VAT rate increase -

Kingdom of Saudi
Arabia
PwC ME Webinar
14 May 2020
Agenda

Introduction and an What does this mean for How will this impact Next steps
overview of what we business? technology and systems?
know
Chadi Abou-Chakra Jay Riche
Mohammed Yaghmour Mihir Bhatt Chadi Abou-Chakra

1 2 3 4
Conclusion and Q&A

Jeanine Daou

5 6
Meet the speakers
Mohammed Yaghmour Jeanine Daou

Zakat and Tax Leader Middle East Indirect Tax Leader

Saudi Arabia & Egypt

Chadi Abou-Chakra Jay Riche

Indirect Tax & Tax Policy Partner Middle East Digital Solutions
Saudi Arabia Leader

Mihir Bhatt

Business Restructuring and

Working Capital Management
Director

PwC 2
Introduction and an overview of what we know

1
 KSA fiscal landscape
What are the reasons for the economic and financial impact and how has this been addressed?

Factors COVID-19 Declining oil

economic prices
impact
KSA

Impact
Fiscal stimulus VAT Amnesty VAT rate Rate increase to support other austerity
package until 30 June increase measures to improve domestic
revenues
introduced 2020
The KSA fiscal deficit
Higher reliance on non-oil revenues year on year to finance the government budget
The sharp decline in Q1 2020 ITX revenues & oil prices triggered a bold response from MOF

Revenues Q1 2019 Q1 2020 %age variance

(SAR (SAR
million) million)

Taxes on Income, Profit, 2,742 3,569 30%

Capital gains

Taxes on Goods and 41,133 30,604 -26%

Services
(of which: Excise Tax and
VAT)

Tax on International Trade 3,490 4,021 15%

and Transactions
(Customs)

Other taxes (of which: 7,071 2,060 -71%

Zakat)

Other revenues 21,883 23,047 5%

Current economic factors has led to higher reliance on non-oil revenues. A VAT rate increase will aim
to make up for decreasing revenues from oil as depicted above based on KSA Government Budget *Source: Ministry of Finance website
Performance reports.
Understanding the wider landscape

Fiscal deficit VAT rate Impact on GCC Operations Evolution of the Alignment with
increase VAT model tax landscape 2030 vision
Government Delay in of the future
revenues Significant Opens the door to government Diversify economy
decreased decrease in VAT unilateral projects while Ensure fiscal and achieve
significantly due to revenues due to operation of GCC continued policies drive sustainable growth
COVID-19 and COVID19 VAT Framework increase in non-oil sector
decline in oil price Agreement government growth
Rate increase spending
Government objective is to
considers tools to bridge the gap in
increase revenues domestic
revenues

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What does this mean for business?

2
What does a rate increase mean?
Guidance should be issued
by GAZT to address the
legislative change required
to enforce the rate increase.
Change in systems,
pricing, documentation,
operations and business
processes to adapt to the
new VAT rate.
PwC
Taxpayers will be required to
charge a higher VAT rate on
their standard rated supplies.
This could impact consumer
Demand for goods
and services
Stress on cash management,
transitional provisions and
compliance requirements.
Businesses will have an
increased VAT cost
associated with their
operations that relate to
exempt supplies.
An increase in
non-compliance risks and
exposure to penalties
proportional to the VAT rate
hike
Compliance with the VAT rate increase
Businesses in KSA should start considering the necessary changes required to manage the impact on their operations, and comply with
the legal requirements in terms of charging and reporting the correct amount of tax due to the authorities.

Taxpayers are also recommended to consider key business and compliance implications due to this rate change.

1 2 3 4
IT system Alignment of Alignment with Strategic
enhancement business functions the approach decision-making
with VAT adopted by tax
authorities

5 6 7
Legal and Cash flow Transitional
financial management considerations
considerations

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 Key considerations
IT system
enhancement
1 2
Gear up the IT systems to
incorporate VAT rate
increase requirements, such
as updates to:
• Documentation i.e. Tax
invoice/simplified invoice
• Vendor/customer master
• Item master
• Tax master
• Tax rate coding etc.
Change to point of sale and
digital platforms (e.g.
e-commerce site)
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Alignment of business Alignment with the
functions with VAT approach adopted by
3 tax authorities
VAT is pervasive. Each
• Guidance from GAZT to
business function, such as
ensure business
finance, IT, marketing,
alignment
procurement, HR, finance
needs to be aligned from • Tax return impact where
VAT standpoint: VAT is currently
automatically calculated
• Marketing
• Potential increase in
• Finance
audit activity to be
• HR expected
• IT • Mitigation of significant
penalties by ensuring
• Tax
compliance
Communication and
• Assess status of
awareness sessions for key
compliance with the VAT
stakeholders and internal
regime and consider
staff
availing benefit from tax
amnesty scheme valid till
June 30, 2020
Strategic
decision-making
4 5
Decisions to be taken by
management on various
aspects, such as:
• Cut-off and transition
procedures
• Pricing decisions
• Cash flow management
Strategic decisions required
to be made for efficient tax
planning, such as:
• Exercising VAT grouping
options
• Vertical / horizontal
integration options
• Restructuring options
Legal and financial
considerations
Review of tax clauses in
existing contracts to assess
flexibility of rate increase. In
case tax rates are hard
coded:
• Assess the impact on
project / pricing
• Discussion with
concerned parties for a
workable solution
• Consider government
contracts and impact
where inclusive of VAT
• Adjustments to tax
clauses in existing
contracts
Determine the financial and
cash flow impact of the
VAT increase
 Key considerations

6 Cash and working capital management

Pla
pre nnin
ng
●
01
Assess, plan and prepare for the financial and
pa g a
rat nd
ion
o ici line
Inv iscip ●
02
Greater focus on invoice timeliness and
cash impacts of VAT increase on the business
d accuracy
● Identify any structural working capital changes ● Increased liquidity burden on timing between
that can be made to counter or minimise the VAT payment and delayed customer collections
impact Opportunities for Cash and (Accounts Receivables)
Working Capital

● Increased risk of disputes and payment

03 ●
04
Opportunities for businesses to conduct holistic
d C
delays, at least in the short term
an te co ontr review of the current terms & relationship
● More pressure on credit, collections and k
is pu t ne ntra act including price, payment terms, delivery lead
dispute management processes will minimise dit r dis men go ct s &
tia times, contract nature and other negotiable
e ge
any impact to the business Cr na
tio
n points to arrive at a win-win position
m a

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 Key considerations

7 Transitional considerations*
Tax point during transitional phase needs to be analyzed carefully. Common issues will be:
• ‘Time of supply’ for supplies spanning over various months (rent, insurance, etc…)
• Continuous supplies
• Supplies returned during the transitional phase
• Advances received / goods and services delivered before the rate change and invoiced later etc.
• Impact on Capital Assets Adjustment calculations due to change in the VAT rates
• Impact on input tax recovery percentage calculations (apportionment) and cost of VAT to be borne by businesses (applicable in case
of businesses making both taxable and exempt supplies)
• Introduction of anti-avoidance rules by GAZT
• Impact on importation of goods during the transitional phase
• Impact on contractual arrangements

*Please note that following the PwC webinar on 14 May 2020, GAZT has issued guidance on 20 May 2020 on the transitional
measures for the VAT rate change. For further details on this, please see the PwC Newsalert here
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How will this impact technology and systems?

3
What does this mean for your systems?
Immediate steps - business readiness for 30 June 2020

More than just a rate change

Regardless of your ERP, this is more than simply pressing a button

Multiple standard rates

Many ERPs will temporarily need to cope with two active VAT rates and
be able to correctly assign these rates to the correct transactions

Varying complexity of different system setups

Some systems will require multiple changes to be made across
different modules, followed by testing to ensure a watertight response
has been made to affect this rate change

PwC
VAT technology lifecycle (data flow diagram)
Post Transaction
Master Data Transaction Data Adjustment Financial Reporting VAT Reporting

Customer Master General Ledger/

Sales Order
Sub Ledgers
Order to
Cash
Material & Services

VAT Return
Tax Code Master Adjustments

General Ledger
Purchase

Master
Order

Procure to Record to Report

Pay

Supplier Master

VAT embedded Transactional Activities Financial Reporting VAT Reporting

Technology impact areas due to KSA VAT rate change
Complex IT System Landscape
● Multiple source of master data in ERP, transactional and / or other legacy systems
● Data movement between systems and its integration (manual / batch / real time)

Movement of financial data in system workflows

● Validation and correct application of business logic for tax determination in financial cycles:
Procure to Pay, Order to Cash and Record to Report

Post Transaction Adjustment

● Correct applicability of tax rates in case of sales return / purchase return during transition
period

Compliant VAT documentation

● Generation of compliant tax invoice / tax credit note with correct tax rates applied to
transactions
Systems - 30 June 2020 and beyond
Increased VAT rate brings KSA much closer to the OECD average VAT rate

Exposure will become much more material

Increased focus on technology will help strategically manage this VAT position going forward
Next steps

4
Immediate next steps
6
5
● Communicate
4 changes to
● Communicating customers and
3 outcomes to key
project steering stakeholders.
● System & User committee
2 Acceptance ● Charge VAT at
● Need
Testing 15% on 1 July
● Configuration assessment for
2020
1 Changes any change
required in tax
● System and function
Processes
Review
● Review
Business
Review
Documents
● VAT impact
assessment

Phase 2: Phase 3:
Phase 1: Impact Assessment Phase 4: Transition & Go Live
Implementation Testing

11 May 2020 - 30 June 2020

Conclusion and Q&A

5
Key takeaways

Assess impact of rate change on your business urgently. Feedback Form

1
Scan the QR code below
using your phone to
Prepare systems to charge and report the correct amount of VAT.
2 complete a 2 minute
survey

Manage financial and cash flow impact on your business.

3

Align business technology to cater for the transitional and go live period
4 simultaneously.

Communicate change to stakeholders and ensure staff are aware of the

5 implications to day-to-day operations.
 Get in touch

Mark Schofield Mohammed Yaghmour Jeanine Daou Suleman Mulla

Partner, Middle East Tax & Legal Zakat and Tax Leader – Saudi Arabia Middle East Indirect Tax Leader Partner, International Tax – Jeddah
Services Leader and Egypt +971 4 304 3744 +966 54 122 8051
+ 971 56 682 0608 +966 50 569 8572 jeanine.daou@pwc.com suleman.mulla@pwc.com
mark.d.schofield@pwc.com mohammed.yaghmour@pwc.com

Chadi Abou Chakra Mohammed Al-Obaidi Yaseen AbuAlkheer Mugahid Hussain

Partner, Indirect Tax – KSA Partner, Zakat & Tax – Riyadh Partner, Zakat & Tax – Jeddah Partner, Zakat & Tax – Khobar
+966 56 068 0291 +966 11 211 0239 +966 54 425 0540 +966 54 425 6573
Chadi.Abou-Chakra@pwc.com mohammed.alobaidi@pwc.com yaseen.abualkheer@pwc.com mugahid.hussein@pwc.com

Jay Riche Fayez Al Debs Fehmi Mounla Wael Osman

Middle East Tax and Legal Digital Lead Partner, Zakat & Tax – Riyadh Partner, zakat & Tax – Jeddah Partner, Zakat & Tax – Khobar
+971 56 385 4717 +966 11 211 0400 +966 2 610 4400 +966 56 699 4653
jay.riche@pwc.com fayez.aldebs@pwc.com fehmi.mounla@pwc.com wael.osman@pwc.com

Ebrahim Karolia Mohammad Harby Mohammad Amawi Alan Wood

Partner, Tax – Riyadh Partner, Zakat & Tax – Riyadh Partner, Zakat & Tax – Jeddah PwC Legal Lead – KSA
+966 56 890 3663 +966 56 907 +966 2 610 4400 +971 56 417 6723
karolia.ebrahim@pwc.com 2618 mohammad.h.amawi@pwc.com alan.wood@pwc.com
Mohamed.harby@pwc.com
23
Thank you

pwc.com

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