What is VAT Calculation Mechanism?
The VAT calculation mechanism is the step-by-step method used to determine the net VAT payable to or refundable from the tax authority. The mechanism is based on the difference between output VAT collected on sales and input VAT paid on purchases, applied to each reporting period.
How It Works
- Apply the standard VAT rate (15% in Saudi Arabia) to taxable sales to calculate output VAT.
- Add output VAT on imports of services subject to the reverse charge mechanism.
- Sum input VAT paid on qualifying purchases, supported by compliant tax invoices.
- Net VAT payable = Output VAT – Input VAT. If positive, pay ZATCA; if negative, claim a refund or carry forward.
Saudi Context
Saudi Arabia applies VAT at 15% with the standard mechanism above. ZATCA’s Fatoora e-invoicing system increasingly automates the matching of input and output VAT. Special rules apply to zero-rated exports, exempt financial services, and the reverse charge on imported services.
Example
A Saudi company has SAR 200,000 output VAT and SAR 130,000 input VAT in a quarter. Net VAT payable is SAR 70,000, paid via the Fatoora portal by the 28th of the month following the quarter-end.