Recreation and Entertainment

Implementing a Value Added Tax ('VAT') System in the Kingdom of Saudi Arabia ('KSA')

The Unified VAT Agreement for the Cooperation Council for the Unified Arab States of the Gulf (the 'VAT Agreement') was approved by KSA by a Royal Decree No. M/51, dated 3 / 5 / 1438H. Pursuant to the provisions of the Unified VAT Agreement, the Kingdom of Saudi Arabia issued the VAT Law under Royal Decree No. M/113 dated 2 / 11/ 1438H ('the VAT Law') and its corresponding Implementing Regulations were subsequently issued by the Board of Directors of Zakat, Tax and Customs Authority ('ZATCA') by Resolution No. 3839 dated 14 / 12 / 1438H ('the Implementing Regulations').

Zakat, Tax and Customs Authority

ZATCA, also referred to as 'the Authority' herein, is the authority in charge of the implementation and administration of VAT (which may be referred to hereinafter as 'the tax') in KSA. In addition to the registration and deregistration of Taxable Persons for VAT; the administration of VAT return filing and VAT refunds, and undertaking audits and field visits, ZATCA also has the power to levy penalties for non-compliance with legal provisions relating to VAT.

What is Value Added Tax?

VAT is an indirect tax which is imposed on the importation and supply of goods and services throughout the supply chain, with certain limited exceptions. VAT is imposed in more than 160 countries around the world.

VAT is a tax on consumption that is paid and collected at every stage of the supply chain, starting from when a manufacturer purchases raw materials until a retailer sells the end-product to a consumer. Unlike other taxes, persons registered for VAT will both:

• Collect VAT from their Customers equal to a specified percentage of each eligible sale.

• Pay VAT to their Suppliers equal to a specified percentage of each eligible purchase.

When Taxable Persons sell a good or provide a service, a 15% VAT charge - assuming a standard case - is assessed and added to the sales Price. The Taxable Persons will account for that 15% that they have collected from all eligible sales separately from its revenue in order to later remit a portion of it to the Authority. The VAT Taxable Persons collect on their sales is called Output VAT.

That same will apply to purchase transactions, in that VAT will be added at the rate of 15% to purchases of goods or services from other Taxable Persons (on the assumption that the basic rate applies to those supplies). The VAT a business pays to its Suppliers is called Input VAT.

Further general information about VAT can be found in the KSA VAT Manual or at Zatca.gov.sa

This Guideline

The purpose of this guideline is to provide further clarification to Taxpayers regarding the VAT implications of common activities carried out by Taxable Persons in the Entertainment and Recreation sectors. Additionally, this guideline provides additional information about the VAT treatment for specific topics such as catering services.

This guideline represents ZATCA's views on the application and fair treatment of the Unified VAT Agreement, the VAT Law and the Implementing Regulations to the sector as of the date of this guideline.

For further advice on specific transactions you may apply for a ruling, or visit the official VAT website at Zatca.gov.sa, which contains a wide range of tools and information that has been established as a reference to support persons subject to VAT, as well as visual guidance materials, all relevant information, and FAQs.

Who carries out an Economic Activity?

An Economic Activity may be carried out equally by natural Persons or legal Persons.

It will be presumed that a legal person that has a regular activity making supplies carries on an Economic Activity. It should be stated that natural persons may perform certain transactions as part of their Economic Activity, or as part of their private activities. There are therefore specific rules to determine whether or not a natural person falls within the scope of VAT.

Natural persons and legal persons who carry on an Economic Activity must register for the purposes of VAT if so required, and such persons must collect the VAT applicable to their activities, and pay the tax collected to the Authority.

Mandatory registration

Registration is mandatory for all persons whose annual turnover exceeds a certain threshold. If the total value of a person's Taxable Supplies during any 12 months exceeds SAR 375,000, (the 'mandatory VAT registration threshold'), that person must register for VAT^[7] on the supplies made, subject to the transitional provisions provided for in the Implementing Regulations.

Taxable Supplies do not include:

• Exempt supplies - such as exempt financial services or residential rental which qualifies for VAT exemption.

• Supplies taking place outside the scope of VAT in any GCC state.

• Revenues on sales of capital assets - a capital asset is defined as an asset allocated for long-term business use^[8].

In certain circumstances, other tests will apply for mandatory registration:

• Persons who are not Resident in the Kingdom of Saudi Arabia are required to pay the VAT in respect of supplies made or received by them in the Kingdom of Saudi Arabia and to register for VAT irrespective of the value of the supplies for which they are obliged to collect and pay the VAT^[9].

• During a transitional period up to 1 January 2019, businesses will only be required to register where annual turnover exceeds SAR 1,000,000, and an application for registration must be submitted no later than 20 December 2018^[10].

More information on mandatory registration for VAT is contained at Zatca.gov.sa

Optional VAT Registration

Any Resident person in the Kingdom of Saudi Arabia who has Taxable Supplies or taxable expenses exceeding the 'Optional VAT registration threshold' of SAR 187,500 in a twelve-month period may register for VAT on a voluntary basis^[11].

Optional VAT registration may be desirable where a business wishes to claim VAT charged to it on their costs before invoices are raised or the occurrence of an onward supply.

More information on voluntary registration for VAT is contained at Zatca.gov.sa

Place of Supply - General Principles

VAT is applicable on any supply of goods or services which is made in the KSA for VAT purposes - that is, in cases where the place of supply is in Saudi Arabia.

KSA VAT is only chargeable on services which take place in the KSA under the place of supply rules within the Unified VAT Agreement. By default, all supplies of services made by a KSA Resident fall within the scope of KSA VAT:

'The place of supply for Services provided by a Taxable Supplier shall be the Place of Residence of the Supplier.^[12]'

In addition to this, a supply made by a Non-Resident can take place in the KSA e.g. due to the Customer's residence. Supplies made to a Taxable Customer in KSA are, by default, also subject to KSA VAT^[13]. Section 4.3 discusses supplies by Non-Residents in more detail.

Special rules apply to specific categories of services (Special Cases).

Place of supply - special cases

As an exception to the general rules of the place of supplies for goods and services, the Unified VAT Agreement sets out special rules for the place of supply of 'Other services' as follows:

'The place of supply for the following Services shall be where they are actually offered:

1. Restaurant, hotel and catering Services.

2. Cultural, artistic, sport, educational and entertainment Services...'^[14]

By way of example, ZATCA considers that these categories include the following Services:

The place where services are 'actually offered' in the context of the Agreement means the physical location at which these services are provided to the Customer. Generally, this will be same place as where those services are consumed by the Customer. The concept of the physical location is set out in the Implementing Regulations:

'Cultural, artistic, sport, educational and entertainment services include the admission to any event taking place in a physical location or the provision of educational services where these are provided in a physical location. The physical location is the place in which the services are offered.'^[15]

Therefore, the place of supply will always be determined based on where the actual services are provided to the Customer, regardless of the place where the Supplier or Customer are Resident. The sale of a ticket in advance does not affect the place where the services are actually offered.

Supplies by Non-Resident performers

The place of supply for the recreation and entertainment services falling within the table in section 4.2 will always be determined by the location where those services are actually offered. In principle, KSA VAT will always be chargeable on services offered in the KSA.

However, the mechanism for charging VAT may differ in cases where the supplier is Non-Resident.

See the table below.

If the Non-Resident Supplier is obliged to charge VAT, it must be registered regardless of its turnover^[16]. However, once it is registered, a Non-Resident is only obliged to collect and pay tax in respect of supplies in Category (a) above. It should not charge VAT on supplies made to Taxable KSA-Resident Customers.

A practical example in the entertainment sector where Non-Residents may be required to register is for supplies of performance services made directly to KSA consumers (involving sales of tickets for admission).

• Ritmo SA makes a supply of services actually offered in the KSA, so the place of supply is in the KSA. Its Customer is Nadi Company, who is a Taxable Customer and Resident in the KSA. Nadi Company reports for VAT due (15%x SAR 75,000) in its VAT return under the Reverse Charge Mechanism. It claims full deduction for this VAT, so makes no net payment to the Authority in respect of this Supply.

• Nadi Company makes supplies of services directly to KSA Customers for admission to the event. The place of supply is the KSA. It includes VAT on the admission price, reports this on its VAT return and pays the VAT to the Authority.

Date of supply

VAT becomes due on the earlier of the following dates:

• The date the performance of the service was completed.

• The date of issuance of the tax invoice.

• The date of partial or full receipt of the Consideration, to the extent of the amount paid^[17].

For admission fees, the performance of the service is completed when the event is completed. However, if the admission fee is paid in advance of the event (e.g. if a ticket is purchased before the event takes place), VAT becomes payable when the admission fee is paid (or upon the issue of a tax invoice, if earlier).

ZATCA considers that the supply of a ticket for an event is not the issue or supply of a 'voucher' falling within the special VAT rules for vouchers^[18]. VAT becomes due at any time when Consideration is received to attend a future event.

Booking fees

A booking fee is an additional amount to the admission fee. The booking fee enables the Customer to secure the right to attend an event in advance, and may in some cases include rights to reserving a particular seat.

If the booking fee is charged by the same Person who acts as Supplier charging an admission fee to an event taking place in the KSA, ZATCA will presume that the booking fee is treated in an identical manner to the admission fee - therefore it is also subject to KSA VAT, regardless of the residence of the Supplier or Customer.

A booking fee charged by a third party intermediary, who does not act as Supplier of the underlying admission, is viewed as a separate supply of services. The intermediary must apply VAT to the booking fee as appropriate.

VAT consequences of cancellation

The right of admission to an event can be cancelled by the Supplier (for example, in case the event cannot take place), or by the Customer (if the Customer has purchased admission in advance but wishes to forfeit his right to attend, such as in the case where he or she is no longer able to attend).

If the Customer forfeits his right to attend, and is not entitled to any refund of the admission fee, the Supplier is still required to charge VAT on the supply made to Customer. In such a case, the Customer pays Consideration for the right to attend an event, whether he or she attends the event or not.

Sports clubs

Advertisement and sponsorships

In cases where a Taxable Person derives revenue through advertising services, such as the display of an advertisement, this is viewed as Consideration for a Taxable Supply of services.

In the recreation and entertainment sector, organizations often enter into 'sponsorship' agreements - in which a sponsor pays monetary or non-monetary Consideration and receives certain benefits in return. Examples of benefits provided to sponsors include:

• Display of advertisements or the sponsor's name at the premises, on the clothing of performers, or in published material such as newsletters or programmes.

• Provision of naming rights to an event or venue.

• Promotion of the sponsor's goods or services.

• Providing rights to attend events or use facilities.

The sponsorship received is Consideration for the supply of advertising or other benefits.

Donations

A 'true' donation given to a club or organization, without any benefit being provided in return, is not Consideration for a supply and is not subject to VAT.

Care must be taken to identify cases in which a donation is Consideration for some kind of benefit provided to the donor. It is presumed that in most commercial arrangements, a person providing a sum of money as a donation will be doing so for some form of benefit. However, ZATCA accepts that in a case where a donation is made in a non-commercial context and some small benefit of trivial value is provided to the donor, this will not constitute a supply by the recipient of the donation.

Competitions: appearance fees and prize monies

A person may derive income from entering sporting or other competitions, such as an appearance fee agreed in advance, or prize monies awarded for winning or achieving a certain result. Such fees may often be seen in motorsport or racing animal events.

The VAT treatment of such income must be analysed on the specific circumstances in each case. ZATCA considers that an appearance fee will in all cases be Consideration for a supply of services. If the Person deriving the appearance fee does so as part of a regular Economic Activity, the appearance fee will be subject to VAT.

Leisure activities may constitute an Economic Activity where they are carried out on a regular basis and meet the tests to be considered as an Economic Activity. The ownership of a racing animal (such as a horse or camel) can be an investment and a means of deriving income on a regular basis. However, ZATCA will require a Person to clearly evidence an intention to derive regular income in order to register for VAT and to deduct Input VAT incurred. The taxpayer guideline on Economic Activity provides further detail and examples.

Often, the award of prize money at an event is not clearly linked to any services provided by the recipient. In cases where money or goods are awarded as a true prize to a participant, and are not a means of compensating the participant for appearance, advertising or other services, ZATCA accepts that the prize money or goods will not be subject to VAT (i.e. not seen as Consideration for a Supply by the Person winning the prize).

Temporary importation for events

A Person wishing to participate in events or competitions held in the KSA may be required to import equipment into the Kingdom in order to enter the event. For example:

• Non-Residents who wish to enter a racing horse, racing camel, or sports car into the KSA to compete in a one-off event.

• Equipment required to hold a conference or event.

The Common Customs Law allows for temporary importation of goods into the Kingdom in specific cases^[22].

The temporary importation involves the release of goods or equipment to free circulation under conditions specified and administered by Saudi Customs, for a set period after which the goods are re-exported from the country. For VAT purposes, temporary importation qualifies as a 'customs duty suspension situation'. Provided that the goods are under a valid temporary admission arrangement, VAT does not become due on their import^[23].

It is important that any goods or equipment intended for temporary entry must be entered under the requisite conditions specified by Saudi Customs in order for VAT to be suspended.

Private jets, boats, and similar transportation

Means of transport such as aeroplanes, boats or luxury vehicles are sometimes used to provide entertainment services or to carry out excursions.

Any means of transport which is designed, adapted, or intended for recreation or private use^[24], including a private jet or boat, is not considered a qualifying means of transport. Therefore, charges for the lease or use of such a vehicle - or the international transport of passengers on these vehicles - do not qualify for zero-rating, and will be subject to VAT at 15%.

The taxpayer guideline on Transportation provides more detail on cases when zero-rating does apply to international transport.

Hotels and serviced accommodation

The provision of accommodation or lodging in any hotel, motel, guesthouse, serviced accommodation or similar establishment is subject to VAT at 15%. Such facilities are not intended as the guest's primary residence, and as such, the accommodation in these facilities does not qualify for VAT exemption as a residential rental^[25].

The taxpayer guideline on Real Estate gives further detail on the cases where VAT exemption applies to residential rental.

The table below considers the application of VAT to some common charges made for hotels or serviced accommodation. For hotels or serviced accommodation situated in the KSA, VAT will apply at 15% to accommodation and related charges, regardless of the place of residence or the tax registration status of the Customer.

Hotel operating companies

Owners of hotels and similar accommodation commonly engage with a third party company to operate the facilities. In these cases, the standard principles for determining which party makes the supply to the Customer or hotel guest should be applied to determine the appropriate VAT treatment:

• If the operator acts as principal, or acts in his own name towards hotel guests, the operator is required to charge VAT on the supply of accommodation. This is regardless of whether the operator treats the Consideration as its revenue, or is required to pass this on to the owner.

• If the hotel guest enters into a contract with the hotel owner, or in the name of the hotel owner, the hotel owner is required to charge VAT on the supply of accommodation.

The application of VAT will depend on the exact facts in the case. Relevant facts to consider include:

1. When the hotel guest signs to accept terms and conditions (for example upon check-in), do the terms and conditions refer to the hotel owner? If not, this indicates the hotel operator acts as principal or in his own name.

2. Is the hotel owner or hotel operator liable to the guest for contractual performance (for example, which entity is required to find alternative accommodation or pay damages if the hotel becomes fully booked)? If the hotel operator is liable, this indicates the hotel operator acts as principal or in his own name.

3. Is the hotel owner mentioned on invoices issued to the guests? If not, this indicates that the hotel operator acts as principal or in his own name.

As follows from the above, it is advisable that hotel operators and hotel owners make it clear (from the contractual and other documentation issued to the Customer) in whose name the supply of accommodation is being made to the hotel guest.

Restaurant and Catering Services

The provision of food or beverages at a restaurant or café, and indeed in all cases where the food and beverages are intended for consumption on the premises, is a supply of catering services.

This includes, for example, food or refreshments provided together with a meeting or conference room, and any food and beverages consumed in a hotel room (either in-room dining or consumption from a hotel mini-bar). Section 8 of this guideline discusses Input Tax deduction in respect of catering services.

Catering services provided at any restaurant, café, hotel or other KSA location by a Taxable Person must be subject to VAT at the standard rate of 15%. The total Consideration for the Taxable Supply of catering services includes any service charges added to the price.

Discretionary Tips

The Taxable Supplier or his employee may receive an additional Consideration for the services provided, which are known as 'tips'. A 'tip' is a discretionary amount provided by the Customer, intended to reward the employee or employees for good service. It may take the form of money provided directly to an employee, or may be added to a bill.

ZATCA accepts that in the instances where a Customer gives a truly discretionary additional amount (that is, the Customer is under no obligation to provide a tip and has not been provided any 'suggested' tip amount), such a tip is not Consideration for the services, and is outside the scope of VAT. If the tip is collected through a hotel room invoice or card payment, the amount of the discretionary tip must be clearly marked on the invoice.

In cases where ZATCA believes that tips are being collected by a Taxable Person as required additional Consideration for services, it reserves the right to determine that VAT is due on the full amount received.

General Provisions

A VAT-registered person may deduct Input VAT charged on goods and services it purchases or receives in the course of carrying on its Economic Activity. Input VAT may be deducted on:

• VAT charged by a VAT-registered Supplier in the KSA.

• VAT self-accounted by the VAT-registered person under the Reverse Charge Mechanism.

• Import VAT paid to Saudi Customs on imports of goods into the Kingdom.

As a general rule, Input VAT which is related to the Taxpayer's VAT exempted activities is not deductible as Input VAT.

In addition, Input VAT may not be deducted on any costs incurred that do not relate to the Economic Activity of the Taxable Person (see section 8.3 for further detail).

Deductible Input VAT is a credit entered on the VAT return which is offset against the VAT charged on supplies (Output VAT) made during that period.

Input VAT may only be deducted where the Taxable Person holds a Tax Invoice, or customs documents showing the amount of tax due, or any other document showing the amount of Input Tax paid or due, subject to the approval of the Authority.^[26]

Proportional deduction relating to input VAT

VAT incurred which relates to a Taxpayer's VAT exempt activities, such as exempt financial services or residential rental, is not deductible as Input VAT. A person making both Taxable Supplies and exempted supplies can only deduct the Input VAT related to the Taxable Supplies. If a Taxable Person incurs general costs or expenses (overheads) in the making of Taxable Supplies, and others that are exempt from VAT, he must in that event split the costs and expenses precisely so as to specify those costs that relate to the Taxable Supplies. The Input VAT will be determined in accordance with the following rules^[27]:

The overhead costs/expenses incurred by the Taxable Person for making both taxable and exempted supplies must be apportioned to most accurately reflect the use of those costs in the taxable portion of the Taxpayer's activities.

A prescribed default method of proportional deduction is calculated on the Values of supplies made in the year, using of the following fraction:

The fraction for the default method does not include supplies of Capital Assets made by the Taxpayer, as these distort the use of Input VAT.

Alternative attribution methods, using other calculation approaches than the Value of supplies, may be approved with the Authority in cases where these better reflect the actual use of VAT incurred. Further information about deduction of VAT and proportional VAT recovery is provided in the Input Tax deduction and Partial Exemption guideline.

Restrictions to input VAT deduction

Input tax deduction is intended for goods used within an Economic Activity. The Implementing Regulations consider certain types of expenditure as falling outside the Economic Activity, meaning that VAT is not deductible when expenditures of these types are incurred by a Taxable Person.

'Expenditure relating to the following Goods or services is not considered to be incurred by the Taxable Person in the course of carrying on his Economic Activity, and consequently the Taxable Person will not be permitted to deduct the Input Tax relating to such expenditure, save where the Goods or services are to be directly supplied onwards as a Taxable Supply by the Taxable Person:

1. Any form of entertainment, sporting or cultural services.

2. Catering services in hotels, restaurants and similar venues.

3. The purchase or lease of Restricted Motor Vehicles, as defined in the second paragraph of this Article.

4. Repair, alteration, maintenance or similar services on Restricted Motor Vehicles.

5. Fuel used in Restricted Motor Vehicles.

6. Any other Goods and services used for a private or non-business purpose.^[28]

Issuing tax invoices

A Supplier must issue a tax invoice for each Taxable Supply made to any VAT-registered person or to any other legal person, or issue a simplified invoice in the event that the Value of the supply is less than SAR 1,000, or for supplies made to the end consumer, by no later than fifteen days following the end of the month in which the supply is made.

The tax invoice must clearly detail information such as the invoice date, supplier's tax identification number, taxable amount, tax rate applied, and the amount of VAT charged^[29]. If different rates have been applied to supplies, the Value of each supply at each rate must be separately specified, as well as the VAT applicable to each rate. A tax invoice may be issued in the form of a commercial document, provided that document contains all of the requirements for the issuing of tax invoices as set out in the Implementing Regulations to the Law^[30].

Note that a Tax Invoice for a Nominal Supply (for example, resulting from the provision of goods or services for no Consideration) must be kept with the person's business records, but must not be issued to the recipient of the goods or services.

Further information on the requirements for tax invoicing are set out in the Taxpayer guideline on Invoicing and Records.

Filing VAT Returns

Each VAT-registered person, or the person authorised to act on his behalf, must file a VAT return with the Authority for each monthly or quarterly tax period. The VAT return is considered the Taxable Person's self-assessment of tax due for that period.

Monthly VAT periods are mandatory for Taxable Persons with annual revenues exceeding SAR 40 million. For all other VAT registered persons, the standard tax period is three months.

The VAT return must be filed, and the corresponding payment of net tax due made, no later than the last day of the month following the end of the tax period to which the VAT return relates.

More information on filing of VAT returns is provided in a separate guideline.

If the VAT return results in VAT due to the Taxpayer, or if the Taxpayer has a credit balance for any reason a request for a refund of this VAT may be made after the filing of the VAT return, or at any later time during the next five years by filing a request for a refund to the Authority. ZATCA will review these requests and will pay the amount due on refund requests that have been approved, directly to the Taxpayer^[31].

Keeping records

All Taxpayers are required by law to keep appropriate VAT records relating to their calculation of VAT for audit purposes. This includes any documents used to determine the VAT payable on a transaction and in a VAT return. This will generally include:

• tax invoices issued and received.

• books and accounting documents.

• contracts or agreements for large sales and purchases.

• bank statements and other financial records.

• import, export and shipment documents.

• other records relating to the calculation of VAT.

Records may be kept in physical copy, or electronically provided the relevant criteria are met - but in all cases must be made available to the Authority on request.

All records must be kept for at least the standard retention period of 6 years. That minimum period for retention is extended to 11 years in connection with invoices and records relating to movable capital assets, and 15 years in connection with invoices and records relating to non-movable capital assets^[32].

Certificate of registration within the VAT system

A Resident person who is subject to VAT and registered with the Authority in the VAT system must display a certificate to the effect that he has been registered in the VAT system in a place visible to the public at his main place of business and at all his branches.

In the event of a contravention, the person in breach will be liable to the penalties provided for in the Law.

Correcting past errors

If a Taxable Person becomes aware of an error or an incorrect amount in a filed VAT Return, or of any other non-compliance with the VAT obligation, he should notify the Authority and correct the error by amending VAT the tax return. Errors resulting in a net understatement of VAT (exceeding SAR 5,000) must be made known to the Authority within twenty (20) days of detecting the error or incorrect amount, and the previous return must be amended. In connection with minor errors resulting in a difference of less than SAR 5,000, the error may be corrected by amending the net tax in the subsequent tax return^[33].