VAT obligations for registered businesses
The introduction of VAT had a significant impact on businesses in Saudi Arabia. Companies that were previously operating in a virtually non-tax environment now have to comply with various obligations imposed by the VAT legislation, such as:
- get registered with the Saudi Zakat Tax and Customs Authority (ZATCA),
- charge VAT to their customers where applicable,
- prepare and submit periodic VAT returns,
- pay VAT to the competent tax authorities,
- issue tax invoices compliant with the locally applicable legislation, and
- comply with extensive accounting obligations.
With the new VAT law, tax authorities have the power to impose administrative fines and other penalties to ensure compliance with these extensive obligations.
This will in turn have an impact on the overall liability of companies and underlines the importance of being fully compliant with VAT legislation at all times in order to avoid the risks of penalties and/or additional VAT assessments. Taxpayers should carefully consider their VAT position, implement efficient processes, and properly monitor their VAT obligations to ensure perfect compliance with the VAT law. This is especially difficult in an environment where the tax authorities also have little experience with VAT and things seem to evolve even faster than in mature tax jurisdictions. Well-prepared businesses made an impact assessment in an early stage in order to prepare them for the introduction of VAT and determine their strategy. Even so, businesses face quite some uncertainty going forward.
It is expected that businesses will hold their directors responsible for any adverse consequences resulting from audits conducted by the tax authorities. They may want to plan ahead and verify the agreements with the directors and possibly amend them. The directors themselves may want to examine again their liability insurances to ensure they are covered.
Harsh penalties for infringements of the VAT law
To ensure that all taxpayers comply with these extensive obligations, the competent tax authorities in each Member State have been granted the power to impose substantial administrative fines.
In addition to these administrative fines, the tax authorities may impose more severe penalties, e.g., prison sentences in case of infringements that are considered tax evasion (see article 40 and following of Saudi Arabia Cabinet Decision No. 257/1438).
The tax authorities may claim any VAT that is due because of incorrect reporting or deducting input VAT that was not deductible.
Who is liable for penalties?
Businesses will be facing a high risk of financial exposure in case of non-compliance with their VAT obligations since they will be liable for any VAT debts or penalties vis-à-vis the tax authorities.
For example, if a business is exporting goods from Saudi Arabia and claiming a zero rate (an exemption with the right to recover input VAT), but fails to keep the appropriate export documentation, the GAZT will claim VAT on these exports. That business will be held liable for VAT on these supplies, together with penalties.
Unlike other jurisdictions, tax procedure laws in the GCC do not provide for a joint personal liability with respect to company directors, executives, managers or any other officers who are responsible for the day-to-day management of the company (hereinafter referred to as “company executives”). Such a joint liability would hold the directors and other managers in the company liable for any VAT debts or other penalties the company incurs as a result of its management.
In Europe on the other hand, company executives can be held liable by the tax authorities in case the company does not comply with its VAT obligations, e.g., non-payment VAT or penalties imposed on the company.
The ability for tax authorities to pursue company executives provides them with an additional opportunity to collect VAT in case of company insolvency and puts additional direct pressure on company directors.
Comparison with European Laws
By way of illustration, the following is an overview of the applicable liability regimes for a selection of European Member States:
- In the UK, HM Revenue & Customs (HMRC) has to ability to pursue a company executive personally for any penalties that it has been unable to collect from the business, if it can prove that the error was a deliberate and dishonest attempt by a company executive to evade VAT, as referenced in Tolley's Value Added Tax 2017-18, p. 1454 (53.12).
- In Belgium, company executives can be held jointly liable in case of a civil error that gave rise to the non-payment of the VAT.
- Luxembourg only recently introduced a personal liability for company executives (as from 1 January 2017). Company executives can now be held personally and severally liable in the event of a breach of VAT compliance obligations and/or non-payment of the VAT which is payable by the company that they manage.