Increase in customs duty rates
KSA has announced an increase in the customs duty rates for an extensive range of goods, including foodstuff, mineral and chemical products, plastic, rubber, leather goods, textile and footwear, base metals (e.g. steel, iron, nickel, copper, aluminium), cement, ceramic, machinery, equipment and electrical equipment, toys, furniture, vehicles and various other manufactured goods. The measure affects a total of 57 Chapters and more than 2,000 Tariff Lines of the KSA Integrated Customs Tariff. The date on which such increase becomes effective is yet to be announced (originally, such update was due to become applicable from 10 June 2020 but such a date was later postponed by the government).
Increase in standard VAT rate
KSA has announced several measures to counter the financial and economic impact of COVID-19 on the government budget including an increase in the standard VAT rate to 15% applicable from 1 July 2020 onwards.
Amendments to the Saudi Arabian Income Tax, VAT, and Excise Tax Laws
The Council of Ministers has amended, on 24 December 2019, the Saudi Arabian Tax, VAT, and Excise Tax Laws to align relevant provisions regarding litigation and appeals (Article 66 of the Tax Law, Article 49 of the VAT Law, and Article 27 of the Excise Tax Law) to the approved work rules/guidelines of the Tax/Zakat Dispute Resolution Committees.
Approval of Tax/Zakat Dispute Resolution Committee's work rules/guidelines
The work rules/guidelines of the Tax/Zakat Dispute Resolution Committee (DRC) were approved through Royal Order no. 26040 dated 21/4/1441H (corresponding to 19 December 2019). More specifically, the Royal Order provides for the items summarised below:
- Approval of work rules/guidelines of the DRCs;
- These rules should apply to all cases currently at the level of GAZT that have not been settled as at the date of this Royal Order;
- The Board of Grievances should continue to look into cases already raised to it before the date of this Royal Order; and
- The DRCs are responsible for hearing and deciding on Zakat cases per their work rules/guidelines.
OECD's Multilateral Convention (MLI) to Implement Tax Treaty Related Measures to Prevent BEPS
The Kingdom of Saudi Arabia has signed the MLI to Implement Tax Treaty Related Measures to Prevent BEPS issued by the OECD on 18 September 2018.
The MLI allows countries to implement the anti-tax treaty abuse BEPS measures and other aspects of the OECD BEPS programme into existing double tax treaties (DTTs). The MLI (once ratified) does not directly amend the underlying text of a DTT, but will instead be applied alongside existing DTTs, modifying their application.
The Kingdom of Saudi Arabia has made the following key notifications/reservations:
Purpose of a DTT - Changes adopted
The Kingdom of Saudi Arabia has made a notification to update the preamble of its DTTs to clearly indicate the KSA’s position against treaty abuse. Specifically, the KSA’s DTTs (to the extent such wording has not already been included in the KSA’s existing DTTs) would include the following as their expressed purpose:
- 'Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).'
- 'Desiring to further develop economic relationship with its treaty partners and enhance cooperation in tax matters.'
Inclusion of the above updated preamble wording is a requirement to meet the BEPS Action 6 (Prevention of Treaty Abuse) minimum standard.
Prevention of treaty abuse through targeted anti-avoidance provisions - PPT (by default)
The Kingdom of Saudi Arabia is one of a minority of countries not to have expressly confirmed its chosen method of combating treaty abuse. As such, there will be a difference between the position chosen by the Kingdom of Saudi Arabia and its treaty partners.
The MLI confirms that, in cases of differences between the reservations made by two jurisdictions and their mutually agreed DTT in relation to how they combat treaty abuse, and in the event the KSA’s treaty partner has also not chosen a specific method of combating treaty abuse (e.g. Egypt), the ‘default’ 'PPT without the ability to refer to the competent authority for final assessment' method would apply.
Including the above adoption of a position to assess availability of treaty relief by the Kingdom of Saudi Arabia is a requirement to meet the BEPS Action 6 (Prevention of Treaty Abuse) minimum standard.
Mutual agreement procedures (MAP) and corresponding adjustments - Changes adopted
The Kingdom of Saudi Arabia has chosen to ensure that all applicable DTTs would include an MAP process that would efficiently address a dispute in relation to the application of DTT provisions.
Specifically, all of the 53 DTTs chosen by the Kingdom of Saudi Arabia would be amended (to the extent the existing DTTs do not already have the necessary provisions and the treaty partner has made the same notifications) so that:
- The taxpayer that initiates the MAP procedure will have a specific period (i.e. three years) to present their case to the relevant competent authority.
- The taxpayer can present their case to either competent authority of the DTT.
- Where the competent authorities fail to resolve the dispute, the dispute can be escalated via formal procedure, irrespective of any domestic time limits.
Artificial avoidance of permanent establishment (PE) and related anti-abuse measures - Changes adopted
The Kingdom of Saudi Arabia has chosen to update the PE definition in its DTTs (to the extent the existing DTTs do not already include the following provisions and the treaty partner makes the same notifications) to:
- Include instances where an agent 'habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise' would give rise to a PE.
- Include instances where a person acting exclusively (or almost exclusively) on behalf of its ‘closely related enterprise’ would not be considered as an independent agent.
- Narrow the list of the specifically exempt activities that would not give rise to a PE to only apply to circumstances where the activity is of a 'preparatory or auxiliary' nature.
- Ensure a PE would now arise where such presence was previously mitigated through artificially splitting contracts.
- Include a definition of a ‘closely related enterprise’.
As the MLI requires mutual agreement before a DTT is amended, the KSA’s relevant DTT articles with respect to PEs would not be updated unless the other treaty partner has also elected to adopt the same changes to the PE definition.
Capital gains from the disposal of ‘land rich’ entities - Changes adopted
The Kingdom of Saudi Arabia has chosen to amend the capital gains article in the 53 chosen DTTs to allocate the taxing right upon disposal of a ‘land rich’ entity to the sourcing jurisdiction.
Specifically, the Kingdom of Saudi Arabia has chosen to (i) adopt the proposed definition of a ‘land rich’ entity to be an entity having more than 50% of its value derived directly or indirectly from immovable property located in the Kingdom of Saudi Arabia at any time during a 365-day period prior to the date of the disposal and (ii) extend the scope to the disposal of shares or comparable interest.
As the MLI requires mutual agreement before a DTT could be amended, the KSA’s relevant DTTs would not be updated unless the other treaty partner has also elected to adopt the same changes to the capital gains article.
Methods for the elimination of double taxation - Changes adopted
The Kingdom of Saudi Arabia has confirmed that its intended mechanism to relieve double taxation on income is through a tax credit mechanism.
Under the mechanism, tax paid by a KSA taxpayer in the other treaty partner’s jurisdiction in respect of income arising in the other treaty partner’s jurisdiction can be deducted from the KSA taxpayer’s KSA corporate income tax (CIT) liability up to the amount of the KSA CIT payable on the foreign-sourced income.
The tax credit mechanism would apply to KSA residents irrespective of the treaty partner’s position.
Entry into force
For the provisions of the MLI to apply to the Kingdom of Saudi Arabia and its DTTs with other treaty partner jurisdictions, the Kingdom of Saudi Arabia and its treaty partners must ratify the MLI through their respective domestic legislative process.
Typically, following the ratification of the MLI into domestic legislation, the MLI would generally enter into force from the beginning of the fourth month following its ratification. The dates for which the MLI provisions would modify the wording of the relevant DTTs are typically:
- For withholding tax (WHT) related changes, from 1 January following the latest MLI entry into force date of the jurisdictions.
- For changes relating to other tax types, in six months from the latest MLI entry into force date of the jurisdictions.
- For MAP-related changes, from the latest MLI entry into force date of the jurisdictions.
The above are the 'typical' dates, and other dates may be agreed between individual jurisdictions.
KSA has ratified the MLI through Council of Ministers order no. 191 dated 8/3/1441H (corresponding to 6 November 2019) and Royal Decree no. M/29 dated 9/3/1441H (corresponding to 7 November 2019).
KSA deposited the MLI with the Secretary-General of the OECD on 23 January 2020 and the MLI entered into force for KSA on 1 May 2020.
The Kingdom of Saudi Arabia has recently signed numerous DTTs. DTTs with the following countries have recently came into force:
- Albania (effective 1 January 2020).
- United Arab Emirates (effective 1 January 2020).
- Georgia (effective 1 January 2020).
- Cyprus (effective 1 January 2020).
- Bulgaria (effective 1 January 2020).
DTTs with the following countries are not yet effective:
- Latvia (signed on 7 November 2019).
- Kosovo (signed on 20 October 2019).
- Mauritania (signed on 2 December 2018).
- Switzerland (signed on 18 February 2018).
- Gabon (signed on 17 December 2015).
- Morocco (signed on 14 April 2015).