2. VAT registration and group registration
In order to determine when a business actually has to register for VAT purposes, a distinction needs to be made between resident taxable persons and nonresident taxable persons.
Residence means that a taxable person is established and conducting business in a country.
For example, a business incorporated in Jeddah is resident in the KSA. If that same business has a branch in the UAE, it is also resident in the UAE.
For the resident taxable persons two types of thresholds apply, a mandatory one and a voluntary one.
The thresholds apply on an annual basis and solely take into account taxable supplies (supplies subject to VAT and zero-rated supplies). The thresholds can be exceeded either under a prospective test or a retroactive test. The mandatory registration threshold is set at SAR 375,000 (or more or less USD 100,000) and the voluntary registration threshold is set at SAR 187,500 (or more or less USD 50,000).
If a taxable person only makes taxable supplies which are exclusively zero-rated, then he is excluded from the requirement to register. The taxable person may elect to apply to register voluntarily.
Apart from the exclusion of the taxable person exclusively making zero rated supplies to register for VAT purposes, the Implementing Regulations of the KSA VAT Law also exclude the Government bodies acting in capacity as a public Authority.
However, in cases where a government body, or an entity owned by the government, carries out activities which involve making supplies of goods or services in a capacity other than its capacity as a public Authority, that government body or entity will be regarded as carrying on an economic activity and may be required to register if conditions are met.
Similarly, salaried employees and other persons in so far as they are bound to an employer by contract or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability, are not considered to be carrying on an economic activity for the purpose of registration.
For a non-resident taxable person, no registration threshold applies. In other words, as from the first income a non-resident taxable person receives in the Kingdom, it will have to register for VAT purposes. Naturally, this requires that the supplies the taxable person makes are taxable in the Kingdom and that it is liable for the payment of VAT. This could be the case for example for the supply of electronically supplied services to a private person established in the KSA.
In KSA, there is a concept of fiscal representation. A fiscal representative is a person who will represent a tax payer before the tax authorities and will take over the obligations of the tax payer it represents. The tax representative shall be jointly liable for payment of any Tax due by that taxable person. Often, convincing business to act as a Fiscal Representative can be a burdensome task.
The tax Authorities in the KSA will publish the list of approved tax representatives and tax agents. The registration can be done either directly by the taxable person himself if he is resident, or by a tax representative who will represent the business. All non-resident taxable persons are required to have a tax representative.
For the purpose of the paragraph 3,4 and 5 (a) of this article of the KSA Law the Implementing Regulations of the KSA VAT Law have set specific requirements.
Registration was officially launched in September 2017. The taxpayers that were making/intending to make annual taxable supplies of goods and services in excess of SAR 375,000 were required to register for VAT by 20 December 2017. GAZT automatically registered large taxpayers that make annual taxable sales of SAR 40 million and above (either based on the past twelve months or on the twelve months to come).
However, taxpayers whose annual taxable turnover is or is intended to be between SAR 375,000 and SAR 1,000,000 have until 20 December 2018 to register.
The registration application has to be filed online on the portal of ZATCA. The minimum information required for the registration application includes the official name of the legal or natural person and ID in case the taxable person is a natural person, physical address or place pf business, email address, electronic identification number of applicable (such as in case awarded to companies) value of annual supplies or annual expenses (in case of voluntary registration) and the effective date of registration.
In case where the mandatory registration application tied to an anticipated increase in the value of annual supplies or in case of a voluntary registration application an alternative effective date can also be requested as per the expectations of the taxable person that by that respective date the supplies will exceed the mandatory or voluntary registration threshold respectively.
Any supporting documents for the application can be requested by the tax Authority and the taxable person will be liable to provide them in minimum of 20 days from the date of request.
Upon the approval of the registration application a Tax registration certificate will be issued which states the registration date and tax identification number. A tax identification number is important for the tax registered businesses for the issuance of compliant invoices.
Any registered taxable person who is resident in the Kingdom is required to display the registration certificate at its main place of business and branches in a manner that is visible to the general public. Although for retail businesses this may be helpful, for other types of businesses the use is much less apparent.
In the absence of the sufficient information required in the application or the evidence that the person is eligible to be registered, the Tax Authority may refuse an application for registration. A notification of refusal must be provided to the person making the application.
VAT Group registration
Generally, the application for and operation of a VAT group for all or some of the corporate group members, including the holding company, is an efficient way to mitigate and/or reduce the risk of error, cash flow burden and real VAT costs resulting from the VAT concepts mentioned above.
The use of a VAT group will allow the members of the corporate group to be treated as a single taxable person and to disregard any supplies between members for VAT purposes in accordance with article 4 KSA VAT law, i.e., no VAT would be obliged to be charged, no tax invoices would be required to be issued, no market value or deeming provisions would need to be applied.
A VAT group does however result in all members of the group being joint and severally liable for the VAT obligations and liabilities of all other members of the group.
The application for and successful granting of a VAT group from the relevant tax authorities for all members of the corporate group will be dependent on:
- whether the criteria are met by all entities; and
- whether ZATCA feels that the application of VAT grouping would result in more efficient collection of the group's tax liabilities and is not sought for the purposes of tax evasion.
The criteria for VAT grouping in the KSA, as set out within article 10 of the KSA VAT Implementing Regulations, can be summarized as follows:
- each person must be a legal person and must be resident in the KSA;
- each person must carry out an economic activity;
- ownership by the same person or group of persons, whether directly or indirectly, of 50% or more of the capital in each legal person, control or the voting rights ;
- at least one of the legal persons must be a taxable person; and
- each person must be linked by economic, financial and regulatory practices in business.
From the above criteria, you will note that a private individual, an unincorporated joint venture or partnership or a non-resident entity with only a VAT registration (but no physical presence in the KSA) would not be entitled to be a member of a VAT group. Unincorporated joint ventures or partnerships are specifically mentioned in the ZATCA guidance as being excluded from VAT grouping provisions also. Fixed establisments can join a VAT group.
KSA VAT Grouping is not a top down VAT grouping, as illustrated in ZATCA’s guides, and it additionally allows for situations where completely independent investors jointly holding more than 50% can apply for VAT Grouping. This is much broader than how other tax authorities traditionally view VAT grouping.
However, the above criteria do appear to allow a legal entity fully engaged in exempt activities (i.e., undertaking an economic activity but not a taxable person) to join the VAT group, as long as one member of the VAT group is a taxable person (i.e., at a minimum exceeds the voluntary registration threshold of SAR 187,500).
Based on the economic activity criterion, a passive holding company would be excluded from VAT grouping, whereas an active holding company would be able to be part of a VAT group in the KSA.
Even where the above criteria are met, it is not guaranteed that VAT grouping will be granted. The approval of a VAT group application is fully at the discretion of the ZATCA, with the ZATCA having the ability to decline the VAT group application in full, accept only certain members to the group, and change the VAT group status at a later date. Further detail may be reviewed within the ZATCA VAT Grouping Guideline.
In addition, obtaining the agreement of all corporate group members to the submission of the application for VAT grouping may depend on the level of external investor involvement, e.g., if one of the corporate group members is 40% owned by an independent investor, this investor may not be willing to agree to take on joint and several liability for VAT with the tax authorities for all other members of the corporate group.
Deduction of VAT by a VAT group
While the application of VAT grouping provisions generally reduce the administrative burden of a corporate group, increase cash flow efficiency and in certain limited circumstances reduce real VAT cost, there are also some challenges introduced by the use of a VAT group. This is especially true where the group engages in exempt activities, inter-group transactions and holding company activities.
It is the obligation of every taxable person to assess the use to which its costs have been put, in order to determine its right to deduct any VAT incurred on such costs. This exercise generally involves a legal entity undertaking a direct attribution exercise between its taxable and exempt (if any) activities, restricting any VAT not attributable to business or economic activities and applying a suitable apportionment mechanism for general overheads.
In the case of a VAT group, all members of the group are now viewed as one single taxable person. Therefore, any inter-group transactions which were previously categorised as taxable or exempt are now viewed as outside the scope for VAT purposes, as they are no longer supplies to another taxable person, i.e., they are treated similarly to inter-department recharges within a single legal entity. Therefore, the direct attribution and apportionment exercise becomes a lot more complex.
Often, the VAT group member who is incurring VAT on costs from an external third party needs to identify whether they can be directly attributed to a taxable or exempt supply made by the group as a whole to an external customer, in order to correctly assess the group's overall deduction entitlement. This can prove very challenging, if not on occasion impossible, where the VAT group members do not have centralised IT systems or have independent management structures which do not coordinate closely on a day-to-day basis.
In addition, VAT grouping often results in certain costs which were previously attributable to taxable or exempt supplies, becoming general overheads of the group as a whole. Depending on the level of deduction entitlement of the entity incurring the cost (i.e., based on its taxable and exempt activities and its apportionment methodology) versus the overall deduction entitlement of the group, this may result in lower or higher deduction entitlement on such costs. This can be a difficult and time-consuming exercise to analyse in advance of forming a VAT group, and an additional task to be undertaken as part of the VAT Compliance process each period, in addition to a consolidation process taking place every period. Annual apportionment reviews would still be obliged to be undertaken by the group as a whole. The group may also end up with more than one apportionment methodology for the group, where it has very distinct areas of its business and it is agreed with the ZATCA that one single apportionment method would not correctly reflect the drivers of the costs across all divisions.
In the event that certain members of a corporate group are added to a VAT group but others are not (due to their exclusion by the ZATCA or their shareholding structure), the group will need to implement new policies, procedures and controls to ensure that VAT group members and non-VAT group members are clearly identified to all within the business, are assessed differently and the correct treatments for supplies and VAT on costs are applied.
It is not unusual to have a corporate group with a limited VAT group, or a corporate group with multiple VAT groups and errors made by staff in VAT treatments or inter-company billing due to a lack of communication, training and policies to ensure consistent and accurate application of the VAT rules.