Guideline for

Explicit Fees, Commissions, or Commercial Discounts Do Not Qualify for VAT Exemption VAT is applied to Financial Services supplied in the KSA by a registered Taxable Person, where the consideration payable in respect of the service is by way of an explicit fee, commission, or commercial discount (not implicit)13. An explicit fee or commission is an identifiable amount charged to the Customer in respect of the service, whether as a discrete monetary value or a percentage of a fixed amount. A commercial discount is any identifiable amount that is discounted for another due amount. This means that the fee charged for the financial service provided, which has an explicitly defined value, is subject to VAT. For example, an intermediary Financial Service, whereby the Supplier is not acting as the principal for the Supply of the financial product, but his activities, which are limited to arranging or mediating the transaction, are made for an explicit fee or a commission, as the intermediary does not bear the financial risk of providing finance. 4.1.3 Provision of taxable and exempt Financial Services Financial Service Suppliers may provide both taxable and exempt Financial Services as part of the same overall product. These should be treated accordingly under the differing interpretations. This is subject to specific rules for Shari’ah-Compliant Financial Products, which simulate non-Shari’ah-Compliant Financial Products. Example (1): Al Faisal Bank is a KSA bank that provides a mortgage loan to a natural person (the Customer) resident in the KSA. The loan is not a Shari’ah-Compliant Financial Product. The Customer will pay interest on this loan to Al Faisal Bank based on the rates offered by the bank, but the bank will also charge an annual fee of SAR 220 to the Customer for the administration of the loan. The interest received by the bank is exempt from VAT, as the bank earns an implicit margin concerning a Financial Service. The administration fee is subject to VAT at the standard 15% rate, as the bank charges an explicit fee for its services. The bank must charge VAT of SAR 33 on the annual fee. 13. Article 29(2), Implementing Regulations. Example (2): A Saudi resident foreign currency provider charges a commission of 2% to a KSA resident natural person (the Customer) for converting SAR 2,000 to Euro. It also makes a margin by offering the Customer a less favorable exchange rate than the currency provider can obtain. The commission of 2% (SAR 40) is explicit and is subject to VAT. The margin earned on the differential of rates is an implicit margin and thus exempt from VAT. This summary table outlines the broad principles discussed in further detail and at the product level throughout the Guideline. VAT exempt Financial Services where the consideration payable in respect of the services by way of an implicit margin or spread (including but not limited to interest or another implicit margin) Equivalent income earned under Islamic finance products Issue or transfer of a debt security or equity security Providing life insurance or reinsurance contracts Taxable at 15% All other Financial Services provided in the KSA, where the consideration payable in respect of the services is by way of fees, commissions, or commercial discount All financial intermediary fees May be zero-rated or outside the scope of KSA VAT Financial Services provided to a recipient resident outside the KSA14 2%fee SAR 40 explicit fee, subject to SAR 6 VAT Exchange rate margin Implicit margin earned on the rate VAT exempt 14. Financial services can only be zero-rated in specified cases. We refer to Section 7 of the Financial Services Sector Industry Guideline dated April 2018, version 1, for further detail on Financial Services that are considered as zero- rated or outside the scope of VAT. 4.2 Application of VAT exemption – specific product types