Business Promotions

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 the General Authority of Zakat and Tax -former name- the Zakat, Tax and Customs Authority (ZATCA) - current name- by Resolution No. 3839 dated 14/12/1438H ("the Implementing Regulations")

Zakat, Tax and Customs Authority (ZATCA)

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 noncompliance with legal provisions relating to VAT.

What is Value Added Tax?

Value Added Tax ("VAT") is an indirect tax which is imposed on the importation and supply of goods and services at the production and distribution stages, with certain 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 subject to VAT will both:

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

• Pay VAT to their suppliers, if any, from whom they have received the goods or services, equal to a specified percentage of each eligible purchase.

When Taxable Persons sell a good or service, a 15% VAT charge - assuming a standard case - is assessed and added to the final 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 that Taxable Persons collect on their sales is called Output VAT.

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

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

This Guideline

The purpose of this guideline is to provide further clarification to Taxpayers regarding the VAT implications of common promotional activities carried out by Taxable Persons. This applies equally to promotional activities in retail and other types of trade with consumers or individuals, and in "business-to-business" trade.

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

For further advice on specific transactions you may apply for a ruling, or visit the official 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 (company) that has a regular activity making supplies carries on an Economic Activity.

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^[10] 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; or

• Revenues on sales of capital assets - a capital asset is defined as an asset allocated for long-term business use.^[11]

In certain circumstances, other provisions 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.^[12]

• 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 2017.^[13] Starting from 2019, the mandatory registration shall be required when annual turnover exceeds SAR 375,000 as required in the Unified VAT Agreement. For persons exceeding that annual turnover in the 2019 calendar year, an application for registration must be submitted no later than 20 December 2018.

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 voluntary basis^[14].

Optional VAT registration is preferable 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.

Consideration

Expenses, fees and other taxes

The Unified VAT Agreement specifies that expenses, fees and other taxes, when charged to the Customer, are included in the Value for VAT purposes:

1. The value of the Supply shall include all the expenses imposed by the Taxable Supplier on the Customer, the fees due as a result of the Supply and all the Taxes including Excise Tax, but excluding VAT.^[20]

The calculation of VAT will depend on whether the fees are expressed to the market as VAT inclusive, or are agreed to be VAT-exclusive in business agreements.

Good Sleep Company, a retail store, sells a bed to an individual for SAR 3,500, and charges a fee for a courier to carry out delivery of SAR 500. All prices are expressed as VAT-inclusive. The total Consideration payable for the supply includes the delivery fee (SAR 4,000). The total Value of the supply reported by the Supplier is the VAT exclusive amount, being SAR 3,809.52.

Al Barq Printing has an agreement with a business Customer for printing documents, which specifies an additional fee of SAR 250 (excluding VAT) for all express orders required on Friday or Saturday. The Customer asks for an urgent print job to be carried out with a standard Value of SAR 3,500. The total Value of the supply is SAR 3,750, including the additional fee. Al Barq adds VAT, at an additional 15%, to this Value (being SAR 562.5).

If a supplier incurs expenses in making a supply, but does not charge these to the Customer, these do not form part of the Value of that supply.

Good Sleep Company offers free delivery on any bed sale that is valued over SAR 5,000. A Customer purchases a bed for the cash price of SAR 6,000. Good Sleep Company incurs the expense of the courier for the delivery, but has agreed to provide the bed with delivery for a combined price of SAR 6,000. VAT is calculated based on the total Consideration (SAR 782.60, being 15/115 x SAR 6,000).

Further information on goods and services sold for a combined price is in Section 6 of this guide.

Third Party Consideration

Consideration is able to be paid to the Supplier by the Customer or by any other persons. Consideration paid or payable by a person other than the Customer is usually referred to as "Third Party Consideration". In determining the total Value of supply and VAT due, Consideration paid by third parties must be included in addition to any Consideration paid by the Customer.

The coffee shop situated in Riyadh mall offers a SAR 5 discount on any hot drink to Customers who show a receipt from a purchase from any another shop in the mall on that day. This is a promotion run by the mall's management as an incentive to shoppers. The mall's management company agrees to reimburse the coffee shop with SAR 4 for each discount given.

In this scenario, the agreement between the parties results in the SAR 4 received from the management company being Third Party Consideration for the Customer's beverage. The coffee shop must calculate and report VAT based on the monetary Consideration from the Customer in addition to the Third Party Consideration from the mall's management company.

Government subsidies

A subsidy paid by any KSA government ministry or authority to a Supplier in respect of a supply of goods or services does not contribute to the Value of supply (in the same way as Third Party Consideration from any other third party).^[21]

The Ministry of Electricity and Water provides a subsidy to a Saudi utility provider to provide water and electricity to citizens in remote areas. The citizens pay the normal market price offered in major cities.

The Saudi utility provider calculates and report VAT based on the monetary Consideration received from the Customers. The Government subsidy is not added to the Value of the supply and is therefore not subject to any VAT charge.

Adjustment to Consideration

The agreed Consideration payable for a supply of goods or services may be adjusted by a later event, in any of the following cases:

1. the Supply is cancelled or terminated after the Supply has taken place or been treated as taking place, in whole or in part,

2. there is a material change or alteration to the nature of the Supply resulting in a change in the Tax charged,

3. the previously agreed Consideration for the Supply is altered for any reason, including due to an offer of an additional discount after the sale was made,

4. the Goods or services or part thereof are returned to the Supplier and the Supplier accepts such return.^[22]

In these circumstances, the adjustment to the Consideration will result in an increase or decrease to the Value of the supply for VAT purposes. A Taxable Person who adjusts the supply's Consideration must include this adjustment in a credit or debit note correcting the original Tax Invoice.^[23]

For VAT purposes, the credit note reflects a decreasing adjustment to Consideration to a previously issued Tax Invoice for a supply of goods or services by the supplier.

Conversely, a debit note reflects an increasing adjustment to Consideration to a previously issued Tax Invoice for a supply of goods or services by the supplier.

Applying Fair Market Value to supplies

Section 4.1.2 of this guide describes that the "Fair Market Value" is applied in cases where non-monetary consideration is provided, to value that Consideration.

In certain circumstances, the Value of a supply may be deemed for VAT purposes to be at Fair Market Value, rather than the actual Consideration paid or payable. This provision prevents Related Persons agreeing an artificially reduced price and a corresponding reduction in VAT payable.

Standard retail prices

A supplier will often specify a price it requests as Consideration for goods and services. In a retail context, this may be physically displayed to the public in a shop, in published material or online.

In some cases the supplier or a third party such as a manufacturer may set a "standard retail price" or a "recommended retail price" for particular goods and services.

In all cases, it is required that "published prices in the local market for Goods and Services must include VAT^[30]". The Authority considers that this applies to any prices which are physically or electronically published, or are displayed to the public in a retail environment.

Individually agreed prices between a supplier and Customer may be stated as a VAT-exclusive price.

A published price might not be the final Consideration agreed between the parties for the sale of goods or services. The VAT should in all cases be calculated based on the total Consideration paid or payable, if this is different from the published price (subject to any supplies for which fair market valuation is required as described in Section 4.5 of this guideline).

A hardware store sells outdoor lights to the public for a standard retail price of SAR 230 each (this is the VAT-inclusive price, including SAR 30 of VAT). It agrees with a landscaping developer to sell 20 of these lights for SAR 3,675. It calculates VAT on the total Consideration payable (VAT of SAR 479.34, being 15/115 x SAR 3,675), shows this on the Tax Invoice issued to the developer, and reports this amount as Output VAT.

Discounted prices

A "discounted price" is a commercial term to describe a selling price which is decreased from an earlier selling price. In these cases, VAT is due on the "discounted" Consideration paid or payable for the supply.

A fashion store has a display showing designer shirts with a "normal" retail price of SAR 250, but offering all Customers a discounted price of SAR 200. If the Customer buys a shirt under the discount offer, VAT is calculated based on the discounted Consideration received (VAT of SAR 26.08, being 15/115 x SAR 200).

A discount may also be provided after an amount of Consideration is agreed between the supplier and the Customer, or indeed after one or all of the following events:

• the supply of goods or services is made;

• the invoice is issued by the supplier and

• the initially agreed Consideration is paid.

In all cases, the discount represents a reduction to the total Consideration payable. The Unified VAT Agreement expressly confirms:

"The value of the Supply is reduced by - discounts in prices and deductions granted to the Customer"^[31].

Ala Al-Din Supply Company has entered an agreement to sell fertilizer to a large farming Customer at SAR 4.28 per kilogram (excluding VAT). On 21 May, it delivers 7,500 kilograms - which, based on the agreement with the Customer - should be priced at 32,100 (plus VAT). The manager of Ala Al-Din gives a further discount to make the VAT exclusive price payable SAR 32,000. VAT is calculated at 15% of this final discounted price (being SAR 4,800) and shown on the Tax Invoice issued to the Customer.

Volume Discounts

As a promotional measure, a supplier may encourage additional purchases from the same Customer by offering a discount which takes effect upon a Customer buying a specified volume or monetary amount of goods and services. Purchases are made at the non-discounted price, until the agreed volume (or monetary amount) is reached, at which time a credit or cash refund is paid to reflect the discount. This is also referred to commercially as a "cash back" promotion.

Standard practice to report retrospective adjustments

In cases where the Customer has made multiple purchases over a time period to reach the specified volume, the discount will result in a retrospective adjustment to multiple supplies. The supplier should issue a credit note which refers to the original tax invoices for the supplies made at the standard (non-discounted) price.

Rose Roast, a coffee supplier, offers a 10% discount to Customers who purchase more than 100 kilograms of coffee beans in a calendar quarter. The standard price is SAR 160 per kilogram, plus VAT of SAR 24.

Breakfast Cafe places a monthly order of 35 kilograms on 1 January, 1 February and 1 March 2020. Rose Roast issues a tax invoice together with the delivery for each order, charging SAR 5,600 plus VAT of 840 for each month's supply.

At the end of March, Rose Roast calculates which Customers have qualified for the 10% discount during the first quarter of 2020. As Breakfast Cafe has ordered more than 100 kilograms, it is given a 10% discount on all purchases in the quarter (SAR 1,764, being 10% of the total VAT inclusive charges). Rose Roast issues a credit note for SAR 1,680 plus SAR 252 of VAT. The credit note refers to tax invoices issued in January, February and March.

Rose Roast should report the discounted amount of Output VAT in its Q1 VAT return. Breakfast Cafe is entitled to input tax deduction on the discounted VAT amount only on its Q1 VAT return.

Alternative - adjustment to current supply

Alternatively, as an administrative simplification, the Authority accepts that a volume discount given by a supplier can instead be reported as an adjustment to the Consideration for a current supply of goods and services, provided that:

1. the discount does not exceed the Value of the adjusted supply; and

2. all goods and services sold to that Customer are chargeable with VAT at the standard rate.

Office Supply Company offers a 10% discount to any Customers for all purchases in a year once they have purchased SAR 50,000 of products during a calendar year.

Al Waha Group, a Customer based in Jeddah, makes the following purchases:

• SAR 10,000 (plus SAR 1,500 of VAT) on February 15;

• SAR 20,000 (plus SAR 3,000 of VAT) on May 30 and

• SAR 30,000 (plus SAR 4,500 of VAT) on October 5.

Once the third purchase is made, Al Waha Group qualifies for the volume discount (SAR 6,000 plus SAR 900 of VAT). Instead of issuing a credit note, Office Supply Company adjusts the Tax Invoice to subtract the volume discount from the total Consideration payable on the Tax Invoice issued on October 5.

The invoice issued in October 5 shows SAR 24,000 (plus SAR of 3,600) for that supply of goods and services. Office Supply Company reports Output VAT of SAR 3,600 in its Q4 VAT return, and does not adjust Output VAT previously reported in Q1 and Q2.

Discount for early payment

A supplier may offer a discount to Customers on a supply of goods or services, on the condition that the Customer makes payment for the supply before a certain date. In cases where the Customer makes early payment and the discount is given, the Output VAT reported, and the tax invoice documentation issued by the supplier, should reflect the discounted Consideration paid.

If a Tax Invoice has already been issued showing VAT based on the non-discounted Consideration, a credit note must be issued to reflect the discount to Consideration.

AB Interior Design sells three curtains to a Saudi resident customer for installation in his family's home. The curtains are installed on 10 June 2019, and a Tax invoice issued to the Customer for SAR 2,940 (including VAT of SAR 441) on the same date. The supplier offers a 2% discount if the invoice is paid by 20 June 2019.

The Customer pays the discounted amount (of SAR 2,881.20) on 18 June. AB Interior Design issues a credit note (for SAR 58.8, including VAT of SAR 8.81) to reflect the reduction in Consideration payable. It includes the discounted amount as Output VAT in its VAT return.

Single and multiple supplies

The first step is to determine whether the goods and services rendered constitute a single supply or multiple supplies. This is particularly important where any element may not be subject to VAT at the 15% rate (e.g. in the case of zero-rated or exempt goods and services).

Multiple supplies will be recognized in situations where a bundle of different and distinct elements (goods or services) are offered, those elements each have a Value and can be enjoyed in their own right, and the Customer has the option to whether to purchase each element.

A single supply should be recognized from a VAT perspective in cases where:

• A supply consists of multiple elements, but it is evident that one element is clearly dominant and the other element(s) is/are to be enjoyed as part of that dominant element and is/are considered ancillary to this principal supply.

• A supply consists of multiple elements, but these elements are linked so closely that, splitting individual elements in to separate supplies would be artificial.

An important factor in determining whether a supply is a single supply or a multiple supply is the intention of the Customer and the supplier. Does the Customer intend to purchase one predominant good or service, or many individual components with independent Values?

In addition, where the separate elements of the supply can be purchased individually from various suppliers this can be an indication of multiple separate supplies, but is not decisive.

Example 24:

A vehicle retailer offers to sell a vehicle for SAR 85,000 (including VAT). This price includes a standard one-year warranty provided to all Customers against mechanical defects. The Customer does not have the option to obtain a lower price by refusing the standard warranty. There is one supply of the vehicle for VAT purposes.

Example 25:

To help finalize the sale, the vehicle retailer agrees to provide and install a roof rack as part of the sale of the same vehicle. The roof rack is normally sold for SAR 1,000 (including VAT). The relative commercial Value indicates the roof rack is ancillary to the vehicle, and the installation indicates the roof rack is to be enjoyed with the vehicle. This indicates there is one supply of the vehicle.

Example 26:

The Customer wishes to obtain an optional five year extended warranty and servicing package to ensure the vehicle is roadworthy over its useful life. The standard price of an extended warranty is SAR 10,000. The retailer offers to provide the vehicle with extended warranty for a single price of SAR 90,000. Whilst the warranty must be consumed in relation to the original vehicle, the relative nature and commercial Value indicates that the Customer is obtaining a distinct supply and is choosing to pay an additional amount for this distinct supply. This indicates that the Consideration relates to two separate supplies.

The supplier must allocate an appropriate Value to the extended warranty, and show this on the Tax Invoice issued to the Customer.

Standard commercial documents may be referred to in order to identify the intention of the supplier and Customer - for example:

• Contractual provisions (for example: whether individual elements are referred to separately in the contract, or for one combined price).

• Invoicing arrangements (for example, whether multiple elements are shown on the invoice with separate Consideration, or a single dominant element shown only).

Commercial documentation is not decisive in all cases. It is possible that these can be incorrectly issued, may lack sufficient detail, or can in some cases be intentionally manipulated to achieve a desired VAT treatment. The Authority may consider that an alternative interpretation is appropriate, based on the commercial substance of the arrangements.

Allocation of Consideration to individual supplies

If a single price is given for multiple supplies of goods and services, the supplier must determine the Value for each individual supply, and calculate VAT accordingly. If the supplier issues a standard Tax Invoice covering multiple supplies - the Value, and amount of VAT, must be shown for each supply.^[34]

In cases where a multiple supply exists:

• If each supply has the same VAT rate, then VAT should be calculated on the full Value of the Consideration received for those supplies.

• If different supplies have different rates or treatments, the VAT must be calculated and applied based on the Value of each supply.

Example 27:

A VAT-registered dentist in the KSA provides and fits a replacement artificial tooth for a patient at his private clinic. The services of the dentist are subject to VAT at 15%, but the artificial tooth is a Qualifying Medical Good which qualifies for zero-rating. The dentist offers a discount of 10% to the patient on the standard charges. The dentist provides an itemized invoice to show the relevant costs to the patient.

The underlying Value of the goods and services provided are not affected by the offer of the discount. The dentist therefore applies the discount evenly to the zero-rated goods and to the services, and applies 0% VAT to the Qualifying Medical Goods as follows:

The Value of each individual supply must accurately reflect the relative commercial Value of goods and services supplied. Suppliers should not seek to artificially value zero-rated or VAT exempt supplies at a higher Value than those supplies taxable at the 15% rate. Suppliers should be able to provide support of the commercial pricing adopted upon request by The Authority.

In case of a single supply, the entire supply must have the same VAT treatment (i.e. standard rated, exempt or zero-rated).

Example 28:

An individual purchases an electric food processor whilst visiting the KSA. The supplier charges a single price of SAR 420 (including VAT) which entitles the Customer to the food processor, and access to content on its Customer-only website (being recipes, storage advice and other information similar to that available on public websites).

In this case, the access to the supplier's website is of nominal Value and is clearly ancillary to the dominant supply of the food processor. The supplier must apply VAT at the standard rate to the supply of goods in the KSA, and should not allocate any Value to the website access provided.

Promotions including "free" goods

In some cases, a good or service will be described as “free” as promotional language, but are provided as part of a package of other goods or services (for example, a retailer sells two identical goods with a third sold “free”, or a mechanic will provide a “free” safety check as part of every motor vehicle service). The provision of free items requires analysis of whether a Nominal Supply is made.

What Is a “qualifying” Voucher?

Vouchers are physical or electronic documents, which entitle Customers to redeem them as consideration for goods or services from a supplier or group of suppliers. A Voucher is not a form of currency, but can be exchanged and used as non-monetary Consideration (and often shows an equivalent monetary Value). A Voucher generally only has commercial Value due to the supplier's undertaking to allow its redemption as consideration for goods and services.

A Voucher is defined for VAT purposes as:

“...an instrument where there is an obligation to accept it as Consideration or part Consideration for a Supply of Goods or services, and where the nature of the Goods or services to be supplied or the identity of the Supplier is indicated on the Voucher or in related documentation^[40]”.

Vouchers meeting this definition are subject to special VAT rules. For the purpose of this guideline, Vouchers falling within this definition are qualifying Vouchers. Other commercial documents may be described as “Vouchers” in promotional language, but are not subject to special VAT rules. These “non-qualifying Vouchers” are discussed in Section 7.5.

When the Voucher is redeemed as Consideration for goods or services, VAT should be charged on the underlying supply of goods or services.

Issue of a Voucher

Where a person issues a new Voucher, whether for Consideration or for no Consideration, this is not considered to be a supply for VAT purposes^[41]. A Voucher can be issued by the supplier who will redeem it (for example, a Voucher issued by a retailer allowing redemption of the Voucher in any of its retail stores), or by a third party (for example, a mall management company issuing a Voucher which can be redeemed in any store within the mall).

Where an existing electronic Voucher is able to contain a stored monetary Value, the issue of additional Value (also known as the “top up”) of that electronic Voucher is also seen as the issue of a Voucher for VAT purposes.

As a measure to prevent abuse of the special Voucher rules, a supply of services arises in any case where the Consideration payable for a Face Value Voucher is above its face value^[42]. This scenario is not expected to occur in usual commercial practice.

Supply of a Voucher

The supply of an existing Voucher is not considered to be a supply for VAT purposes, unless the Consideration payable for a Face Value Voucher is above its face value. If the Consideration payable exceeds the face Value, this is a supply of services to the extent the Consideration exceeds the face value.

Al Hamdan Group has the exclusive distribution rights for a specific brand of electronic device. As a promotional strategy, in October 2019 Al Hamdan Group issues 1,000 Vouchers entitling Customers to redeem for SAR 500 of that product to an intermediary Company, charging SAR 480 each. As the Consideration for the issue is less than the face Value, this is not a supply for VAT purposes.

In December 2019, The intermediary Company sells 200 of the Vouchers to Consumer Marketing Company, charging SAR 495 each. This is not a supply for VAT purposes, as the Consideration is less than the face Value.

In January 2020, Consumer Marketing Company sells the 200 Vouchers individually to the general public after the launch of a new device to the KSA market. Due to the popularity of the products at that time, it is able to charge SAR 510 for each of the Vouchers. The additional Consideration of SAR 10 (above the stated face Value) is a supply of services. Consumer Marketing Company must report the relevant portion of Output VAT (SAR 1.30) on the Value of that additional supply.

Redemption of a Voucher for goods or services

When Vouchers are redeemed for a supply of goods and services, VAT is charged at the appropriate rate on the goods and services provided, with the Voucher forming non-monetary Consideration for that supply.

Ifthe Voucher is a Face Value Voucher, the value of the non-monetary Consideration will be valued at the amount of face Value used.

A Customer uses a bookstore Voucher with SAR 100 of Value as part Consideration to purchase a book, paying an additional SAR 150 using his credit card in store. The bookstore accounts for Output VAT on the supply based on the Face Value Voucher (SAR 100) plus the monetary Consideration (therefore SAR 250 in total).

If the Voucher is not a Face Value Voucher, its Value will be based on the Fair Market Value of goods and services provided.

On January 14, a Customer uses a Voucher issued by Garage Company, which entitles him to a free luxury car wash at its garage. The standard retail price of the car wash is usually SAR 30, but Garage Company runs a promotion during January entitling all Customers to a reduced price of SAR 28. The Fair Market Value of the Voucher is therefore SAR 28, and VAT must be calculated based on this non-monetary Consideration.

Treatment of 'non-qualifying' Vouchers

Other commercial documents which are described as 'Vouchers', but do not meet the definition of a Voucher for VAT purposes are called 'non-qualifying' Vouchers in this guideline.

1. A non-qualifying Voucher is treated under standard VAT rules. VAT is accounted for on the Consideration paid or payable (if any) on the issue or supply of a non-qualifying Voucher as a supply of services. At redemption, the supplier must account for VAT based on the total Consideration paid for the supply of goods and services.

Examples of non-qualifying Vouchers include the following:

1. A document entitling a Customer to a discount on a supply of goods and services. These documents are often issued for free by a supplier as a promotional measure, and reflect a discount that is commercially acceptable to the supplier. Such non-qualifying Vouchers have no Fair Market Value. If a Customer 'redeems' a discount Voucher, this is simply treated as a discount to the Consideration.

2. A document which evidences a pre-payment for a known supply of goods and services, or a supply to a known Customer. For example, a non-qualifying Voucher issued by an event company in April 2023 for SAR 120, allowing a Customer to attend a lecture by a guest speaker on 17 September 2023. This is an advance payment in April for a supply of service (the event) taking place in September, requiring VAT to be reported in the event company's Tax Return for April 2023.

Purchase stamps

Purchase stamp promotions generally provide a physical card or token which is stamped upon the purchase of a single or similar good or service. Upon the Customer having purchased a sufficient number of goods or services at the standard price and evidenced this with purchase stamps, the Customer is usually entitled to an equivalent free good or service when he surrenders the completed card.

This type of purchase stamp programme clearly links the provision of the “last” or “free” good or service with the Consideration paid for the earlier purchases.

A typical example is a coffee card, where the Customer is entitled to a tenth coffee from a supplier for free, after previously having purchased nine coffees over time at the standard price of SAR 20, including VAT, and gaining stamps for each purchase. In this example, the Customer who completes the card and obtain a “free” coffee, effectively purchases ten coffees over time for a discounted price of SAR 180 (the standard price of nine coffees).

In these cases, it is therefore accepted that a Nominal Supply does not take place in respect of the provision of the "free" good or service on surrender of the completed purchase stamp card, as Consideration for that good or service has already been paid in advance from the previous purchases. Likewise, the surrender of the card is not a form of non-monetary Consideration for the supply.

Under the coffee card example, the supplier will have collected VAT on sales of the first nine coffees (SAR 23.48 being the VAT component of the SAR 180 paid for the first nine purchases) and reported this as Output VAT, and therefore does not have any additional VAT obligation on provision of the free tenth coffee.

In most circumstances, a purchase stamp card has no separate commercial Value without the Customer having made previous purchases, and a completed card is not usually sold to other Customers. Therefore, a purchase stamp card will not be viewed as a Voucher in usual commercial situations.

Loyalty points – single supplier schemes

Loyalty points are often used by retailers and service providers to incentivise purchases.

Points are issued to Customers upon the Customer purchases of goods and services, or upon other events (for example, the Customer may "earn" bonus points for referring another Customer). The points are generally held on a Customer's personal account, and once the Customer acquires sufficient points these may be redeemed for free goods or services.

A "single supplier" points programme involves points being issued by one supplier, allowing redemption against goods or services supplied by that supplier. A third party may administer the loyalty points scheme on behalf of the supplier.

Common features to single-supplier loyalty points schemes are:

• The Customer generally 'earns' points by making purchases, or acts of non-material Value (such as making a referral to another Customer). In these cases, the Customer does not make a supply in return for the issue of points.

• The Customer purchases goods or services as his primary motive, and is given points as a consequence. This is a single supply of the underlying goods or services. In these cases, the supplier does not make a separate supply of points.

• Loyalty points can generally not be traded to other persons and have no commercial Value unless redeemed by the original Customer under the terms of the programme. In these cases, the surrender of points by the Customer for a reward good or service is not separate Consideration for a supply.

• The provision of a free good or service is predominantly linked to points acquired for previous purchases from that same supplier which are taxable at the same rate of VAT. Provided this link can be shown as part of the points programme, the provision of the good or service as a reward, for no extra Consideration, does not constitute a Nominal Supply.

• Goods or services offered to the Customer as a reward can be either the usual goods or services sold by that supplier, or a different type of reward good/service. In either case, the reward item is provided in the course of carrying on the supplier's usual economic activity and incentivizing future sales. The purchase or manufacture of the reward item is, in principle, eligible for input tax deduction in accordance with other general business costs.

A large retailer runs a single supplier loyalty scheme under which Customers are issued with an electronic card, and provided one loyalty point for every SAR 100 of purchases made when the number of the card is shown or quoted.

Ahmed is a regular shopper at the store and joins the loyalty scheme in January 2021. By March 2022, he has acquired 53 loyalty points (from total purchases made of SAR 5,300 including VAT). He refers to the scheme website and sees that he may use 25 points for a new children's toy, normally valued at SAR 120. He visits the retailer and asks to surrender 50 points for two toys for his children.

The 'reward' goods are linked to Ahmed's earlier purchases from the same retailer. Therefore, the provision of reward goods relates to the earlier Consideration provided for those purchases. The retailer does not make a Nominal Supply upon providing the toys to Ahmed.

Multi-party loyalty schemes

More complex loyalty points schemes involve multiple 'participating' suppliers. Under these schemes:

• points may be acquired or 'earned' by participating Customers as a result of purchases from multiple suppliers participating in the scheme;

• Once earned, points cannot be traded or transferred by a participating Customer to another person;

• Once issued, points acquired in respect of all purchases generally have an equivalent right to eventual redemption (the points all carry the same effective 'value' under the scheme);

• Points issued to participating Customers in respect of purchases from one Supplier may be redeemed against goods or services supplied by that supplier or another participating supplier;

• The scheme may be operated by a participating supplier, or by a third party operating company (who does not make supplies of goods or services to the participating Customers).

The VAT treatment will depend on the exact specifics of each loyalty scheme. Suppliers and operators of a scheme should analyse the appropriate treatment, and may choose to seek a ruling on individual circumstances. As a default, the Authority will assume the following characteristics of a multi-party loyalty scheme:

The supply of goods and services together with points 'earned' on that purchase under the usual terms of a multi-party loyalty scheme, is considered as a single supply of the goods and services for the total Consideration collected. No additional supply is made on the issue of points with a supply of goods or services.

Unlike in a single party scheme, the provision of goods and services upon the redemption of points in a multi-party loyalty scheme cannot be seen as linked to the supplies under which points were originally earned.

When participating suppliers make a supply of goods and services upon the redemption of points by a Customer, the supplier must account for VAT on the supply made to that Customer. The Value of the supply will depend on whether the participating supplier receives any direct Consideration for that supply (whether monetary or non-monetary), or makes a supply for no Consideration.

Multi-party loyalty schemes usually involve payments between participating suppliers, and/or between operators and participant suppliers. The VAT implications of these payments must be determined on a case-by-case basis, based on what underlying supplies of goods or services are related to those payments.

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; or

• 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 (including some blocked expenditure types such as entertainment, sporting or cultural services, catering service, and restricted motor vehicles),^[43] or on any costs which relate to making exempt supplies.

This 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.^[44]

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. (It should be noted that real estate supplies are exempt from value-added tax, and are subject to the real estate transaction tax. Further information about Real Estate Transaction Tax is included in the real estate transaction tax guidelines.) A person making both taxable 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 tax will be determined in accordance with the following rules:^[45]

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 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.