Saudi Arabia: Circular on the Reverse Charge Mechanism Application

In detail

ZATCA issued a new circular to provide clarification on the application of the Reverse Charge Mechanism rules to businesses receiving a supply of goods or services, from a non-resident supplier. 

Reverse Charge Mechanism (‘RCM’) is defined in the GCC VAT Agreement as the mechanism by which the taxable customer is obligated to pay the tax due on behalf of the non-resident supplier, and is liable for all the obligations provided for in the GCC VAT Agreement and the VAT legislation.

Scope of RCM application

• RCM is only due on services which are taxable in nature and received by:

  • The taxable customer from a non GCC resident supplier;

  • The taxable customer from a person resident in another Member State (till the time Electronic Services System for Intra-GCC supplies is implemented).

• The Circular provided examples (non-exhaustive list) for the application of RCM as follows:

* For services provided by a non-resident supplier to non-taxable persons in KSA, the non-resident supplier will be required to register for VAT purposes in KSA and discharge his VAT obligations..

** The special cases for services, referred to above, include: 

• Article 17: Leasing means of transport

• Article 18: Supply of goods and passenger transportation services

• Article 19: Supply of real estate related services

• Article 20: Supply of wired and wireless telecommunication services and electronically supplied services

• Article 21: Other services which include hotels, restaurants, cultural sports, educational services, etc.

Areas of consideration for RCM application 

• A non-resident supplier is a supplier with no place of business or other fixed establishment in the KSA.

• Under the RCM, the recipient is deemed to have made the supply of services to himself. Therefore, the recipient must report output VAT, and is at the same time eligible to deduct the corresponding input VAT, provided that the standard criteria for deduction is met.

• For VAT due date, the same rules will apply for supplies made under the RCM as well i.e.on the date of the supply of services, the date of issuance of the tax invoice or upon partial or full receipt of the consideration (to the extent of the amount received) whichever comes earlier

• The VAT accounted for under the RCM must be entered in field 9 of the VAT return form which automatically assumes input VAT is fully deductible (unless the taxable person is also making exempt supplies for which an adjustment to the extent of irrecoverable VAT needs to be made as per the procedure laid down in the VAT legislation).The reporting of the same amount of output tax and input tax takes place in field 9 of the same VAT return form by entering the value of the services received in the first column.

• VAT deduction is available by a taxable person under RCM, provided that the goods or services received are for the purpose of the taxable person’s economic activities and in the course of making taxable supplies. The reporting of the reverse charged VAT is a condition for the corresponding deduction.

• Whilst the RCM involves a deemed supply of services by the recipient, the recipient is not required to issue a tax invoice to itself in respect of this supply. The recipient should however retain the supplier invoice with its business records to support the calculation of VAT under the RCM.

• The obligation is on the taxable customer to pay the output VAT in the correct period, and failing to do so could lead to penalties.