Saudi Arabia VAT Regulations made easier for non-residents to register in Kingdom

In a welcome change to the KSA VAT Implementing Regulations, The Board of Directors of the General Authority of Zakat and Tax (GAZT) has taken significant steps to enable non-residents to register in the Kingdom. The change took effect from July 18, 2019.

Non-residents are no longer obliged to appoint a tax representative in order to register for VAT in Saudi Arabia. GAZT has eased the path to registration by providing for the appointment of a third party as an alternative to a tax representative, subject to certain requirements.

This is a significant relaxation of the rules. Until the change, a non-resident was compelled to appoint a tax representative who, was jointly liable for all VAT debts. This potential financial risk discouraged service providers from acting in this capacity, thereby, making it extremely difficult for non-residents to register for VAT in the Kingdom. There are many foreign businesses waiting to register in Saudi.

This will encourage non-residents to register for VAT, thereby boosting VAT collections and increasing compliance. The change also signals to the market that Saudi is trying to develop a business friendly environment with fair regulations and that the regulators are willing to adapt their approaches, where necessary.

Since the inception of VAT, GAZT had expressed some concerns that the number of non-resident registrations was quite low given the strong levels of foreign activity in Saudi Arabia. The lack of registrations was due in large part to the difficulty in finding Saudi residents willing to act as a tax representative. Prior to the changes, the tax representative had unlimited joint liability for the tax debts of the non-resident. This requirement placed a major potential financial burden on the representatives, which, understandably, were unwilling to accept without adequate indemnification. Non-residents, on the other hand, were reluctant to provide financial guarantees without clear guidelines in terms of the value. The prospect of appointing a representative thus became unnecessarily costly and cumbersome for non-residents.

During various discussions with GAZT in the initial stages of VAT implementation, we had suggested that the legislation be amended to stipulate the requirement that some form of security be provided either to GAZT or to the tax representative and to provide guidelines regarding the value of the security.

GAZT has responded positively to this feedback and to comments from business and has provided practical options to enable the non-residents to register.

The appointment of a tax representative is now optional for non-resident taxpayers. Also, the financial liability of the tax representative has been effectively limited to half of the annual output tax liability of the taxable person.

For non-residents who do not appoint a tax representative, it is mandatory to appoint a third party, established in the Kingdom, to comply with the record keeping requirements provided for in the VAT legislation. It appears that a Saudi third party will not be jointly liable for the non-resident’s VAT liability in KSA. However, the non- resident must now provide a cash security to the GAZT at the time of applying for registration, based on the GAZT’s estimation. The value of the security is expected to be at least half of the expected annual VAT output liability of the taxpayer.

The change is highly welcomed, as many foreign businesses have faced difficulties with the appointment of a tax representatives for VAT in KSA. This will also improve overall tax compliance and collection in the Kingdom.

* Therer is Head of Indirect Tax at KPMG Al Fozan & Partners in Saudi Arabia