Transitional Provisions in Saudi Arabia - FAQs

What are transitional provisions?

Transitional provisions are rules established by ZATCA to make it easy for businesses to adapt to the VAT regime. The introduction of VAT is the first time an indirect taxation method is being implemented in Saudi Arabia, so the transitional provisions are meant to ensure a smooth transition process. 

What is a continuous supply?

In continuous supply, of goods or services are provided repeatedly over a specific period of time. 

What are some examples of continuous supply?

Here are some examples of continuous supply:

• An operating lease or rental of goods which does not provide the possibility for the transfer of ownership later
• Supplies of electricity and water 
• Construction services 
• Insurance services (Takaful) 
• Management services for a specified period
• Gym memberships
• Provision of labour to third parties over a specified time period
• A contract for periodic maintenance services 

What is one-off or non-continuous supply?

In a one-off supply, the supplier supplies the goods or services in a non-continuous manner, and the customer obtains the rights to use those goods or services immediately (right from the first instance). 

How is the payment processed for one-off supply?

A one-off supply can be paid off either in a single payment or in multiple payments over an agreed-upon period.

What are some examples of one-off supply?

Here are some examples of one-off supply:

• A sale to a consumer in a retail store 
• A manufacturer placing an order with their supplier, to be shipped and delivered the next month
• A sale of goods in instalments where the customer takes possession and ownership of the goods once the payment is completed
• Transaction fees that banks charge to individuals 
• Fees for attending events
• A consultant providing reports
• Repair services offered by a repair and maintenance company
• Any contract that allows the customer to take ownership of the goods before the date of transfer. This includes any finance lease or hire contract that results in a transfer of ownership and involves payment in instalments.

What is the date of supply for a non-continuous supply of goods made before January 1, 2018?

For supplies that do not involve transportation of goods, the date of supply of the goods is the date when they are placed at the customer’s disposal. For supplies that involve transportation, the date of supply is the date when the transportation of the goods begins. For goods or services that involve assembly or installation, the date of supply is when the services are complete.

A one-off supply of goods or services made before January 1, 2018 is not subject to VAT, even if a tax invoice was issued for that supply after January 1, 2018, or payment was received on or after January 1, 2018. 

What if there is an adjustment to a non-continuous supply made before January 1, 2018?

The date of supply is still the date that the goods or services were supplied, and the same tax treatment that applies to the supply will apply to the adjustments. So credit notes or debit notes reflecting adjustments to supplies that took place before January 1, 2018 should not include any VAT.

Adjustments include the following:  * A supplier granting a discount on the supply. * A supplier charging an additional or reduced amount. * A supplier granting a refund when defective goods are returned. In such cases, the supplier is obliged to provide a credit note or a debit note to reflect the change in price.

What is the date of supply of a continuous supply of goods or services made after January 1, 2018?

Supply under contract: If a continuous supply is made under a contract and the recipient pays for the supply in instalments, then there is a special transitional rule permitting the seller to split the VAT accounting over the duration of the contract. Each instalment will be treated as a separate supply, with its date of supply as either the date on which the instalment falls due, or the date of payment (whichever occurs first). 

Supply without contract: Goods and services supplied on a continuous basis without a contract are treated differently. Each supply made with respect to an invoice or payment is considered a separate entity.  

What if an invoice has not been issued or payment has not been received within 12 months after the supply commenced?

In this case, the supply will be considered to have been made on the day following 12 months after the latest of the following dates:

• The date of commencement of the continuous supply
• The date of issuing the last invoice 
• The date of issuing the receipt of the last payment for the goods and services supplied

What are the transitional rules for invoices or receipts issued  before January 1, 2018?

If the supply of goods or services takes place on or after January 1, 2018, any invoices issued before January 1, 2018 will be ignored for VAT purposes, and the supply will be subject to VAT. 

If an invoice is issued before January 1, 2018 without including VAT for a supply that is to be performed after January 1, 2018, the supplier must issue an additional invoice specifying the VAT amount.

What is the impact of long-term contracts on one-off supplies of goods or services that take place on or after January 1, 2018?

VAT will be applicable to the full value of any one-off supplies of goods and services made on or after January 1, 2018. The taxable value will include all instalments paid or due.

What is the impact of long-term contracts on one-off supplies of goods or services that take place on or after January 1, 2018?

VAT will be applicable to the full value of any one-off supplies of goods and services made on or after January 1, 2018. The taxable value will include all instalments paid or due.

What is the impact of long-term contracts on continuous supplies of goods or services?

In the case of continuous supplies of goods or services that take place both before and after January 1, 2018, only the part of the supply that takes place on or after January 1, 2018 is subject to VAT. 

What are the transitional rules for contracts under the VAT regime?

During 2018, the supply of goods and services delivered under certain pre-VAT contracts will be treated as zero-rated, provided the contracts meet ZATCA’s guidelines. During this transitional period, suppliers and business owners who have previously signed long-term contracts can renegotiate the contracts to suit the new tax regime.

What are the requirements for a contract to qualify for transitional provisions?

A contract must meet the following requirements to qualify for transitional provisions:

• The contract must have been signed before May 1, 2017.
• The taxable supplier must be able to completely deduct the input tax on the supply (or refund the tax).
• The customer must submit a written letter to the supplier confirming their eligibility to deduct and refund the input tax completely. 

Any supply made after December 31, 2018 will be taxable under the VAT regime. Contracts that contain VAT-related provisions, and contracts where the price of goods and services can be adjusted legally to include VAT, are exempt from transitional provisions.

What is the timeline for treating contracts as zero-rated?

For contracts signed before May 31, 2017, and contracts that are exclusive of VAT, the supply of goods and services can be treated as zero-rated until the end of the contract or December 31, 2022 (whichever comes first). The taxpayer should deduct any VAT incurred on the supply of goods and services made after the deadline.

What is grandfathering of contracts?

Certain long-term contracts signed before the VAT regime can continue under the previous law with no changes,  which is called grandfathering of contracts. Transitional provisions are provided for such contracts to reduce the tax burden.

Should suppliers obtain certification from their customers to deduct or recover VAT?

Yes. Suppliers need to obtain a certificate from their customers to apply the grandfathering rule to their contracts and deduct or recover VAT on their supplies. This applies to one-off supplies of goods or services and to multiple or a continuous supplies of goods or services over a specified period. This certificate can be issued by electronic means, and both the supplier and the customer should maintain copies of it in their records.

What information needs to be included in the certificate provided by the customer for the deduction or recovery of input VAT?

The certificate needs to provide the following details:

• The name and the TIN of the supplier
• The name of the customer
• The description of the goods or services, the start and the end date for the supply, and any other relevant description.
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