published list, the ceiling reaches 20 percent instead of 25 percent. The Swiss most prominent goods that were included in the decision to raise tariffs are cheese, cosmetic powders, chemicals, and machines. Find an overview of the different rates on products here 

Tripling of the VAT rate 

To mitigate the financial and economic impacts of COVID-19 on the government budget in the medium and long term, Saudi Arabia has introduced a package of measures. The main introduced measure is an increase of its headline value-added tax rate (VAT) to fifteen percent from five percent as per 1st July 2020. 
 
For memory, Saudi Arabia introduced the VAT regime as part of the Common VAT Agreement (“VAT Framework” ) agreed upon between the States of the Gulf Cooperation Council (GCC) with a VAT rate of 5 percent to be applied across all member States. Until today, not all GCC States have implemented the Framework. Saudi Arabia and the United Arab Emirates introduced VAT with effect from 1st January 2018 and Bahrain one year after at a standard rate of 5 percent. Oman, Qatar and Kuwait are yet to implement VAT and therefore, there will be a question over whether these States will implement it at the originally agreed 5 percent or will seek to implement it at a higher rate, following the recent Saudi Arabia's actions.

Implication for companies 

The recently published Guideline in Arabic by the General Authority for Zakat and Tax (GAZT) provides examples of how its transitional rules will apply to the VAT rate change in the Kingdom. Saudi Arabia will keep the same VAT system (Zero-rated supplies, VAT exempted and taxable goods and services) without implementing a “lower rate” of VAT alongside the higher standard VAT rate.

After 1st July, companies will be under significant pressure to evaluate the impact of this rate change on their businesses and ensure an ability to comply, without creating risk of error and penalties for their business activities. Similar to when VAT was first introduced in the Kingdom, companies will need to ensure  that a 15 percent standard VAT rate tax code is created within their enterprise resource planning (ERP) system for both sales and purchases, together with appropriate procedures and controls as to when it should be used and appropriate mapping to their general ledger. GAZT informed that companies engaged with the Public Sector will still apply the VAT at 5% for contracts that were entered into prior to May 11 2020 up until the end of June 2021. Companies such as insurers will also note that for invoices issued prior to May 11 but where services are provided post-1 July 2020, the 5% rate will still apply. More technical details are summarised by Deloitte

Are preferential-products which are included in the FTA EFTA-GCC also affected? 

Based on the published list customs duties on some products included in the FTA EFTA-GCC will be increased too (e.g. machines, textiles). Swiss products complying with the rules set out in the free trade agreement will be granted the announced “Preferential tariffs” as per the FTA EFTA-GCC agreement. Compared to products originating out the EFTA States, those Swiss products could be very competitive.

Whether  exporters of processed agricultural products could benefit from the preferential tariffs is not clear yet. Nevertheless, it would be recommendable to join the EUR.1 movement certificate correctly filled out to the requested clearance documents. For memory, the implementation of the FTA by the GCC States was postponed until the 1st July 2015, and the GCC States started implementing (technically) the FTA between GCC States and EFTA State on 1st July, 2016. Instantly, Swiss companies started benefiting from the preferential treatment granted under the FTA from 1st July 2016. Provided that the EUR.1 movement certificate has correctly been filled out, involved companies started requesting the reimbursement of the paid customs duties and have been refunded for exported products from 1st July 2015. The EFTA and GCC Secretariats are still discussing the due implementation of the dismantlement of the tariffs on products listed in the category (B) in Annexes III, V, VI of the Agreement and the Bilateral Agricultural Agreements between individual EFTA States and the GCC States. The tariffs have been supposed be eliminated five years after the entry into force of the FTA that took place on 1 July 2014. We will keep you informed accordingly.

Do you have any questions?

Do you have any remaining questions about the measures introduced in Saudi Arabia? The ExportHelp team of Switzerland Global Enterprise is the first port of call for Swiss and Liechtenstein SMEs with administrative export-related issues of any kind. You will receive a response within 24 hours; research taking up to one hour is free of charge.

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