The Zakat, Tax and Customs Authority (ZATCA) of Saudi Arabia introduced amendments to Articles 33, 34 and added a new Article 36 of VAT Regulations (VATR) which sets out additional rules for applying a zero VAT rate to some categories of supply.
“Export” of services related to other services subject to a special place of supply rule
The amended clause (a) of Paragraph (2) of Article 33 of VATR states that the zero VAT rate does not apply if (we marked the major change in bold) the place of supply for the services is located in any Member State according to the special cases listed in Articles seventeen to twenty-one of the Agreement, and this does not include services supplied separately from the services whose place of supply is located in any Member State according to any of these special cases, which may be directly or indirectly related to it.
International transportation of passengers
The amended Paragraph (2) of Article 34 of VATR states that international transportation of passengers is subject to the zero VAT rate in accordance with the provisions contained in VATR, removing the previous requirement for such zero-rating to apply only in cases where:
• The transportation is by way of any qualifying means of transport, or
• The transportation is by way of a scheduled passenger flight or voyage which runs according to a published timetable.
Further, the amended Paragraph (8) of Article 34 of VATR states that a qualifying means of transport should be defined as any means of transport [previousy - any vehicle, vessel or aircraft] designed or adapted to carry a minimum of ten (10) people, or designed to carry goods on a commercial basis, which is used predominantly for international transportation [removing the final statement of the Paragraph: “and not domestic passenger transportation”].
A new Article 36 has been added to VATR which states that:
1. The supply of qualified military goods to the armed forces and government internal security forces in all their sectors, which is made through a taxable person registered with ZATCA and licensed in the field of military industrialization by the General Authority for Military Industries (GAMI), shall be subject to VAT at a zero rate.
2. Military goods that qualify for the purposes of applying the provisions of this article mean locally manufactured military goods that meet all of the following requirements:
a. The imported goods must be locally manufactured by the same supplier that applies the zero VAT rate.
b. The supplier has obtained a certificate of supplying qualified military goods from GAMI confirming that the supply fulfils all the requirements and controls mentioned in this article in relation to each contract, provided that the certificate includes the data of the supplier, the customer, and the supplies subject of the contract, with separate consideration for the qualified military goods to be subject to the zero VAT rate and for any other goods or services to which the provisions of this article do not apply.
3. The zero VAT rate applies only to supplies that fulfil all the requirements and controls mentioned in this article on the date the tax is due and within the limits of the consideration of eligible goods.
4. The Governor of ZATCA - in coordination with GAMI - may issue any additional controls related to the application of the provisions of this article.
We expect ZATCA to update its public guides to advise the market on how it is going to interpret these new rules.
The changes appear to be effective from 2 December 2022 prospectively, so urgent action is needed. The change calls for the companies involved in the mentioned types of supplies of services to revisit the VAT treatment and, potentially, the business model of respective arrangements.
KPMG Professional Services would be happy to assist the companies interested in the analysis of these new changes, as well as in clearance with ZATCA of the new VAT treatment of their respective business models.
Tariq Al Sunaid
Head of Tax
Senior Director, Domestic Tax
Senior Director, Domestic Tax
Director, Head of Indirect Taxes
Stefan El Khouri
Senior Director, Head of Transfer Pricing
Director, Domestic Tax