Circular on VAT treatment of some financial services in

4 min read

The Saudi Arabian tax authority (ZATCA) issued a Circular on the VAT treatment of certain supplies in the Financial Services industry.

The Circular mainly addresses two areas – zero-rating of financial services and the VAT regime of credit card payment-related services. It also provides some clarifications same apply to other industries.

In detail

The Circular mentions that the financial service is occurring in the country where the supplier is resident. However, no further clarification is provided if this rule also applies to the case where a non-resident supplier provides services to a KSA resident not registered for KSA VAT.

When mentioning the conditions of zero-rating of services, the Circular quotes the newly introduced sentence added to Article 33(2) of KSA VAT Implementing Regulations (VATR) regarding the treatment of services directly or indirectly related to other services with the place of supply in KSA. However, the Circular does not provide further details on how this new rule will be interpreted by ZATCA. So we will be waiting for future clarifications from ZATCA in this respect.

ZATCA comments that services cannot be zero-rated if the supplier has no evidence that a non-resident customer is a resident outside KSA. It was always a challenge in the market how to verify the customer does not have a branch or a fixed establishment in KSA. The Circular mentions that the certificate of incorporation issued by foreign authorities would be sufficient evidence of the customer's residence in such a foreign country. While we will be waiting for future clarifications from ZATCA in this respect, the interpretation provided in the Circular may be used in potential requests for rulings to simplify the zero-rating tests.

The Circular mentions that the zero VAT rate may be applied if the KSA resident person, other than a customer, is receiving a direct benefit in KSA but is able to deduct input VAT in full. While the same was mentioned in Article 33 of VATR for a while, this rule is rarely applied in practice and reference to it in the Circular may be seen as a sign that the applicability of this argument is worth reconsideration with ZATCA.

The Circular comments on the VAT regime of credit card payment-related services where the major takeaway appears to be the interpretation that income received by an Issuing Bank from a non-resident Payment Network Operator (PNO) is a consideration for the service provided by an Issuing Bank to the Acquirer Bank and cannot be zero-rated just because PNO is a non-resident. It means that if such a service is provided by a KSA-resident bank to a KSA-resident bank, the Issuing Bank would need to charge VAT. And if the service is provided by a non-resident bank to a KSA-resident bank, the latter would need to account for this service under the reverse charge mechanism.

ZATCA comments that if there is any offset of the service fee charges in card payment arrangements, the gross value of each service should be considered for KSA VAT purposes, not the balancing net amount.

The Circular also mentioned that the service fee charges in card payment arrangements should participate in the proportional deduction calculations. This is something that we expected, but closer attention should be made to ensure the above-mentioned gross amounts (not net amounts) are participating in such calculation.

Way forward

While titled “Circular”, it represents the public opinion of ZATCA which is not legally binding. However, considering the tendencies of the current court practice on tax matters, analysing the public opinions of ZATCA is of great importance to reduce the risk of tax exposure.

KPMG KSA 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.