A guide to Applying KSA VAT for Transport: Place of Supply

Introduction

In the Kingdom of Saudi Arabia, Value Added Tax (VAT) applies to most goods and services including transport services. Even though transport services are taxable, it doesn’t necessarily mean we have to pay VAT for every supply of such services.

The Implementing Regulations of VAT Law, in its Article 25 of Chapter 5 and Article 34 of Chapter 6 has defined when tax needs to be paid on transport service. It sets out the Place of Supply rules and defines what services can be included under Zero rated services. 

Here’s an easy to understand guide about the application of Place of Supply rules and Zero rated supply in transport services.

1. Place of Supply Rules

The Kingdom of Saudi Arabia follows a territorial system to apply VAT of 15%. The Place of Supply rules determine the application of VAT on the basis of origin and destination of transport service. If the service is taking place within the borders of Saudi Arabia, then VAT will be applied according to the local standard rate (currently 15%). For services like import and export zero rated VAT is applicable and for services that take place completely outside of Saudi Arabia, no KSA VAT will be applied; however, there are exceptions depending on which type of service is being supplied.

2. Place of Supply for Transport Services

Generally speaking, the VAT is applied to a person based on where the transportation starts regardless of the fact the supplier is Saudi National, Resident/Expat living in Saudi or Outside of Saudi. Please see the table below:

Transportation Begins	Transportation Ends	Description	Does VAT Apply?
In KSA	In KSA	Place of supply is KSA  (domestic transport)	Yes : Standard Rated
Outside KSA	In KSA	Place of supply outside KSA  (International transport)	Yes – Zero Rated*
In KSA	Outside KSA	Place of supply is KSA  (International transport)	Yes – Zero Rated*
Outside KSA	Outside KSA	Place of supply outside KSA	No – Out of Scope

Example: Abdulla, a Bahraini National, is a retail businessman, places orders online from Bahrain for a shipment of 30 kilogram of Ajwa Dates – Al Madinah – Grade 1 with Al Ameen Dates Company at Al Madinah. To transport the Ajwa-dates from Al Madinah to King Fahd International Airport, Dammam, he appoints a third party transport company at Al Madinah –  Al Safar Transportation Company. He then books an air cargo on Saudia flight at King Fahd International Airport, Dammam, to ship the Ajwa-dates from Dammam to Bahrain International Airport, Muharraq Island, Bahrain.

Here are 4 things that needs to be taken into consideration 

1. Abdulla places online order of the Ajwa Dates – is not a Saudi resident, is not a Saudi National, is not in Saudi.  
2. He places online order of 30 kilograms of Ajwa Dates-Al Madinah-Grade 1 with a Al Ameen Dates Company at Al Madinah. The placement of the order is in Saudi Arabia.
3. Then, he books Al Safar Transportation Company for the transportation of the Ajwa Dates from Al Madinah to King Fahd International Airport, Dammam. Here the standard rate of VAT of 15% is chargeable for the transportation of the Ajwa Dates from Al Madinah to Dammam since the transportation of Ajwa Dates is inside Saudi Arabia.
4. After that he books Air Cargo on Saudia flight to ship the Ajwa Dates from Fahd International Airport, Dammam to Bahrain International Airport, Bahrain. Since the shipment starts Inside Saudi but, it is shipped to Muharraq Island, Bahrain i.e, outside Saudi Arabia, here zero rated VAT is chargeable.

3. Place of Supply for Transport Related Services

All services which are ancillary to (in support of) and provided with transport services are subject to VAT. However, these services shall also be subject to Place of Supply Rules mentioned in Point 2.

The list of transport related services is as below:

Example: 

1. A South Korean based petrochemical company –  Hyuk Gi Petrochemical Co. Ltd., ships Ethylene and Polyethylene from King Abdulaziz Port, Dammam, plus he requests for additional security protection for the transportation of chemicals. Since the shipment /supply is from Saudi Arabia(Dammam) and additional security protection service is from Saudi, Zero Rated Vat is applicable. 
2. Saudi Arabian Auto Dealer Al Sayyārat Auto Company, imports sedan cars from China. Since the place of supply is outside of Saudi Arabia, but the car is imported to Saudi Arabia zero rates VAT is applicable even for additional packaging related to transportation. This further means, this includes port fees; customs clearance; insurance; loading and unloading; storage connected with importation and inspection services; zero rated VAT will be applicable.

4. Leasing of Means of Transport

The leasing or rental of means of transport (such as cars, ships, aircraft etc.) is subject to 15% VAT. If the leasing is taken outside Saudi Arabia and used in Saudi Arabia, zero rated VAT applicable on a leased vehicle.

Example:

1. Yasmeen leases a Nissan Patrol vehicle for one week that  is registered in Saudi Arabia from Al Riḥla Auto Leasing Company, to travel from Jeddah to Al Madinah and back to Jeddah then VAT at the standard rate of 15% will be applicable for the entire trip. 

2. Ahmed leases a Toyota Camry car for 3 weeks from Shukran Car Rental Leasing Company in Muscat, Oman and travels to Riyadh to visit his friends. Since the car was rented/leased from Muscat, Oman (outside of Saudi Arabia), zero rated VAT is applicable.

Conclusion

Understanding the Place of Supply rules for transport can help businesses navigate the complexities of VAT regulations in Saudi Arabia. Companies should stay up-to-date on all changes to ensure they remain compliant with the law.  By being aware of these rules, businesses will benefit from increased efficiency and cost savings thanks to correctly applying VAT principles when it comes to transport services.

It’s important for businesses to clearly understand these regulations in order to comply with them effectively and avoid any penalties or fines. Get in touch with PFA & Co expert Chartered Accountants to learn more and stay up-to-date on VAT guidelines and also learn about KSA VAT exemptions and evidence needed for VAT compilation.