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Interview - New taxes ‘essential necessity’ to support Saudi Arabia’s economy

New taxes ‘essential necessity’ to support Saudi Arabia

Rupert Pease, Head of Tax, KPMG in Saudi Arabia and the Middle East and South Asia

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Head of Tax

KPMG in Saudi Arabia

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A number of discussions and questions about taxes in Saudi Arabia have arisen lately after the decision was taken to implement excise tax from April 2017 and value added tax (VAT) in January 2018. There has been some confusion between these types of taxes.

 

Commenting on the development of taxation in Saudi Arabia, Rupert Pease, Head of Tax, KPMG in Saudi Arabia and the Middle East and South Asia says: “Actually the concept of taxation in the Kingdom is not new. 

 

Currently foreign companies operating in Saudi Arabia pay corporate tax at a
rate of 20%. This has been around for a number of years. In addition, Saudi
Arabia has a fully-operational tax department that was set up quite a number of years ago, the Department of Zakat and Income Tax. It was recently reorganized and is now referred to the General Authority of Zakat and Tax, GAZT. Taxation in the Kingdom only applies to foreign companies, local companies pay zakat, a religious donation. GAZT is responsible for the collection of tax and zakat.


Companies that have Saudi and foreign shareholders, commonly known as “mixed companies”, pay both tax and zakat, based on the percentage basis of ownership.”

 

He further says: “What is new is the implementation of VAT, and we now know for a fact that VAT will be introduced on Jan. 1, 2018. The basic rate is expected to be 5%. VAT is basically a consumption tax, which will ultimately be paid by individuals and not companies. 5% is very low compared to other countries where VAT was introduced many years ago. For example, in UK the VAT rate is 20%, and France 23%.”

 

Countries are always looking for sources for revenues. These revenues support government expenditure to benefit the nation, for example, health care, defense,education, policing, infrastructure, etc. For many years Saudi Arabia’s revenues were dependent on the sale of oil. In other countries, such as the UK and Canada, the prime source of revenues for governments is taxation, in particular, personal taxation. Personal taxation is the tax that individuals pay on their income. This could be as high as 50%, depending on the level of income. The more one earns, the more one pays in personal tax. This is commonly referred to as a marginal tax system. The second source of revenue in the UK and Canada is VAT, or HST/GST as this tax is known in Canada. Many refer to this type of tax as a “fair” tax due to the fact that it is only paid on consumption, that is, if one does not spend, one will not pay the tax. VAT will be collected by companies, and, in turn, the VAT collected from consumers will be passed on the government. The company itself, in many cases, but not all, will not pay VAT, the consumer will. The 5% is one of the lowest, if not the lowest, VAT rate in the world.

 

Speaking of the possibility of this rate to increase, he says: “It depends on the economic growth, future oil prices, and what the government will need to finance its expenditure budget. The Saudi government has embarked on a number of significant projects that will support growth and development, for example, the Riyadh metro system, which will ultimately change the face of Riyadh when it is completed. We all need to understand that Saudi government’s revenues from the sale of oil have suffered due to the reduction in the oil price. It is time to introduce alternative sources of revenue to keep the standard of living where it is.”

 

However Excise tax is a different tax than VAT. The government intends to introduce excise tax on certain products to discourage the use of these products due to the harm these products can cause to person’s health. Basically, the tax will be imposed on tobacco, energy and soft drinks. We expect to see excise tax introduced in April 2017. Then VAT will follow in January 2018. It seems that excise tax on tobacco, for example, will be at a rate of 100%. This means that the price of a packet of cigarettes will double. VAT will be imposed on most items, however basic foods, for example, flour, cooking oil, bread, rice, vegetables and water, medicine and health care are expected not to attract VAT. 

 

Other items, for example, clothes, luxury items such as jewelry and watches, cars,petrol, mobile phones, telecommunication services, will increase by 5%.

 

In regard to Saudi society and tax, he says: “Saudi society is well aware of the recent drop in oil prices. In addition, we are also aware of the development projects that are being carried out. If one looks at the objectives of the Kingdom’s Vision 2030, one would notice government’s main intention is to not only maintain, but also improve the nation’s high standard of living with less dependence on oil revenues. The introduction of tax is never popular, but it is an essential necessity to support the country’s economy. The provision of infrastructure, education, health care, defense, and policing, among others, is an indication of a healthy and well-to-do economy that will ultimately attract more foreign investors. This is at the core of Vision 2030. This will lead to the generation of more employment. Saudi Arabia is blessed with a young and educated population. The economy must provide employment to our youth. This will lead to economic growth.”

 

On the economic future, he comments: “Change is good. We should embrace change when change is for the better. Vision 2030 is ambitious, and will lead to economic prosperity. I am not saying that change is easy, change in and by itself is difficult. Saudi Arabia will ultimately be even more successful due to its dynamic young population. The young are open to new ideas and new ways of doing things.”

 

Taxes are there to be used for the benefit of the nation. It is up to companies to ensure that they make the necessary preparation to ensure that these are ready for the introduction of VAT by obtaining proper advice from qualified sources. The media’s role is to ensure that accurate reports are published to ensure thatthe public receives reliable information that are dependable. 

© 2017 KPMG Al Fozan & Partners Certified Public Accountants, a registered company in the Kingdom of Saudi Arabia, and a non-partner member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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