A taxable person in Saudi Arabia may deduct input tax incurred on goods and services received in the course of carrying on an Economic Activity, provided these relate to taxable supplies (including zero-rated ones), while specific categories of expenditure set out in the Implementing Regulations are excluded from this right.
The General Condition for Deducting Input Tax
The Implementing Regulations of the VAT Law provide that a Taxable Person may deduct Input Tax charged on Goods and services supplied to him, to the extent these are received in the course of carrying on an Economic Activity and constitute taxable supplies (including zero-rated supplies), internal supplies, or supplies that would have been taxable had they been made in the Kingdom. Input Tax may only be deducted where the Taxable Person holds evidence of the amount of Input Tax paid or payable.
Expenditure Excluded From Deduction
Article 50 of the Implementing Regulations defines categories of goods and services considered to be received outside the scope of Economic Activity, for which input tax may not be deducted unless resupplied as a taxable supply, including:
- Entertainment, sporting or cultural services.
- Catering and hospitality services in hotels, restaurants and similar venues, unless providing them is a statutory obligation of the employer toward its employees.
- The purchase or lease of Restricted Motor Vehicles (designed to carry ten persons or fewer), except vehicles used exclusively for the Economic Activity, those intended for resale, or emergency vehicles.
- Repair, maintenance and fuel for Restricted Motor Vehicles.
- Any goods or services for a private or non-business purpose.
Proportional Deduction Where Exempt Supplies Exist
Where a taxable person makes both taxable and exempt supplies, input tax exclusively and directly attributed to taxable supplies is deducted in full, while input tax exclusively attributed to exempt supplies is not deductible at all; input tax that cannot be attributed exclusively to either is deducted proportionally, using a fraction based on the value of taxable supplies relative to total supplies made during the preceding calendar year. At the end of each calendar year, the taxable person must compare the estimated proportion used during the year against the actual proportion achieved, and make any necessary adjustment to Input Tax in the final Tax Return for that year.
The Time Limit for Deduction
Input Tax may not be deducted in any period which falls more than five calendar years after the calendar year in which the supply takes place. Deduction also requires that the taxable person hold evidence of the amount of Input Tax paid or payable, whether in the form of a Tax Invoice or another document accepted by the Authority; incurring the tax economically is not, by itself, sufficient without this formal evidence.
Illustrative Example
If a business incurs SAR 3,000 of input tax on general expenses relating 80% to taxable supplies and 20% to exempt supplies, the deductible amount is calculated proportionally: SAR 3,000 x 80% = SAR 2,400 deductible, while SAR 600 remains non-deductible as it relates to the exempt portion.
Legal References
- IMPLEMENTING REGULATIONS OF THE VALUE ADDED TAX LAW — Article 49 (conditions for deducting input tax and the time limit) and Article 51 (proportional deduction).
- Guideline for Amendments to the Implementing — the section on Article 50 (expenditure excluded from deduction, as amended).
For questions about your specific situation, you can ask the Saudi Arabia Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.