ZATCA provides the option to calculate VAT on the profit margin of the sale of qualified used cars

Background

Earlier this year, ZATCA released Public Consultation on this issue of profit margin eligibility, available here at https://istitlaa.ncc.gov.sa/en/Finance/GAZT/theclassificationcarsvat/Pages/default.aspx.

What happened?

The Zakat, Tax and CUstoms Authority (ZATCA) made it possible to calculate the VAT on the profit margin of the sale of ‘qualified used cars’, without it being on the total sale value, starting from 1 July 2023.

This comes from the backdrop of a Public Consultation issued earlier this year at https://istitlaa.ncc.gov.sa/en/Finance/GAZT/theclassificationcarsvat/Pages/default.aspx, wherein ZATCA proposed to provide conditions for calculating VAT liability on the profit margin method.

As per the latest update, ZATCA stated that allowing the tax to be calculated on the ‘profit margin’ comes in as an effort to reduce the amount of VAT on ‘qualified used cars’.

ZATCA further clarified that the ‘profit margin’ method targets car gencies and showrooms registered with ZATCA for VAT purposes, and who can practice car trading activities subject to certain conditions.

ZATCA stresses that the method of calculating VAT on the profit margin is not mandatory, (i.e., the tax can be applied on the entire amount due according to the method currently applied.)

Further ZATCA confirmed that, in order to apply the profit margin method, certain conditions are required to be met. Amongst them, the most prominent conditions are as follows:

• The car must be classified as a ‘qualified used car’ by ZATCA;
• The car must be present, and previously used in the Kingdom; and
• The seller must be registered with ZATCA for VAT

Further, those who are licensed to practise the activity of car trade must also obtain approval from ZATCA in order to be considered qualified to use the profit margin method on qualified used cars.

What is the effect?

The effect of the application of the profit margin method is that the VAT is applied to the difference between the purchase price and the sale price (i.e., the realised profit margin), and not on the full value of consideration received.