Guideline for

Transfer of the commodities by the market trader to the financing provider In a Tawarruq agreement, when a local trader sells goods to a financial institution (the financier), this supply is subject to VAT in the KSA if the goods are located locally and delivery takes place within the KSA. If the bank's purchase of the goods is part of a Shari’ah-Compliant Financial Product, and the transfer of ownership is temporary and solely for financing purposes, and the bank (the financier) is not granted full disposal rights to the goods, then this is not considered a separate supply of goods for VAT purposes and is treated within the scope of exempt financial services. However, if it is proven that the financier has a full disposal right or that the acquisition was for the purpose of permanent retention or final consumption, then this transfer is considered a separate supply subject to VAT20. To avoid VAT, the trader must maintain evidence proving that: The transfer of goods to the financier was temporary. The transaction is within a Shari’ah-compliant financing product or as a guarantee related to financing or any other arrangement. The goods are not consumed or used by the financier. 20. Article 29, Implementing Regulations If this evidence is not available, the trader must issue a tax invoice in the taxpayer's name and calculate VAT on it. In this case, the taxpayer may not be able to deduct it as input tax because the purchase does not result in a taxable supply. Under these conditions, the transfer of Goods is also not relevant for the calculation of the proportional Input Tax deduction of the market trader. The documents on which the financing structure is based must be provided, confirming that the basic goods are not suitable for final consumption by the financier, the financee, and the end party that purchases the goods from the financee. Further guidance on the required evidence to consider a transfer of commodities within a finance product as outside the scope of KSA VAT is included in Paragraph 13.6 of this Guideline. 8.2.2 Transfer by the financier to the financee In a Murabaha agreement, the financier (financial institution) sells the commodity to the financee (customer) at a deferred price that includes: 1. The base price of the commodity (cash purchase price), 2. A financing profit (the difference between the deferred sale price and the purchase price). According to the provisions of VAT in the KSA: • The financing profit realized by the financier is considered consideration for a financial service that is exempt from tax. • The base price of the commodity is outside the scope of tax, as it does not represent an actual supply of goods for final consumption. These amounts (profit or base price) are not subject to the proportional deduction mechanism for input tax, since the proportional deduction mechanism applies only to input tax related to a taxable activity, while this transaction is either exempt (profit) or outside the scope (value of the commodity). If there are explicit fees, commissions, or commercial discounts imposed by the financial institution within the contract, these are considered supplies subject to VAT and must be taxed at the standard rate.