Executive Summary

On 15 May 2019, the General Authority of Zakat and Tax (GAZT) approved an amendment to the excise tax Executive Regulations. The amendments expand the scope of excise taxes in Saudi Arabia to include sweetened beverages, electronic smoking appliances, and liquids used in those devices. The changes will impact importers and producers of affected, newly excisable goods, and those holding inventory of those goods at the effective date of the change.

In a further announcement, on 19 May 2019, the Saudi Customs Authority released Official Circular 263/21, lifting the ban at all customs points on the importation of shisha (water pipes for smoking) and related tobacco, electronic cigarettes and liquids consumed in such electronic cigarettes. The circular further outlined that customs duty and excise tax will be levied on those items.

Detailed discussion

Background

The Excise Tax Agreement of the States of the Gulf Cooperation Council indicates that excise tax “…shall be imposed on goods that are deemed harmful to human health and to the environment, and on luxury goods, according to a list of goods and corresponding tax rates as determined by the Ministerial Committee.” The Excise Tax Implementing Regulations currently apply the tax in Saudi Arabia as follows:

• Tobacco products – 100%
• Soft Drinks – 50%
• Energy Drinks – 100%

Under the announced changes, the following items will become excisable goods:

• Sweetened beverages – 50%
• Electronic smoking appliances and tools – 100%
• Liquids used in such smoking appliances and tools – 100%

The effect of the changes will be to align the excise tax treatment of tobacco and other smoking products and equivalents, and to tax sweetened beverages in the same manner as soft drinks.

Detailed definitions of the products intended by the GAZT to be subject to excise tax have yet to be produced, and will be essential to ensure that product classification is clear and unambiguous.

Transitional and administrative issues

The effective date of the change is yet to be announced by the authorities, but is expected to be 1 July 2019. In addition to affecting newly excisable goods imported or produced on or after the effective date, any excisable stock held under customs or excise tax suspension or by a government entity at the effective date will be subject to excise tax, if the total retail value of the excisable stock exceeds SAR60,000. Affected taxpayers will be required to determine the value of the excise tax payable, and file the relevant declaration within 45 days from the effective date.

Registration requirements

Any persons importing, producing, or holding excisable goods under a customs or excise duty suspension arrangement will be required to apply for registration to the GAZT within 30 days from the effective date. The GAZT will review the registration application within 14 days from the date of submission.

Digital tax scheme

The proposed changes include the launch of a digital tax stamp (DTS) scheme for excisable goods. The DTS scheme will require paper tax stamps and digital codes on the goods to confirm and ensure that all due excise tax has been paid. This scheme will be initially applicable to all tobacco products offered for consumption in Saudi Arabia from 23 August 2019, and gradually phased to other excisable products.

Implications

The announced expansion in the scope of excise tax will impact all businesses importing, producing or holding newly excisable products at the effective date of the change. Those businesses will be required to consider their requirements to register, charge and account for the tax to the GAZT.

Businesses currently registered for excise tax in respect of soft drinks, energy drinks and tobacco will also be required to adapt to the expansion of the scope of the tax, where they are also importing, producing or distributing newly excisable goods.

Affected businesses will be required to carefully consider the following compliance and commercial issues, in response to the announcement, in advance of the effective date:

• Excise treatment of products imported, produced or distributed
• Registration and reporting obligations
• Changes required to systems to monitor and report tax due
• Inventory subject to excise tax at the effective date of the changes
• Inventory held under suspension
• Pricing, and impact on demand, and corresponding revenue and profit
• Commercial and contractual arrangements with customers, factoring in the additional tax

We expect the GAZT will release guidance on these issues in due course.

For additional information with respect to this Alert, please contact the following:

Ernst & Young and Co (Certified Public Accountants), Riyadh

• Asim Sheikh | asim.sheikh@sa.ey.com
• Stuart Halstead | stuart.halstead@sa.ey.com
• Altaf Sarangi | altaf.sarangi@sa.ey.com
• Mohammed Bilal Akram | mohammedbilal.akram@sa.ey.com
• George Campbell | george.campbell@sa.ey.com

Ernst & Young and Co (Certified Public Accountants), Al-Khobar

• Sanjeev Fernandez | sanjeev.fernandez@sa.ey.com

Ernst & Young and Co (Certified Public Accountants), Jeddah

• Danny Vu | danny.vu@sa.ey.com

Ernst & Young Middle East, Dubai

• Robert Dalla Costa | robert.c.costa@ae.ey.com
• Ramy Rass | ramy.rass@ae.ey.com
• David Stevens | david.stevens@ae.ey.com

EY Consulting LLC, Doha

• Filip Van Driessche | filip.vandriessche@qa.ey.com

Ernst & Young LLP (United States), Middle East Tax Desk, New York

• Asmaa Ali | asmaa.ali1@ey.com 

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