Saudi Arabia: Amendments to rules for applying a zero VAT rate to some categories of supply

The Zakat, Tax and Customs Authority (ZATCA) of Saudi Arabia introduced amendments to Articles 33 and 34, and added a new Article 36, of the value added tax (VAT) regulations to set out additional rules for applying a zero VAT rate to some categories of supply.

Amended Article 33 states that the zero VAT rate does not apply if the place of supply for the services is located in any member state according to the special cases listed in Articles 17 to 21 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.

Amended Article 34 states that international transportation of passengers is subject to the zero VAT rate in accordance with the provisions contained in the VAT regulations, removing the previous requirement for such zero-rating to apply only in cases when:

• 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.

Amended Article 34 states that a qualifying means of transport must be defined as any means of transport designed or adapted to carry a minimum of 10 people, or designed to carry goods on a commercial basis, which is used predominantly for international transportation.

A new Article 36 has been added to the VAT regulations, which states that:

• 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), will be subject to VAT at a zero rate.
• 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:
  • The imported goods must be locally manufactured by the same supplier that applies the zero VAT rate.
  • The supplier has obtained a certificate of supplying qualified military goods from general authority for military industries (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.
• 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.
• The governor of ZATCA—in coordination with GAMI—may issue additional controls related to the application of the provisions of this article.

Tax professionals expect ZATCA to update its public guides to advise the market on how it is going to interpret the 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.

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com