Saudi Arabia: Circular on the VAT treatment of certain supplies in the Financial Services Industry

In detail

Supplies of services by KSA based financial institutions to customers located outside KSA

The Circular highlights that financial institutions should consider the following factors while determining VAT treatment for a service:

• Place of supply of services

• Nature of services

• Location of customer

Services provided by the financial institutions usually fall under ‘general place’ of supply concept as prescribed in the GCC VAT Framework Agreement which means the place of supply will be where the financial institution is located. 

The next step would be to assess the nature of services and depending on the circumstances, consideration of services may either be treated as:

• Explicit fee or commission etc - Subject to 15% VAT

• Implicit margin or spread - Exempt from VAT

• Services provided to a non-resident customer - Subject to 0% VAT (Article 33 exceptions assessment will be required)

In case of application of 0% VAT under Article 33 of the Implementing Regulations, the Circular includes examples and clarifications for each of the exceptions mentioned therein the aforementioned Article which taxpayers may use as a guidance in order to apply correct VAT rate.

This Circular also reiterates that unless all GCC states have not introduced VAT and Electronic Services System is not implemented, the GCC member states will be considered as another country for the purposes of applying relevant provisions of the VAT Implementing Regulations.

Incentives provided by international credit card issuers and payment network operators to KSA based financial institutions

In the context of incentives or rebates provided by international credit card issuers and payment network operators, ZATCA clarified the VAT implications that financial institutions should consider (depending on the contractual and commercial arrangements between the parties) while entering into such arrangement, which typically are classified into two broad categories:

Interchange Services

ZATCA in the Circular explained the mechanics of ‘interchange services’ by way of highlighting parties involved, how interchange fee arises, and how it should be treated from a KSA VAT perspective if the parties involved are KSA VAT registered or located outside KSA.

What is an Interchange fee?

Interchange fee represents amounts paid by Retailer’s bank (Acquirer Bank) to a card holder’s bank (Issuing bank). Typically the following parties are usually involved where a customer uses his credit card to make a purchase:

• Cardholder

• Retailer/ Merchant

• Issuing Bank (who issues the credit card)

• Acquirer Bank or POS Bank (Merchant or retailer’s bank)

• Payment Network Operator (referred to as ‘PNO’)

Critical VAT considerations related to interchange fee

In the event where the PNO is located outside KSA however the Acquirer Bank and Merchant are located in KSA, ZATCA considers this to be a domestic supply of service and hence the standard rate of VAT will be applicable.

ZATCA is of the view that a 0% VAT will only be applicable in instances where the Acquirer Bank and Merchant are located outside KSA, exceptions to the provisions of Article 33 do not apply and Issuing bank is able to support the above arrangement through adequate supporting documentation.

The location of PNO will not affect the underlying VAT treatment and due consideration should be given to the location of Acquirer Bank and Merchant.

ZATCA clarified that although the interchange fee receivable and payable are often communicated to banks on a net basis, the Issuing bank must determine the gross value of its supplies and report the output VAT as such on these supplies where applicable.

Merchant fee

ZATCA clarified that usually the Acquirer Bank and Merchant are located in the same country, therefore, they should apply the VAT treatment as per the applicable regulations of that country. However, where a KSA based Acquirer Bank is charging fee to a non-KSA based mechant for using Point-of-Sale in KSA, the VAT treatment of such fee needs to be assessed in the light of provisions of Article 33 of the Implementing Regulations as well as other relevant provisions. 

PNO charges

Charges levied by PNO such as authorisation, settlement on the Issuer/ Acquirer Banks should be reported under Reverse Charge Mechanism using the gross values (without netting off).

Due consideration should be given to the input VAT proportional deduction calculations where required.