Saudi Arabia to expand VAT base as oil prices fall

• Tourists can claim back VAT
• Ecommerce platforms to collect tax
• Saudi has highest VAT in GCC

Saudi Arabia has introduced new regulations allowing visitors to the country to claim back value added tax (VAT) to facilitate the tourism industry, but it plans to widen the tax base to include online transactions. 

The world’s second largest oil producer is facing a steep decline in international oil prices on which the government relies for 60 percent of its revenue.

It needs to widen its tax base to fund billions of dollars of spending on infrastructure and other projects.

Under the new regulations ecommerce platforms will from January 1 next year be required to collect the tax, and determine those – like non-residents – who may be exempt, the government said in its official gazette.

Services subject to VAT could now include accommodation rented online, digital services, software and goods bought and sold on ecommerce sites.

“The general direction is that you need to assume that anything you buy or acquire from an electronic marketplace would be subject to VAT,” said Tina Hsieh, a tax specialist and partner at law firm Baker McKenzie, based in Dubai.

“According to this new change, the default position is unless you satisfy certain exceptions VAT will apply on these sales of goods and services.”

Saudi Arabia is an outlier in the six-member Gulf Cooperation Council, charging VAT at 15 percent. Bahrain charges 10 percent and the UAE and Oman put on 5 percent. Kuwait and Qatar have yet to introduce VAT.

The kingdom is the biggest GCC country by population at almost 35 million, and three times bigger than the next in line, the UAE.

As the kingdom seeks to diversify its economy away from oil, tourism – including pilgrimage to Islam’s two holiest sites in the cities of Mecca and Medina – is a priority for the country. Last year it welcomed a record 30 million visitors.

Under the new so-called implementing regulations, and as of April 18, visitors to the largest Arab economy can on departure apply for VAT refunds on purchases of select goods and services.

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“The most important factor is to bring the tourists to the country,” said Turab Saleem, Middle East and North Africa head of hospitality, tourism and leisure at real estate consultancy Knight Frank.

“Now you’re going to have to maximise the benefit out of it by offering them comparative pricing.”

Much of Saudi Arabia’s tourism plans are centred around the luxury and high-end sectors. Compared with other nearby destinations, such as Dubai, Saudi Arabia does not yet have as much in the way of shopping to attract tourists.

Visitors to the UAE, for instance, have long been able to secure a VAT refund of almost 90 percent on goods and services spent in the country, bar some exceptions.

“If you want to encourage retail, which is a big support to hospitality, these things have to be available at a reasonable price, and it will do wonders to the overall growth of sales because of tourism,” said Saleem.