KPMG: Saudi Arabia’s new sugary drinks tax won’t impact businesses, investments in long term

The imposition of 50% excise tax on Sugar Sweetened Beverages (SSBs) is one of the most far-reaching expansions of excise taxes to date in Saudi Arabia and will only have a short-term impact on the FMCG supply chain including manufacturers, wholesalers, retailers and the hospitality industry, according to Nick Soverall, Head of Indirect Tax at KPMG in Saudi Arabia.

With effect from December 1, 2019, excise tax in the Kingdom was extended to include SSBs such as certain types of manufactured juices and beverages. Total taxes on goods and services, as projected by the Saudi Arabia’s budget 2020, stand at SAR 142 billion, 0.8% higher than the 2019 estimates, supported by expected economic recovery and the implementation of the SSB tax.

“The new SSB tax will affect consumption and production in the short- to medium-term due to the lower consumption of sweetened beverages,” he said, adding that effects on customer behavior are expected to stabilize over time, as manufacturers may switch production to different beverages.

Furthermore, KPMG expects some of the entities specialized in the production and distribution of SSBs may face difficulties in classifying products for excise purposes.

A sweetened beverage has been classified by the General Authority of Zakat and Tax (GAZT) as “any product containing any type of sugar or other sweeteners ‎produced for the purposes of drinking as a beverage whether ready for drinking, or as concentrate ‎powders, gel extracts or any form that can be converted into a drink’ with the exception of certain 100% fruit or vegetable juices and milk and dairy products”.

"As the definition is kept rather wide and generic, there are some potential issues faced by the industry in terms of product classification for tax excise purposes," said Soverall. GAZT is expected to publish a list of products that will be included in the excise regime to provide more clarity.

Although there is a possibility of investment in the beverages sector being impacted in the short term following the imposition of SSB tax, the KPMG executive said investment levels will remain in line with normal market growth over time. 

That said, companies are likely to face difficulties in terms of product classification, the transitional calculations for goods on hand, updating systems and identifying the correct retail price on which to calculate the excise tax. "Consequently, cash flow could be affected," Soverall stated.

The first submission deadline being January 15, 2020, making it urgent to bring clarity to the changes in compliance. Different categories of companies may require support: producers, importers, wholesalers and retailers. 

As compliance is not straightforward and product classification leaves room for discussion, Soverall said that KPMG can support companies with rulings to get further clarity from GAZT and to request additional information in disputable cases. 

Moreover, alignment may be necessary between GAZT regulations, Saudi Customs and excise taxation regimes in the region – especially for importers. For producers, support is likely to be required for classification, quantification and recalculation of volumes, or to identify retail prices that are in line with GAZT requirements. 

“We can provide support regarding the procedures for exporting excisable goods, moving excisable goods within the country or cases where excise tax payments are exempted,” Soverall concluded.