By TIOL News Service

WASHINGTON, SEPT 11, 2019: SAUDI Arabia has been advised through a report by the International Monetary Fund (IMF) on its successful introduction of value added tax (VAT). Released yesterday, IMF's 'Selected Issues' Report (SIR) on the country has recommended that General Authority of Zakat and Taxes (GAZT) should "build on the successful implementation of the VAT". GAZT should continue to build its own and taxpayers' capacities and ensure that compliance remains high as the tax is expanded to more companies. A robust revenue forecasting mechanism is needed as a basis for target setting in GAZT, and the compliance strategy should increasingly become risk-based and ensure it is not overly burdensome to companies or GAZT.

It adds: "Consideration should be given to raising the VAT rate which is very low by international standards, in consultation with other GCC Gulf Cooperation Council) countries". According to SIR, the successful introduction of VAT at the beginning of 2018 was a "landmark achievement". The tax authorities now need to focus on solidifying the operation of the VAT, while considering options for raising additional non-oil revenues. These options could include raising the VAT rate from its current low level, in consultation with the GCC.

Three features of the Saudi VAT stand out from an international perspective. First, compared to a sample of 40 advanced, emerging market, and oil exporting countries with a VAT, Saudi Arabia has at 5 percent, a very low standard VAT rate. Standard VAT rates in other countries range from 8 percent in Japan to 27 percent in Hungary, although in the later some products are subject to reduced rates. Second feature is a high registration threshold. Only three countries in the sample (Indonesia, Kazakhstan, and UK) have a higher registration threshold than Saudi Arabia. Third, VAT efficiency already in line with many other countries. The C-efficiency ratio in Saudi Arabia in the first year of operation was already at the median level of advanced and emerging market countries.

Saudi Arabia introduced the VAT on January 1, 2018, along with the UAE. Bahrain followed at the beginning of 2019, while the other three GCC countries have yet to implement the VAT. To transpose the GCC agreement into domestic legislation, Saudi Arabia approved and published its VAT law in July 2017. The GCC countries agreed in June 2016 to introduce a common value-added tax. The GCC VAT agreement sets a single tax rate of 5 percent and harmonizes the main features of the VAT.It prescribes a common legal framework which is binding on all countries and calls for some harmonization of the tax base but leaves countries to decide the tax treatment of six sectors: education, health, real estate, domestic transportation, financial services, and oil and gas. The Agreement also allows member countries to zero rate certain domestic food items from a common list of about 100 items drawn up using customs Harmonized System (HS) codes as well as medicines and medical equipment. Exports are zero rated.

The introduction of the VAT has had broader benefits for tax administration. GAZT now has much better information on the corporate sector and has been using this to strengthen tax administration in other areas. For example, Zakat collections increased by 31 percent in 2018. Zakat is an obligatory contribution of a certain portion of one's wealth in support of the poor or needy or other charitable purposes.