8. Tax rates

This section discusses the different tax rates applicable in KSA.
In Effect From 01 Jan 2018

The GCC has determined the applicable rate in the Treaty. It is 5%. The rate is applied on the taxable base, i.e. either the value of the supply or the value of imports. In principle, all implementing Member States of the GCC should have applied that rate. Should they wish to increase or decrease the applicable rate, they will need to amend the Treaty. No sanction mechanism is foreseen if they apply a different rate. 

KSA has increased the VAT rate to 15% with effect from 1 July 2020, foreseeing limited transitional provisions. HRH Crown Prince Mohamed bin Salman has said however that the increase is temporary and for a maximum period of 5 years. The VAT rate should come back down to a level somewhere between 5 and 10%.

The 15% rate applies across the board and is the default rule. There is no defined limited list of taxable supplies, which limits it to certain supplies.

The exception to this rule is when the Treaty or the KSA VAT legislation provides for an exception to the general rule. These can be zero rates or exemptions. A zero rate in other jurisdictions is sometimes also called an "exemption with the right to deduction", which is closer to its actual technical and conceptual meaning. 

The difference between zero rates and exemptions lies in the possibility to deduct input VAT. In both situations, the supplier does not charge VAT, but a zero rate means that the supplier can still deduct input VAT whereas the application of an exemption means that the supplier loses that right.

A number of zero rates and exemptions are mandatory under the Treaty. For certain sectors or transactions however, the application of the zero rate or exemption has been left to the discretion of the GCC Member States.

In KSA, the zero-rated supplies are set out in Chapter 6 of the Implementing Regulations (see article 31 and following). 

KSA has exempted the following transactions from VAT (see articles 29 and 30):

  • Financial services;
  • Lease or license of residential real estate.

There are no other rates, such as reduced rates in KSA.

Investment Gold is subject to a zero rate

Gold is considered as a qualifying metal for VAT purposes that can be used for investment purposes or other purposes.

A special regime applies when the tradable gold has a purity level more than or equal to 99% is supplied for investment. The gold will be considered as an investment metal if the following criteria are met:

  • It must carry a stamp as authorised by the Ministry of Commerce and Investment if produced locally, or by any international standard guaranteeing its quality and allowing it to be traded on an international bullion market.
  • It must be in an investment or a tradable form (bullion or coins).
  • It must be traded at a price based on the spot price on the global bullion market.
  • If the gold was imported from outside Saudi Arabia, the refiner must be in the “Good Delivery” list of the London Bullion Market Association.
  • It must have the form and character of metal only (i.e., not be a jewellery item, such as a ring).

A decorative bar of gold, granules of gold for industrial use or non-qualified collectable gold coins and gold jewelry are not considered as qualifying metals for investment purposes.

Generally, the supply of investment gold is the supply of good where it involves the transfer of ownership or the right to dispose of a specific and identifiable wafer, bar, ingot, and other parcel of investment gold. Therefore, the place of supply of the goods will be determined on the basis of where the investment gold is located at the time of sale.

Many transactions in investment metals may not involve such a transfer of ownership. Investment metals may also be leased or sold on an unallocated basis. When metals are sold on that basis, the purchaser has the right to ownership of a certain quantity of metals for which the supplier holds in a pool, but the purchaser does not obtain ownership of any particular wafer, bar, ingot or other parcel of identifiable metal, until the sale is converted to allocated metal.

Therefore, the sale of investment metals on unallocated basis, and leases of metals are supplies of services for VAT purposes and the place of supply rules for services will apply in this case.

The special regime allows that the sale of investment gold in the KSA may be subject to VAT at a zero rate in the following cases:

  • lease of gold, where the lessee obtains a right to the possession of the goods;
  • transfer of rights, where the transferee is able to obtain a right to possession of gold;
  • an assignment of possession in gold in order for work to be carried out;
  • the surrender of one of the above rights for consideration; or
  • first supply by producers or refiners in the KSA of a newly extracted or newly refined gold (for investment or otherwise).

The import of qualifying metal is exempt for VAT purposes in the KSA.

Any associated services related to investment gold such as refining, leaching, granulating, casting and re-casting of gold carried out in the KSA are subject to the standard rate of 15% VAT.

When gold is not used for investment purposes, the supply of gold will be standard rated. For example, the industrial supplies of gold such as granules, jewelry, and artefacts will be taxed at the standard rate of 15% VAT.

The table below illustrates examples of the VAT treatment applicable throughout the supply chain.

Transaction

VAT Treatment

Mining Co. sells raw gold to Al Salam KSA Trading Co.

Zero-rated supply

(First supply of qualifying metal by producer)

Al Salam KSA Trading Co. sells the raw gold to Eagle KSA Refining Co.

Standard rated supply

(Not a first supply and not investment grade)

Eagle Co. sells the refined gold bars to Danah KSA Trading Co.

Zero-rated supply

(First supply of qualifying metal by refiner and supply of qualifying metal for investment)

Danah KSA Trading Co. sells the refined gold bars to a jeweller.

Zero-rated supply

(Supply of qualifying metal for investment)

The jeweller sells the gold to a customer.

Standard-rated supply

 

Use of gold as an investment metal in Islamic financing transactions

In some cases, gold as an investment metal is used as a mechanism for Islamic financing products, under which the nominal ownership of the gold will pass to the customer on a temporary basis and the possession of the gold is never passed to the customer.

The nominal ownership to the underlying goods is returned to the financial provider or other third party at the end of the contract.

Therefore, in such cases, where the ownership of gold is transferred without the right of possession to the customer, it is not considered a supply for VAT purposes.

Diamonds

There is no special regime with respect to diamonds in the KSA and therefore, both their imports and sales will be subject to the standard rate in the KSA. Since 1 July 2020, the standard VAT rate in KSA is 15%. The UAE has a special regime for the domestic sale of diamonds, where the sale is subject to the reverse charge mechanism, if destined for resale and considered trade goods.

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