VAT between companies in Saudi Arabia: Practical steps to settle invoices and avoid errors

When dealing with another company in any industrial or commercial sector, many entrepreneurs think the tax they pay or receive is just a number on the invoice and does not need detail. The reality is that value added tax (VAT) in Saudi Arabia is subject to specific rules, otherwise you will face issues in the tax return or even fines.

First: When is VAT applied to B2B transactions?

The law imposes VAT on all goods and services transferred within the Kingdom, unless expressly exempted. In transactions between companies (B2B), the principle remains the same: if the recipient is registered in the Zakat, Tax and Customs Authority (ZATCA) system and is entitled to reclaim the tax, the invoice must show VAT at 15%.

There are few exceptions, such as exports or certain technical services that are exempt under the regulations. Therefore, before any transaction, ensure both parties are registered in the tax system.

Second: How to calculate VAT on the invoice

The basic step is to determine the tax base (price before tax) then apply the 15% rate. The formula is simple:

• VAT amount = original price × 15 ÷ 100
• Final total = original price + VAT amount

However, in B2B invoices, other elements may affect the tax base, such as tiered discounts or additional service fees.

Practical example: Raw materials supplier

Company “A” supplies Company “B” with a quantity of steel worth 250,000 SAR. The contract includes a trade discount of 5% if payment is made within 10 days. VAT calculation is as follows:

• Original price = 250,000 SAR
• Trade discount = 250,000 × 5 ÷ 100 = 12,500 SAR
• Price after discount = 250,000 – 12,500 = 237,500 SAR
• VAT = 237,500 × 15 ÷ 100 = 35,625 SAR
• Amount due = 237,500 + 35,625 = 273,125 SAR

This way, the invoice is clear to both parties, and Company “B” can claim VAT refund in its tax return.

Practical example: Maintenance services company

Company “C” provides monthly maintenance services to Factory “D” worth 40,000 SAR, and adds a fixed fee to cover fuel costs of 5,000 SAR. There are no discounts. VAT calculation:

• Total value before tax = 40,000 + 5,000 = 45,000 SAR
• VAT = 45,000 × 15 ÷ 100 = 6,750 SAR
• Amount due = 45,000 + 6,750 = 51,750 SAR

In this case, the invoice must clearly show the line item “value of services” and “fuel fee” to avoid misinterpreting any part of the tax base.

Third: What is the difference between deductible and non-deductible VAT?

In the ZATCA system, every registered company pays output tax (collected) and reclaims input tax (paid on its purchases). The difference between them is recorded as net VAT in the return. If input tax exceeds output tax, the company receives a positive balance refunded to its bank account.

What you must note is that you cannot deduct VAT on exempt goods (such as exports), so if an invoice includes both an exempt part and a taxable part, you must split the tax base accordingly.

Fourth: Steps to remit VAT in the Zakat, Tax and Customs Authority (ZATCA) system

1. Verify invoice accuracy: Ensure the supplier’s tax number is present, full customer details are included, and the VAT amount is clear.

2. Record the invoice in accounting software that supports electronic invoicing. Modern systems transfer data automatically to the ZATCA platform.

3. Prepare the monthly tax return: Gather all issued and received invoices, and calculate net VAT.

4. Submit the return via the electronic portal by the last day of the month following the transactions.

5. Pay any dues if net VAT is positive, or await refund of the balance if negative.

Fifth: Common mistakes and how to avoid them

• Entering the VAT rate incorrectly (e.g. 14% instead of 15%).
• Omitting discounts from the invoice, leading to VAT being calculated on a higher value than actual.
• Issuing an invoice without the customer’s tax number, which prevents VAT reclaim.
• Mixing exempt goods and taxable goods in the same invoice.
• Delaying VAT payment, exposing the company to administrative fines.

Each of these mistakes can be easily corrected if internal review procedures are in place before issuing the final invoice.

Sixth: Tips to reduce the VAT burden on companies

• Use accounting software that supports electronic invoicing to reduce manual errors.

• Keep an electronic copy of every invoice and ensure it meets technical requirements (XML).

• Regularly review contracts to identify any clauses that may qualify for exemption or allow adjustment of the tax rate.

• Where discounts or promotional offers exist, calculate VAT after applying the discount to ensure accuracy.

• Train procurement and accounting staff on VAT concepts for B2B transactions, especially when dealing with suppliers from other countries.

Conclusion

Calculating VAT on B2B transactions is not complicated if you follow clear steps: determine the tax base, apply the rate, and maintain proper documentation in the ZATCA system. Paying attention to small details such as discounts and tax numbers can change the VAT amount from hundreds to thousands of riyals. Therefore, always review each invoice before sending, and use digital tools to avoid recurring errors.

In this way, you will achieve full compliance with the law and benefit from VAT refunds safely, which positively impacts company liquidity and reputation with trading partners.