A later change to the value of a supply, and the matching change to input tax, under amended Article 40

Article 27 of the Common VAT Agreement allows a Taxable Person to adjust the value of the Tax imposed where, at a date later than the Supply date, the Supply is cancelled or rejected in whole or in part, the Supply value is reduced, or the Consideration is not collected in whole or in part in accordance with each Member State's bad-debt conditions. Article 40 of the Implementing Regulations sets out the Saudi rules. Paragraphs (3), (10) and (11) were amended by ZATCA Board Resolution No. (01-06-24), published in the Official Gazette on 18 April 2025 and effective from the date of publication.

When the value of a supply is adjusted

Article 40(1) provides that the value of a Taxable Supply by a Taxable Person is adjusted where:

• the Supply is cancelled or terminated after it has taken place or been treated as taking place, in whole or in part;
• there is a material change or alteration to the nature of the Supply resulting in a change in the Tax charged;
• the previously agreed Consideration is altered for any reason, including an additional discount offered after the sale; or
• the Goods or services, or part of them, are returned to the Supplier and the Supplier accepts the return.

Under Article 40(2), an adjustment to the Tax previously reported must be made where the Supplier has both issued a Tax Invoice whose amount no longer reflects the event, and accounted for an amount of Tax that does not reflect it.

The supplier's correction

Amended Article 40(3) provides that, in cases where a subsequent adjustment to the value of goods or services is required, the Taxable Person who acts as Supplier must adjust the previously due Output Tax to reflect the amount of Tax calculated on the change in Consideration.

The timing depends on the direction of the adjustment:

• an increase in Output Tax must be made in the Tax Return for the Tax Period in which the event occurred (Article 40(4)); and
• a decrease in Output Tax must be made in the Tax Return for the Tax Period in which the event occurred, or in the Tax Return for the period during which the Credit Note was issued to the Customer, whichever is later (Article 40(5)).

The matching change to the customer's input tax

Article 40(6) provides that, where an adjustment to the value of a supply is required under Paragraph (2) and the Customer is or was a Taxable Person on the date of the supply, the Customer must correct its Input Tax to reflect the Tax amount calculated on the change in Consideration in the Tax Period in which the Credit Note or Debit Note is issued. The supplier's correction of output tax and the customer's correction of input tax are therefore linked through the Credit Note or Debit Note.

Unpaid purchases: the customer's input tax reversal

Amended Article 40(10) provides that any Taxable Person who has deducted Input Tax on a Supply received, but has failed to make payment in full after a period of twelve months from the month following the month in which the supply took place, must adjust the deductible input tax by the tax calculated on the consideration that remains unpaid on that date, by including the adjustment in the tax return for the tax period of the month in which the twelve-month period ended.

The amendment changed the starting point of the twelve months, which now runs from the month following the month of supply rather than from the date of supply, and specified the return in which the adjustment is made. It also introduced an exclusion for supplies of goods under financing contracts, including finance leases, Murabaha and lease-to-own contracts, received from a taxable person legally licensed to carry out any of those activities, for which payment is made in periodic installments. The exclusion applies provided that the contract or agreement remains valid, there is no legal dispute over it, the supplier has declared the full amount of tax due on the supply in the return for the tax period related to that supply, and the Customer has a written certificate issued by the supplier to that effect.

Amended Article 40(11) provides that, where an adjustment is made under Paragraph (10) and the Taxable Person subsequently pays the Consideration, the Input Tax deduction may be increased correspondingly by including the adjustment in the tax return for the tax period in which the payment was made or any subsequent tax period.

The supplier's separate bad-debt relief

Article 40(7) to (9) contain a separate relief that allows the supplier to reduce Output Tax where Consideration is not received, subject to conditions including that at least twelve months have passed from the date of the Taxable Supply and that the customer is not a Related Person. That relief is distinct from the customer's reversal under Paragraph (10). Article 40(12) provides that all adjustments under the Article are subject to any time limits imposed by the Law or the Regulations.

Instruments relied on: Common VAT Agreement, Article 27; Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Article 40(1), (2), (4) to (9) and (12), with Article 40(3), (10) and (11) as amended by ZATCA Board Resolution No. (01-06-24) dated 17/05/1446H, published in the Official Gazette (Umm Al-Qura, issue 5082) on 18 April 2025, unofficial English translation. The Arabic text prevails.

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