Saudi Arabia VAT tax triples to 15 pct on July 1: All you need to know amid COVID-19

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Saudi Arabia will be tripling its value-added tax (VAT) rate on July 1, from 5 percent to 15 percent.

The announcement came in mid-May following a wave of enormous cost-cutting programs to help counter the unprecedented economic fallout caused by the ongoing coronavirus pandemic.

The focus of these cuts and the hike in VAT is to protect the health care and livelihoods of Saudi Arabians, Finance Minister Mohammed al-Jadaan said at the time.

“These are the priorities: The health care of people and the livelihood of people, and we want to make sure that we maintain our fiscal strength so that as the economy gets out of the lockdown, we are able to support the economy,” al-Jadaan told Bloomberg in a telephone interview.

What is VAT?

VAT is a tax that is added onto the cost of goods and services at every stage of production in an economy, but is generally only paid by the end consumer – meaning that products and services in shops will become more expensive if the rate is increased.

Saudi Arabia’s new VAT rate of 15 percent is still low compared to most developed economies.

Data from the Organisation for Economic Co-operation and Development (OECD), a group of major economies, shows the average VAT rate across member states that have the tax in place stood at 19.3 percent.

Meanwhile, in Europe the average is even higher, with VAT across OECD member states averaging 21.4 percent.

More help next year

The increase in VAT will help the Kingdom to provide a strong, financially stable base for its economy and future growth, especially as the global economy grapples with what is likely to be its greatest recession in nearly 100 years.

However, the impact of the increase will likely be of greater help to Saudi Arabia in the future, rather than immediately, al-Jadaan indicated.

The VAT increase “is something that will help this year, but will help more next year and the year after as we get out of the COVID-19 crisis,” the minister said.

The increased revenue heading to state coffers as a result of VAT will likely not be significant this year, the minister continued, as consumers are not spending as much as normal while in lockdown.

VAT rates: Compared

Here’s the VAT rate of all countries in the OECD with VAT compared to Saudi Arabia:

1. Hungary: 27 percent
2. Denmark: 25 percent
3. Norway: 25 percent
4. Sweden: 25 percent
5. Finland: 24 percent
6. Greece: 24 percent
7. Iceland: 24 percent
8. Ireland: 23 percent
9. Poland: 23 percent
10. Portugal: 23 percent
11. Italy: 22 percent
12. Slovenia: 22 percent
13. Europe average: 21.4 percent
14. Belgium: 21 percent
15. Czech Republic: 21 percent
16. Latvia: 21 percent
17. Lithuania: 21 percent
18. Netherlands: 21 percent
19. Spain: 21 percent
20. Austria: 20 percent
21. Estonia : 20 percent
22. France: 20 percent
23. Slovak Republic: 20 percent
24. United Kingdom: 20 percent
25. OECD average: 19.3 percent
26. Chile: 19 percent
27. Germany: 19 percent
28. Turkey: 18 percent
29. Israel: 17 percent
30. Luxembourg: 17 percent
31. Mexico: 16 percent
32. New Zealand: 15 percent
33. Saudi Arabia: 15 percent
34. Australia: 10 percent
35. South Korea: 10 percent
36. Japan: 8 percent
37. Switzerland: 7.7 percent
38. Canada 5 percent

Source: OECD Tax Database

Not all countries in the world impose VAT. Many, such as the US, opt to use a sales tax instead. While VAT is collected by all sellers in every stage of a supply chain, sales tax is only collected by the retailer when a product has reached the end of the supply chain, with end consumers footing the bill.

Read more:

Saudi Arabia inflation eases as VAT rate jump moves closer

Saudi Arabia reaps the benefit of establishing VAT

Saudi VAT: New coronavirus tax rate one of the lowest among advanced economies

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