Key Topics Covered

• What is Value Added Tax (VAT)?
• How VAT Mechanism Works in Saudi Arabia
• Companies Eligible for VAT Registration
• VAT Registration Process (Tax Registration)
• Taxable Supplies, Exempt Supplies, and Zero-Rated Supplies
• Record Keeping and Accounting Books Management
• Tax Invoices and Legal Requirements
• Credit Notes and Debit Notes
• Tax Returns and Compliance Obligations

What is Value Added Tax (VAT)?

Value Added Tax is an indirect tax that reaches up to 15% depending on the type of goods or services, and is applied in the Kingdom of Saudi Arabia to goods and services that are bought and sold within the country's borders. VAT is imposed on supplies of goods and services that take place within the country, with few exceptions. The tax applies to every stage of the supply chain, from production until the goods or services reach the final consumer. The General Authority for Zakat and Tax (ZATCA) supervises the regulation, implementation, and collection of VAT in the Kingdom.

How the VAT Mechanism Works in Saudi Arabia

The VAT mechanism is based on the principle of tax deduction, where:

1. Input Tax: This is the VAT that companies pay when purchasing goods and services necessary for conducting their business activities.

2. Output Tax: This is the VAT that companies collect from their customers when selling goods or providing services.

Companies registered in the VAT system deduct input tax from output tax and pay the difference to the General Authority for Zakat and Tax.

Illustrative Example:

"Wood Products Company" sells furniture to wholesaler "Salem Company" for SAR 10,000. Wood Products Company adds 15% VAT (SAR 1,500) making the total SAR 11,500.

Salem Company raises the selling price to SAR 15,000 and sells the furniture to "Desert Furniture Store," adding 15% VAT (SAR 2,250) making the total SAR 17,250. Salem Company recovers SAR 1,500 in input tax and transfers SAR 750 (2,250 - 1,500) to the General Authority for Zakat and Tax.

Desert Furniture Store raises the selling price to SAR 20,000 and adds 15% VAT (SAR 3,000) making the total SAR 23,000, selling it to the final consumer. The store recovers SAR 2,250 in input tax and transfers SAR 750 (3,000 - 2,250) to the General Authority for Zakat and Tax.

Companies Eligible for VAT Registration

Mandatory Registration:

All companies with revenues exceeding SAR 375,000 from taxable supplies during the past twelve months (or expected during the next twelve months) must register for the VAT system.

Voluntary Registration:

Companies with revenues ranging between SAR 187,500 - 375,000 from taxable supplies may voluntarily register for the VAT system. Companies that provide only zero-rated supplies and exceed SAR 375,000 in revenue may also register voluntarily.

VAT Registration Process

Registration for Residents (How to Register for VAT):

Companies and individuals residing in the Kingdom of Saudi Arabia can register electronically through the General Authority for Zakat and Tax (ZATCA) portal. It should be noted that tax registration is mandatory for entities whose revenues exceed the prescribed threshold.

Registration for Non-Residents:

Non-residents in the Kingdom of Saudi Arabia who make taxable supplies within the country are required to register and submit VAT returns. This can be done by appointing a tax representative based in the Kingdom of Saudi Arabia. The tax representative approved by the General Authority for Zakat and Tax submits VAT returns and makes payments on behalf of the non-resident taxpayer.

Group Registration (Tax Group Registration):

Two or more legal entities can register for VAT as a single tax group if the following conditions are met:

• All legal entities in the group are under the control of the same person(s) by at least 50%.
• All members in the group conduct economic activities.
• All members in the group are resident in the Kingdom of Saudi Arabia.
• At least one member meets the minimum requirements for VAT registration.

Taxable and Non-Taxable Supplies

Standard Rate Supplies (Taxable Supplies):

Most goods and services provided within the Kingdom of Saudi Arabia are subject to VAT at 15%, and these taxable supplies include:

• Food and beverages
• Private healthcare and educational services
• Local transportation
• Rental and sale of commercial buildings
• Sale of residential buildings

Exempt Supplies:

Some goods and services are not subject to VAT, and these tax-exempt supplies include:

• Residential rentals
• Certain financial services

Zero-Rated Supplies:

Some goods and services are subject to VAT at 0%, and these zero-rated supplies include:

• Non-GCC exports
• International transportation
• Medicines and medical goods
• Investment metals (gold, silver, or platinum with 99% purity or higher)

Record Keeping and Accounting Books Management

Companies and individuals registered in the VAT system must maintain records, invoices, and all related documents for at least 6 years after the end of the tax period. Record keeping includes maintaining all documents related to VAT transactions. Records can be kept in paper or electronic format, but must be stored within the Kingdom. This rule also applies to non-resident taxpayers.

Mezan cloud accounting software provides an integrated solution for managing accounting records related to VAT, ensuring full compliance with the requirements of the General Authority for Zakat and Tax.

Tax Invoices

A tax invoice is a non-negotiable document issued by a company to its customers containing supply details. Businesses registered in the VAT system must issue tax invoices for each taxable supply within a maximum of 15 days from the month following the month in which the actual supply occurred.

The tax invoice must include the following information:

• Name, address, and tax registration number of the supplier (invoice issuer)
• Name and address of the customer (invoice recipient)
• Invoice issue date
• Sequential invoice number
• Description of goods or services provided
• Total amount before tax
• VAT rate and amount
• Total amount including tax
• Statement of whether the invoice is for taxable, exempt, or zero-rated supply

Mezan cloud accounting application enables the issuance of tax invoices compliant with the General Authority for Zakat and Tax requirements automatically and easily, saving time and effort while ensuring tax compliance.

When to Use Credit Notes

Credit notes are used to adjust the value of tax invoices in the following cases:

• When goods are returned for refund
• When there is an error in the original invoice that resulted in an increase in the tax amount
• When VAT is collected higher than the correct amount
• When discounts are granted after issuing the tax invoice

When to Use Debit Notes

Debit notes are used to adjust the value of tax invoices in the following cases:

• When VAT is collected lower than the correct amount
• When additional goods or services are supplied that were not included in the original invoice
• When there is an error in the original invoice that resulted in a decrease in the tax amount
• When prices of goods or services increase after issuing the original invoice

Tax Returns

Businesses registered in the VAT system must submit their tax returns and pay the tax due to the General Authority for Zakat and Tax periodically, either monthly (if annual sales exceed SAR 40 million) or quarterly depending on business size.

Important Notes

• All businesses registered in the VAT system must comply with the General Authority for Zakat and Tax requirements to avoid fines and penalties.
• Registered businesses can recover input tax related to their economic activities.
• Tax identification number must be included on all invoices and official correspondence.
• Small and micro businesses can benefit from support and consultation services provided by the General Authority for Zakat and Tax to ensure tax compliance.

How Mezan App Helps Small Businesses with Tax Compliance

Mezan is one of the best cloud accounting applications for small and micro businesses in the Kingdom of Saudi Arabia. Mezan offers a range of features that facilitate compliance with VAT requirements:

1. Tax Invoice Preparation: Mezan creates tax invoices compliant with the General Authority for Zakat and Tax requirements.

2. Automatic VAT Calculation: Mezan automatically calculates tax values on invoices, credit notes, and debit notes.

3. Tax Return Preparation: Mezan helps prepare and submit tax returns within specified deadlines.

4. VAT Reports: Mezan provides detailed reports on input tax and output tax for different tax periods.

5. Tax Record Storage: Mezan allows secure and organized storage of all tax documents and records for 6 years as required by regulations.

6. Automatic Alerts: Mezan sends alerts to companies before tax return submission deadlines to avoid penalties.

For more information and details on how Mezan can help your company comply with VAT requirements, please visit our website or contact our specialized support team.