Corporate taxpayers in Saudi Arabia frequently engage foreign service providers for technical, consulting, and professional support. Under the Reverse Charge Mechanism (RCM), the VAT liability shifts from the foreign supplier to the Saudi recipient. This guide explains how to account for the VAT on imported services, reclaim eligible input tax, and remain compliant with ZATCA requirements.
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What Is the Reverse Charge Mechanism?
The Reverse Charge Mechanism is a VAT collection method where the responsibility to account for VAT on imported services falls on the Saudi recipient rather than the foreign supplier. This ensures that services consumed in Saudi Arabia are subject to VAT, even if the provider is outside the Kingdom and not VAT-registered locally.
Under RCM, the Saudi corporate taxpayer:
- Calculates VAT on the value of imported services.
- Declares the VAT as output tax in the relevant VAT return.
- Claims the same amount as input tax (if eligible), resulting in no net cash outflow when fully deductible.
Scope: What Services Are Covered?
The RCM applies to services supplied by non-resident entities to Saudi VAT-registered businesses where the place of supply is Saudi Arabia. Common examples include:
- Consulting and advisory services (management, legal, financial).
- IT support, software licenses, and cloud subscriptions.
- Engineering, design, and technical services.
- Marketing, branding, and creative services.
- Training, workshops, and online professional courses.
How to Account for VAT Under RCM
- Identify Imported Services: Review supplier contracts and invoices to confirm if the provider is non-resident and the services are used in Saudi Arabia.
- Determine Tax Base: The taxable value is the consideration paid (or payable) for the service, converted to SAR using the official exchange rate on the tax point date.
- Apply the 15% VAT Rate: Calculate VAT on the taxable value.
- Record in VAT Return: Declare VAT as output tax in the “Imported Services” section.
- Claim Input Tax: If the service is used for taxable business purposes, reclaim the same VAT amount as input tax in the same return.
Example: RCM VAT Calculation
| Description | Amount (SAR) |
|---|---|
| Invoice value from foreign consultant | 100,000 |
| VAT @ 15% (Reverse Charge) | 15,000 |
| Total VAT liability declared as output tax | 15,000 |
| Input tax claim (if eligible) | (15,000) |
When fully deductible, there is no net VAT cost; however, documentation must be maintained for audit purposes.
Documentation Required for Input Tax Claim
- Supplier invoice showing service description, value, and supplier’s details.
- Proof of payment to the foreign supplier.
- Evidence of service usage for taxable business purposes (contracts, work reports, deliverables).
- Exchange rate records if invoice issued in foreign currency.
- VAT return records showing both output tax declaration and input tax claim.
Common Mistakes in RCM Compliance
- Failing to identify imported services from foreign suppliers.
- Using incorrect exchange rates for currency conversion.
- Not declaring output VAT under RCM before claiming input tax.
- Claiming input tax for services used for exempt or non-business activities.
- Inadequate record-keeping leading to disputes during ZATCA audits.
Best Practices for Corporate Taxpayers
- Maintain a dedicated Imported Services Register to track all RCM transactions.
- Integrate VAT checks into procurement processes to flag non-resident suppliers.
- Ensure finance teams are trained on RCM accounting and documentation requirements.
- Perform periodic reconciliations between procurement, accounting, and VAT records.
- Engage tax advisors for complex cross-border service arrangements.
Key Takeaways
- RCM shifts VAT liability from foreign suppliers to Saudi recipients for imported services.
- Corporate taxpayers must declare VAT as output tax and can reclaim it as input tax if eligible.
- Accurate documentation and compliance with ZATCA’s VAT rules are essential to avoid penalties.
