1.1. IMPLEMENTING A VALUE ADDED TAX (“VAT”) SYSTEM IN THE KINGDOM OF SAUDI ARABIA (“KSA”)

The Unified VAT Agreement for the Cooperation Council for the Unified Arab States of the Gulf (the “VAT Agreement”) was approved by the KSA by Royal Decree No. M/51, dated 3/4/1438 H. Pursuant to the provisions of the Unified VAT Agreement, the KSA issued the VAT Law under Royal Decree No. M/113 dated 2/11/1438 H (the “VAT Law”) and its corresponding Implementing Regulations were subsequently issued by the Board of Directors of the General Authority of Zakat and Tax (“GAZT”) by Resolution No. 3839 dated 14/12/1438 H (the “Implementing Regulations”).

 1.2. GENERAL AUTHORITY OF ZAKAT AND TAX GAZT

Also referred to as “the Authority” herein, is the authority in charge of the implementation and administration of VAT (which may be referred to hereinafter as “the tax”) in KSA. In addition to the registration and deregistration of taxable persons for VAT, the administration of VAT return filing and VAT refunds, and undertaking audits and field visits, GAZT also has the power to levy penalties for noncompliance with legal provisions relating to VAT.

 1.3. WHAT IS VALUE ADDED TAX?

VAT is an indirect tax which is imposed on the importation and supply of goods and services, with certain exceptions. VAT is imposed in more than 160 countries around the world. VAT is a tax on consumption that is paid and collected at every stage of the supply chain, starting from when a manufacturer purchases raw materials until a retailer sells the end-product to a consumer. Unlike other taxes, persons registered for VAT will both: • Collect VAT from their customers equal to a specified percentage of each eligible sale; and • Pay VAT to their suppliers, if any, from whom they have received the goods or services, equal to a specified percentage of each eligible purchase When taxable persons sell a good or service, a 5% VAT charge – assuming a standard case – is assessed and added to the final sales price. The taxable persons will account for that 5% that they have collected from all eligible sales separately from its revenue in order to later remit a portion of it to the Authority. The VAT taxable persons collect on their sales is called Output VAT. The same will apply to purchase transactions, in that VAT will be added at the rate of 5% to purchases of goods or services made from suppliers registered for VAT (on the assumption that the basic rate applies to those supplies). The VAT a business pays to its suppliers is called Input VAT.

2.3. CALCULATING THE VALUE OF TAXABLE SUPPLIES

For VAT registration purposes, the total value of Taxable Supplies is calculated across a twelve month period, using either a retrospective or prospective test. Retrospective Test The value of taxable supplies is total value of supplies made by the Taxable Person at the end of any month plus the previous eleven months. Prospective Test The value of taxable supplies is the total value of supplies expected to be made by the Taxable Person within the following twelve months. Most businesses are expected to become required to register on the basis of the retrospective test. The prospective test is intended to apply in cases where turnover is clearly expected to exceed the mandatory registration threshold. The total value of taxable supplies includes all supplies of goods and services made by the person as supplier, which are subject to a 5% or a 0% rate of tax (where supplied by a VAT registered person).

(1) Article 79(9), Transitional provisions, Implementing Regulations 8 VAT General Guideline Version 1 The standard method to calculate the value of a Supply is “the value of Consideration less the Tax”, that is, the VAT-exclusive price paid or payable for the supply.

(2) The total value of taxable supplies also includes: • Nominal supplies. A nominal supply does not result from an actual supply of goods or services to another person, but is instead deemed for VAT purposes to be a taxable supply – as a result of an event where a taxable person uses or provides goods or services in a certain way (for example, supplying goods or services for no consideration)

(3) • Receipt of reverse charge supplies. In cases where a Taxable Person receives a supply of taxable Goods or services in the KSA from a non-resident supplier, that person is deemed to make a supply to himself

(4) with VAT due under the Reverse Charge Mechanism • After a GAZT order announces the full implementation of VAT in the GCC and the introduction of the Electronic Services System, intra-GCC supplies made from KSA to a VAT-registered person in another GCC State will not be subject to KSA VAT but will count towards the total value of taxable supplies.

(5) See Section 9 on international trade for more details The total value of taxable supplies does not include: • Exempt supplies – such as exempt financial services or residential rental which qualifies for VAT exemption; • Supplies taking place outside the scope of VAT in the KSA;(6) or • Revenues on sales of capital assets – a capital asset is defined as an asset allocated for long-term business use(7)