In January 2019, he Kingdom of Saudi Arabia's (KSA) tax authority, the General Authority of Zakat and Tax (GAZT), published its guide on the VAT treatment of professional services, in which, among other things, the VAT treatment of global contracting arrangements is set out. In some cases, VAT may be due twice in the KSA, in addition to any VAT charged on the services outside the KSA.

Export services to a recipient based outside the KSA are only subject to the zero rate of VAT when strict conditions are met. When there is a direct benefit in the KSA, the service is subject to the standard rate of VAT of 5%. In the absence of a VAT refund mechanism for foreign companies, this VAT results in an increase to the cost of doing business.  

Furthermore, taxpayers should carefully look at the procurement side where services brought in by a foreign company are (partly) used in the KSA. In the guide, the GAZT takes the view that the KSA branch may be regarded as the recipient of a supply that is invoiced and contracted for by its foreign head-office with a foreign supplier. As a result, the branch is required to account for VAT under the reverse charge mechanism (whilst foreign VAT may also be charged by the foreign supplier to its head-office). The GAZT argues that the branch is the recipient of the services on the basis that it is most closely connected to the supply and is consuming the services.  

The same result is achieved by Article 18(3) of the Implementing Regulations, although this only appears to apply to intra-GCC transactions (and only after all of the GCC countries have implemented VAT). It is unclear on which amount the branch has to account for reverse charge VAT – the full invoice amount or the portion that is recharged to the branch by its head-office.  

Taxable persons that are not entitled to recover input tax in full should ensure that their procurement and service arrangements are optimized and that sufficient substance is in place to support the anticipated VAT treatment.