Saudi Arabia: VAT treatment of some financial services

A circular on the VAT treatment of certain supplies in the financial services industry.

A circular on the VAT treatment of certain supplies in the financial services industry.

The Zakat, Tax and Customs Authority (ZATCA) of Saudi Arabia issued a circular on the value added tax (VAT) treatment of certain supplies in the financial services industry.

The circular mainly addresses two areas:

  • Zero-rating of financial services
  • VAT regime of credit card payment-related services

The circular states that financial services are treated as occurring in the country where the supplier is resident, but it is unclear whether this rule also applies when a non-resident supplier provides services to a Kingdom of Saudi Arabia (KSA) resident not registered for KSA VAT.

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 is often difficult 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.

The circular also 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 the VAT regulations, 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 major takeaway appears to be the interpretation that income received by an issuing bank from a non-resident payment network operator (PNO) will be treated as consideration for the service provided by an issuing bank to the acquirer bank and cannot be zero-rated just because the 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.

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

The circular also mentions that the service fee charges in card payment arrangements must participate in the proportional deduction calculations. This is something that tax professionals expected, but closer attention needs to be made to provide the above-mentioned gross amounts (not net amounts) are participating in such calculation.

KPMG observation

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.

For more information, contact a KPMG tax professional:

Philippe Stephanny | +1 202 533 3082 |


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