For corporate taxpayers in Saudi Arabia, input VAT recovery becomes complex when expenses relate to both taxable and exempt supplies. The Zakat, Tax and Customs Authority (ZATCA) requires businesses to use apportionment methods to fairly allocate VAT recovery on mixed-use supplies. This guide explains the rules, available methods, and best practices for compliance.
📌 Understanding Mixed-Use Supplies
Mixed-use supplies occur when goods or services are used for both taxable (VAT-applicable) and exempt (non-VAT) business activities. Examples include:
- Shared office utilities for both VAT-registered and exempt divisions.
- Marketing campaigns that promote taxable and exempt products.
- Administrative expenses benefiting both taxable and exempt operations.
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✅ ZATCA’s Rules on Apportionment
Under Article 51 of the VAT Implementing Regulations, businesses must apportion input VAT between taxable and exempt use when goods or services are used for both purposes. This ensures that VAT recovery is limited to the proportion used for taxable supplies.
📊 Common Apportionment Methods
While ZATCA allows flexibility, these are the most widely accepted methods for Saudi VAT purposes:
1. Standard Turnover-Based Method
The proportion of taxable turnover to total turnover is applied to input VAT for mixed-use supplies.
2. Sector/Departmental Allocation
Input VAT is divided based on usage by different business divisions or cost centers.
3. Time-Based Apportionment
For assets used over a period (e.g., vehicles, equipment), VAT recovery is based on the percentage of time used for taxable activities.
4. Direct Attribution Method
Where possible, expenses are directly linked to either taxable or exempt activities, and VAT is claimed only for the taxable portion.
⚠️ Mistakes to Avoid
- Using outdated turnover ratios for apportionment.
- Claiming full VAT without a documented allocation method.
- Not performing annual adjustments to reflect actual usage.
- Failing to retain supporting calculations and records for ZATCA audits.
💡 Best Practices for Compliance
- Choose an allocation method that reflects actual business usage.
- Document your chosen methodology and rationale.
- Review allocations at least annually to ensure accuracy.
- Maintain all invoices, contracts, and supporting documents for at least six years.
🏁 Conclusion
For Saudi corporate taxpayers, input VAT recovery on mixed-use supplies requires careful calculation and documentation. By applying an accurate and reasonable apportionment method, businesses can remain compliant, optimize VAT recovery, and reduce the risk of disputes with ZATCA.
