Saudi Arabia’s income tax rules are governed by the Income Tax Law (Tax Law), which came into force in 2004. The Tax Law is supplemented by implementing regulations (by-laws). Zakat is governed by the implementing regulations for zakat collection (zakat regulations). The Ministry of Finance issues ministerial resolutions concerning aspects of tax and zakat, and the General Authority of Zakat and Tax (GAZT) regularly issues circulars and responses to frequently asked questions containing its interpretation or position on regulations.
The GAZT generally takes a substance-over-form approach in dealing with tax matters as it is generally favourable for them. The GAZT often scrutinises transactions and challenges taxpayers if they view transactions were motivated by non-commercial tax reasons. In some cases, the GAZT takes positions based on its own interpretations of the laws and regulations; for example, the virtual permanent establishment (PE) concept.
Saudi Arabia’s direct taxation system includes income tax, withholding tax and zakat. Whether Saudi resident companies are subject to income tax or zakat – or both – generally depends on the nationality of their owners:
• Resident companies that are wholly owned, either directly or indirectly, by Saudi/GCC nationals ( residents from Bahrain, Kuwait, Oman, Qatar and the UAE) – with no non-GCC entity in the ownership structure – are subject only to zakat.
• Resident companies that are wholly owned, either directly or indirectly, by non-Saudi/GCC nationals are subject to income tax.
• Resident companies that are jointly owned by mixed companies (companies owned by Saudi/ GCC and foreign nationals) are subject to zakat in proportion to the Saudi/GCC ownership and to income tax in proportion to the foreign ownership. Exceptions to these rules include:
• Resident companies listed on the Saudi Stock Exchange (Tadawul) are generally only subject to zakat;
• Resident companies engaged in natural gas investment, and oil and hydrocarbon production are only subject to income tax; and
• Resident companies are subject to income tax to the extent their shares are owned by persons engaged in oil and hydrocarbons production. All non-resident entities and companies, regardless of their ownership structure, which conduct business in Saudi Arabia through a PE, or which derive income from sources within the country, are subject to income tax.
Non-residents that provide services in Saudi Arabia without having a PE or branch are subject to withholding tax.
Persons Subject to Income Tax
The following persons are subject to income tax:
• Resident companies that are not listed on the Tadawul, to the extent they are owned by nonSaudi/GCC (foreign) nationals;
• Resident companies engaged in natural gas investment and oil and hydrocarbons production;
• Resident companies to the extent their shares are owned by persons engaged in oil and hydrocarbons production;
• All non-resident entities, regardless of their ownership structure, that conduct business in Saudi Arabia through a PE; and
• All non-resident entities that derive taxable income from sources in the country. For the purposes of determining the ownership of a resident company, indirect ownership is traced up to the second level, for example, the direct investee company and its parent company. The restriction on the tracing of indirect ownership was enacted by Ministerial Resolution No. 1727 on February 10, 2018. However, based on discussions with the GAZT and their practices, they may not restrict the tracing of indirect ownership up to the second level. If at any point the shareholding structure exits the GCC, they may take this into account for tax purposes.
A natural person is considered a Saudi resident if one of the following conditions is met:
• The person has a permanent place of residence in Saudi Arabia and resides in the country for at least 30 days in a tax year; or
• The person resides in Saudi Arabia for at least 183 days in a tax year without having a permanent place of residence. A company is considered resident in Saudi Arabia if one of the following conditions is met:
• It is formed in accordance with the Saudi Arabian Companies Regulations; or
• Its central management is located in Saudi Arabia.
Income Tax Rates
The general income tax rate is 20%. However, income from oil and hydrocarbons production is subject to tax at rates ranging from 50% to 85% depending on the amount of investment.
Non-residents that provide services in Saudi Arabia without having a PE or branch are subject to withholding tax ranging from 5% to 20% depending on the nature of services.
Income Subject to Tax
Income subject to tax is gross income and includes income, profits, gains of any type and any form of payment arising from carrying out activity. Gross income includes capital gains and incidental income but excludes certain exempt income. The Tax Law provides that income derived from the following types of activities and sources is considered taxable in Saudi Arabia:
• Any activity carried out in Saudi Arabia;
• Immovable property located in Saudi Arabia;
• Disposal of shares in a company, the property of which consists mainly – directly or indirectly – of shares in immovable properties in Saudi Arabia;
• Disposal of shares in a resident company;
• Lease of moveable property used in Saudi Arabia;
• Sale or licence for use of industrial or intellectual property used in Saudi Arabia;
• Dividends, management and directors’ fees paid by resident company;
• Any payments made by a resident company to its head office or to an affiliated company in respect of services;
• Amounts paid by a resident for services performed wholly or partly in Saudi Arabia;
• Exploitation of natural resources in Saudi Arabia;
• Income derived through a PE of a non-resident located in Saudi Arabia;
• Interest charge and insurance/reinsurance premium with certain conditions; and
• Income from technical or consultancy services rendered to a resident person in Saudi Arabia or related to an activity carried out in the Kingdom.
Tax exempt income includes:
• Capital gains realised from the disposal of securities listed on the Saudi Arabian stock, regardless of whether the disposal was executed through a stock market inside or outside of Saudi Arabia, or through any other means; subject to the conditions set out below: * Disposal is performed in accordance with the Capital Market Law in Saudi Arabia; or * If the securities disposed of did not exist before July 30, 2014.
• Dividends, in cash or kind, from a resident company, or a non-resident company, are exempt provided the ownership in the investee company is at least 10% for at least one year before the distribution of the dividend.
Group Relief for Asset Transfers
No gain or loss is calculated on the transfer of assets between wholly owned group companies – directly or indirectly by the same parent company – provided the asset remains within the group for at least two years after the transfer. Where this relief is claimed, the transfer is considered as made at book value for tax purposes. The wording of the law is broad enough to take a position that covers all wholly owned groups and not only groups or entities within Saudi Arabia.
Capital Gains Tax
A non-resident person with no PE in Saudi Arabia will be subject to capital gains tax (CGT) on capital gains derived from the disposal of fixed and traded assets, or from the disposal of shares in a resident company (unless the sale relates to listed securities that qualify for exemption).
The non-resident seller is required to file the CGT return and pay due tax at the rate of 20%. Any capital gains made by a Saudi resident company is subject to zakat/tax, on the basis of year-end results.
The non-resident seller is required to inform the GAZT of the sale transaction and pay the due tax on the resulting capital gains within 60 days of the sale transaction date. The seller is primarily responsible for paying CGT; however, in case of failure, the seller and purchaser are jointly liable, with the seller to pay any amount that is due to the GAZT as a result of a sale transaction. Delay in settling the required CGT will result in late filing penalties and delay fines.
Capital gains realised by a resident taxpayer is added to the tax base and subject to tax on the overall position for the year.
Interest Expense Limitation
The Tax Law does not stipulate any minimum debt-equity ratio, and an entity can be formed with the minimum required capital and funded by debt. However, deductions for interest expense incurred during a tax year cannot be the entities’ total interest income plus 50% of taxable income before interest income and interest expense. Any disallowed interest as a result of this limitation is a permanent loss. The interest expense limitation is not applicable to banks. Interest paid by a branch to its head office is not considered a deductible expense except in the case of a branch of a bank.
Tax losses can be carried forward indefinitely by a capital company, subject to satisfaction of the loss carry-forward requirements. The amount of carried forward tax losses that can be deducted in a year is limited to 25% of the taxable income for that year.
The following restrictions apply to the deductibility of tax losses:
• Losses from natural gas investment cannot be deducted from the oil and hydrocarbons tax base; and
• Losses from oil and hydrocarbons activities cannot be deducted from the tax base of entities engaged collectively in the production of oil and hydrocarbons, and natural gas investment. Prior to January 1, 2018 tax losses could only be carried forward by a company if there had not been a change of 50% or more in its underlying ownership or control. After January 1, 2018 amendments provide that a capital company can carry forward tax losses even if there is 50% or more change in its underlying ownership or control, provided it continues to perform the same activities.
Accordingly, an acquisition of shares in a company will not cause the acquired company to lose the potential benefit of carried forward tax losses, provided the acquired company continues to carry on the same business. It has also been clarified that the transfer of assets between companies would not be considered as a change in ownership or control.
Taxpayers are required to make an advance payment of corporate income tax for the year in three instalments, which are due by the end of the sixth, ninth and 12th month. Each instalment of advance payment of tax is equal to 25% of tax liability of the prior period reduced by any withholding tax deducted at source during the prior period. However, the taxpayer is not required to pay advance tax if the instalment calculated is less than SR500,000 ($133,300).
If a taxpayer foresees that the current year’s taxable income will be lower than the previous year by at least 30%, the taxpayer may request the GAZT to proportionately reduce the amount of advance tax due under the second and third instalments proportionally.
Delay Fines & Penalties
The GAZT imposes delay fines if there is a delay in submitting the tax declaration and late settlement of income tax beyond the prescribed deadline, as well as penalties where there is a tax evasion.
Failure to file a tax return or payment of due amount in time results in a fine amounting to the greater of:
• 1% of the gross revenue to a maximum penalty of SR20,000 ($5332); or according to the following rates:
• 5% of the underpayment of tax if the delay is for up to 30 days after the due date;
• 10% of the underpayment of tax if the delay is more than 30 and no more than 90 days after the due date;
• 20% of the underpayment of tax if the delay is more than 90 days and no more than 365 days;
• 25% of the underpayment of tax if the delay is more than 365 days after the due date. In addition to the penalties mentioned above, 1% of underpayment of tax for each 30 days of the delay is added in the following cases:
• Delay in payment of tax payable per the return; or
• Delay in payment of tax payable per the GAZT assessment. A penalty for tax evasion is imposed at a flat rate of 25% on the additional tax assessed if a taxpayer intentionally conceals facts or information from the GAZT that would have resulted in an increase in the tax liability.
Saudi Arabia does not impose personal income taxes on wages and salaries. It should be noted that salaries, wages or any benefits paid to a shareholder, or any of their relatives or a partner, are not deductible expenses for income tax purposes.
Non-residents without a PE in Saudi Arabia are subject to withholding tax on the payments from Saudi Arabian residents and non-residents with a PE in Saudi Arabia that are sourced from the Kingdom (see table).
Saudi Arabian residents and non-residents with a PE in Saudi Arabia are required to deduct the required amount of withholding tax from payments and remit it to the GAZT. Such payers are required to file:
• Monthly withholding tax returns within 10 days of the end of the month in which the payments are made to the non-resident. Failure to settle the withholding tax results in a delay fine equal to 1% percent of the outstanding withholding tax per every 30 day delay in payment; and
• An annual withholding tax return within 120 days of the end of the fiscal year. For proprietorships, the annual withholding tax return should be filed within 60 days of the end of the fiscal year. For transactions with related parties, the date the transaction is recorded as the date of payment if transactions are settled through account rather than making payments.
The GAZT may request information relating to payments made to non-residents at the time of assessment. Records, such as copies of contracts and other supporting documents in relation to payments subject to withholding tax, should be maintained for a minimum of 10 years after payment. If a payment is still under review by the GAZT, the records relating to the payment should be maintained until the review is finalised or a final decision is issued by the Appeal Committee.
Zakat is an obligatory payment required from Muslims according to sharia law and forms one of the five pillars of Islam.
In most Muslims countries the payment of zakat has been left to the individual; however, in Saudi Arabia the collection of zakat is governed by regulations. The following persons who are engaged in a business activity are required by regulations to pay zakat to the GAZT:
• Saudi and GCC nationals residing in Saudi Arabia;
• Resident companies to the extent they are owned by Saudi and/or GCC nationals (with no non-GCC entity in the ownership structure);
• Resident companies listed on the Tadawul (except to the extent of non-resident founding shareholders or their successors and shares owned by Saudi government departments and organisations); and
• PEs of non-resident Saudi and GCC nationals if any two of the three conditions laid down in the regulations are met, i.e., the board of directors holds regular meetings in Saudi Arabia; or executive decisions are made in Saudi Arabia; or non-resident PE earns more than 50% of its revenue from Saudi Arabia. Resident companies are not subject to zakat to the extent they are owned by resident and non-resident persons engaged in the production of oil and hydrocarbons.
For the purposes of determining the ownership of a resident company, indirect ownership is traced up to the second level; for example, the direct investee company and its parent company. The restriction on the tracing of indirect ownership was enacted by Ministerial Resolution No. 1727 on February 10, 2018. However, based on discussion with the GAZT and their practices, they may not restrict the tracing of indirect ownership up to the second level. If at any point the shareholding structure exits the GCC, they may take this into account for tax purposes.
Zakat Base & Rate
On March 14, 2019 the Minister of Finance issued new zakat regulations replacing previous zakat regulations. The new regulations are effective for fiscal years beginning on or after January 1, 2019. Some of the key observations include the following:
• Zakat is imposed on the higher of the zakat base or the zakat adjusted income.
• The zakat base is equal to the sum of equity and loans that are outstanding for more than 354 days, reduced by allowable deductions, which include net fixed assets and certain investments.
• Additions to the zakat base of long-term loans and similar balances have restricted to long-term assets deductible for zakat purposes.
• Limited relief has been granted in relation to real estate and insurance/reinsurance businesses in the form of deductions of long-term projects under development (certain conditions apply) and statutory deposits.
• The lower of accumulated brought forward losses as per audited financial statements or the GAZT’s assessment is allowed.
• Zakat on the zakat base is imposed at the rate of 2.5%. However, if zakat is payable on zakat adjusted profit, the rate is 2.5% if the zakat year is the lunar year (354 days) or 2.6% if the zakat year is the Gregorian calendar year (365 days).
• Appeal procedures have also been updated requiring a zakat payer to pay the zakat liability on the undisputed amounts. In addition, for an appeal to be accepted, a zakat payer is required to pay a minimum of 10% to maximum of 25% of the assessed zakat liability or provide bank guarantee equal to 50% of assessed zakat liability.
• An adjustment to the value of transaction between related parties would be made if the transaction is not at arm’s length. In early March 2020 the GAZT published a draft zakat law for consultation purposes. Public consultation was invited until March 31. The key change envisaged in the law is the imposition of financial penalties for late registration, late filing and payment of zakat. If the draft regulations are approved and issued in 2020, a levy of financial penalties will be effective from January 1, 2021.
Zakat & Tax Return Filing
Zakat and taxpayers are required to file an annual zakat/tax return in Arabic within 120 days of the end of the financial year of the company. In the case of a foreign shareholding, a tax return is also required to be certified by Saudi-certified public accountant. Under the current Tax Law, extensions are not granted – with the exception on an exception for Covid-19.
A zakat/tax return is required to be supported by audited financial statements, the social insurance payment certificate, break-up of purchases made during the period, annual withholding tax and other detailed account of affairs.
The GAZT implemented the online electronic filing system (ERAD) in 2016. As per the ERAD system, it is mandatory for all zakat and taxpayers, including mixed companies and fully owned foreign companies to submit their zakat/tax returns electronically. The online filing system requires all types of zakat/ taxpayers to submit their annual corporate tax returns, zakat returns, withholding tax returns and other statutory declarations through ERAD.
Recently, the GAZT updated the zakat/tax form to reduce the disclosure requirements applicable to the taxpayers, e.g., removal of vendor-wise disclosure of property rentals required in the previous form, which is now replaced by a requirement to disclose the total amount of rental expense only.
Additionally, transfer pricing by-laws have been introduced in Saudi Arabia effective for tax periods ended December 31, 2018 and onwards. These by-laws require a Disclosure Form for Controlled Transaction (DFCT) to be submitted along with the annual tax return.
The DFCT has been incorporated in the GAZT portal as part of the tax return. The form requires a taxpayer to disclose, among other things, the details of controlled transactions entered into by a taxpayer during the year and the transfer pricing method adopted by taxpayers to determine the value of such transactions.
Assessment & Statute of Limitation
A final assessment is raised by the GAZT after a full and thorough review of the declaration submitted to the GAZT. This review may result in further details being requested by the GAZT before raising an assessment.
The Tax Law, however, provides that a declaration will be considered as finalised/accepted as filed by the taxpayer in the event that five years have lapsed from the date of filing the declaration, without the GAZT requesting any additional information or raising an assessment. The Tax Law empowers the GAZT to:
• Raise an additional tax assessment within five years of the statutory filing deadline to rectify errors in the application of regulations;
• Raise an additional tax assessment within 10 years of the statutory filing deadline correcting material errors in the declaration or the assessment; and
• Raise an additional assessment at any time with the taxpayer’s consent.
Article 66 and 67 of the Income Tax Law provide for the constitution, jurisdiction and functions of appeal committees. In July 2017 Royal Decree No. M/113 was issued to amend Article 67 regarding such appeal committees. As per the amendment, zakat/taxpayers will not have the option to file an appeal before the Board of Grievances (BoG). Recently, rules for dispute resolution committees have been issued, which have classified the appeal procedures to be followed by the taxpayers.
For the cases already filed before BoG, if BoG has issued the judgement that it does not have jurisdiction over the case after the changes in Article 66 and 67, the taxpayer may file an appeal before the General Secretariat of Tax Committees (GSTC) within 60 days from the date of BoG’s decisions. However, if a BoG decision was issued before the issuance of these rules, the taxpayer may file an appeal before GSTC within 60 days of the effective date of these rules for tax disputes and violation resolution committees.
These rules also clarified that, according to the new appeal procedures, a taxpayer will have a right to file an appeal before the GAZT within 60 days of an assessment raised by the GAZT. The taxpayer will have the right to file an appeal with the Tax Violation and Dispute Resolution Committee (TVDRC) within 30 days in the event of the GAZT’s rejection of appeal or lapse of 90 days with no response from the GAZT, whichever comes first. In addition to this, the zakat/ taxpayer may opt to approach the settlement committee for settling disputes with the GAZT.
In the event of an unfavourable outcome from the settlement committee, the TVDRC’s unfavourable decision, or a lapse of 60 days (which may be extended to maximum of 60 days) with no response from the TVDRC, a taxpayer will have a right to file an appeal within 30 days with the Appellate Committee of Tax Violation and Dispute Resolution (ACTVDR).
In the case of an unfavourable decision from the ACTVDR, the taxpayer will have a right to file a review appeal before ACTVDR within 30 days of the decision.
A PE is defined as a permanent place of the non-resident’s activity through which it carries out business, in full or in part, including business carried out through an agent. The following are considered PEs:
• Construction sites, assembly facilities, and the exercise of supervisory activities connected therewith;
• Installations, sites used for surveying natural resources, drilling equipment, ships used for surveying for natural resources as well as the exercise of supervisory activities connected therewith;
• A fixed base where a non-resident natural person carries out business;
• A branch of a non-resident company licensed to carry out business in the Kingdom. A dependent agent mentioned above is defined in the by-laws as someone who has any of the following powers:
• To negotiate on behalf of the non-resident;
• To conclude contracts on behalf of the non-resident;
• Maintains stock of goods owned by the non-resident on hand in Saudi Arabia to supply customers on behalf of the non-resident;
• An insurance/reinsurance agent (with or without powers to negotiate); or
• A place from which a non-resident carries out insurance and/or reinsurance activity in the Kingdom through an agent is considered a PE of the non-resident even though the agent is not authorised to negotiate and conclude contracts on behalf of the non-resident. A place is not considered a PE of a non-resident in Saudi Arabia if used in the Kingdom only for following:
• Storing, displaying or delivering goods or products belonging to the non-resident;
• Keeping a stock of goods or products belonging to the non-resident for the purpose of processing by another person;
• Purchasing goods or products for the sole purpose of collection of information for the non-resident;
• Carrying out other activities of preparatory or auxiliary nature for the interests of the non-resident. The Tax Law and the by-laws do not provide any period or threshold of onshore presence that would result in activities of non-resident entity to qualify as a PE in Saudi Arabia.
However, the GAZT has recently begun applying the concept of virtual PEs where offshore services are provided even without physical presence of a non-resident in Saudi Arabia.
Force of Attraction
The force of attraction rule envisages that when an enterprise is said to have a PE in another country, it exposes itself to taxation of income that it earns from carrying on activities in that other country, whether or not through that PE. The reason for this contention is that the Tax Law states that income is from a source in the Kingdom if it is attributable to a PE of a non-resident located in the Kingdom, including income attributable to sales in the Kingdom of goods of the same or similar kind as those sold through such a PE, and income arising from the rendering of services or the performance of other activity in the Kingdom of the same or similar nature as activity performed via such a PE.
Saudi Arabia has double tax treaties in force with Algeria, Austria, Azerbaijan, Bangladesh, Belarus, China, the Czech Republic, Egypt, Ethiopia, France, Greece, Hong Kong, Hungary, India, Ireland, Italy, Japan, Jordan, Kazakhstan, Kyrgyzstan, Luxembourg, Macedonia, Malaysia, Malta, Mexico, the Netherlands, Pakistan, Poland, Portugal, Romania, Russia, Singapore, South Africa, South Korea, Spain, Syria, Sweden, Tajikistan, Tunisia, Turkey, Turkmenistan, the UAE, Ukraine, the UK, Uzbekistan, Vietnam and Venezuela. Other treaties have also been concluded with Morocco and Switzerland, but await ratification. The expansion of Saudi Arabia’s tax treaty network (especially over the past years) is indicative of the Kingdom’s desire to increase bilateral trade with its major trading partners.
The OECD has taken up an initiative to prevent base erosion and profit sharing, i.e., international tax planning with the intention of shifting profits to low-tax or no-tax jurisdictions. Saudi Arabia has recently signed this convention, becoming the 84th country to be part of the convention to counter tax evasion.
Withholding Tax Refund/Upfront Claim
After the accession to the World Trade Organisation, the Saudi tax treaty network grew rapidly. In order to curb any misuse of treaty benefits for withholding taxes purposes, the GAZT issues its Circular No. 3228/19, dated 23-Rabi al-thani 1431H ( corresponding to May 23, 2010), which provided for the payment of withholding tax at the rates prescribed in Saudi tax regulations first and claiming the refund of overpaid taxes based on the provisions of tax treaties later.
However, the GAZT subsequently issued Circular No. 5068/16/1434, dated 30-Rajab 1434H ( corresponding to June 9, 2013), advising certain amendments in the procedure of claiming tax treaties’ benefits as provided in the previous GAZT’s Circular No. 3228/19.
Based on the GAZT’s circular later, the Saudi Arabian entity making taxable payment to a non-resident service provider can apply the provisions of effective tax treaties (i.e., not settle withholding tax on payment to non-resident parties from a treaty country or apply a reduced rate) if it complies with the following requirements:
• Reporting of all payments to non-resident parties (including those payments which are either not subject to withholding tax or subject to withholding tax at a lower rate as per the provisions of effective tax treaties) in the monthly withholding tax returns (on a prescribed format);
• Submission of a tax residency certificate issued by the tax authorities in the country where the beneficiary is residing. Such a tax residency certificate should confirm that the beneficiary is resident in that country in accordance with the provisions of Article 4 of the treaty and the amount paid is subject to tax in that country. Such forms should be on the prescribed format (Form Q7/B). The document should be attested by the Saudi embassy in the country of non-resident and the Ministry of Foreign Affairs in Saudi Arabia; and
• Submission of an undertaking from the Saudi entity that it would bear and pay any tax or fine due on non-resident payees due to incorrectness of submitted information or a computation error or misinterpretation of the provisions of tax treaty (Form Q7/C), attested by the Chamber of Commerce. The above-mentioned Circular No. 5068/16/1434 also specified that the Saudi Arabian entities that cannot comply with the above-mentioned requirements may follow the procedure provided in the previous circular, i.e., Circular No. 3228/19.
Saudi tax laws provide that a taxpayer is entitled to a refund of any overpayment made under the provisions of the Tax Law within five years of the year for which the overpayment was made.
Under the Income Tax Law, all persons (natural or legal) and government agencies are required to provide the GAZT with information pertaining to contracts with a value exceeding SR100,000 ($26,660) that they entered into with the private sector.
A zakat/taxpayer is required to report all the contracts it concludes with the private sector of a value of SR100,000 ($26,660) or more within three months of the signing of the contract. The GAZT also reserves the right to obtain data on any other contracts of less than SR100,000 ($26,660) as well or any other information relevant to tax.
Based on the amendments to the Tax Law dated September 20, 2017, the GAZT’s right to receive information now extends to the provisions of international agreements.
Since January 2018 value-added tax (VAT) has been at a single rate of 5% on the majority of goods and services. The GAZT continues to develop its capacity to administer taxes, which is crucial to ensure the key principles of taxation are adhered to and in supporting the Vision 2030 goal of economic diversification. VAT raised over SR49bn ($13.1bn) in 2018. The Kingdom now boasts 240,727 VAT taxpayers and VAT compliance reaching 90%, exceeding the GAZT’s expectations of 60-70%.
The introduction of VAT followed the implementation of excise tax in June 2017, since expanded to several new categories of goods, was followed by the introduction of transfer pricing and new zakat regulations in early 2019. The Kingdom is rapidly moving towards a fully taxed economy.
The VAT system in the Kingdom is based on the GCC Agreement, Saudi VAT Law and the Saudi Implementing Regulations. These documents outline the legal basis for determining, inter alia, the nature, location, timing and value of supplies.
Certain supplies of goods and services are zero rated or exempted from VAT to provide some relief to consumers. Examples include: the leasing of residential real estate, qualifying medicines and medical goods, export of services, qualifying financial services, educational services to Saudi nationals, etc.
Mostly, the compliance requirements for VAT taxpayers have been kept relatively straightforward, with the obligation to file monthly returns, or quarterly if the turnover is below SR40m ($10.7m), by end of the following month of the tax period. The VAT return contains summary-level numbers of turnover and VAT on output and input transactions.
That said, taxpayers that operate in complex industries – for example, retail and corporate banking, asset management, insurance and telecommunications – can find the reporting requirements extremely challenging.
To address this concern, the GAZT has published a number of guides on topics such as Islamic finance, financial services, investment funds, real estate investment and financing, professional services, health care, the digital economy, economic activity and real estate. Private rulings have also been issued to the taxpayers that have applied for clarifications.
Since 2019 the GAZT has been very active in terms of conducting audits, issuing assessments for contraventions and questioning the approach adopted by taxpayers in terms of specific transactions. This has led to an increased number of disputes with the GAZT. Taking into consideration that the tax courts have yet to hear any VAT cases, taxpayers still face some uncertainty, even if they are confident in their tax position.
February 2020 marked the beginning of a VAT compliance cycle for the year. To ensure accurate compliance in the new year, taxpayers must consider the legislative provisions that took effect in 2019, such as amendments to Article 33 of the VAT regulations, whereby the conditions for the zero-rating of exported services appear to have been relaxed in some respects. In particular, the restriction in zero rating requires the recipient to receive a direct benefit from the supply.
In light of these changes, it is important that taxpayers revisit their approach to the VAT treatment of major business transactions.
Since 2005 the World Customs Organisation has adopted the SAFE Framework of Standards to Secure and Facilitate Global Trade to act as a deterrent to international terrorism, secure revenue and promote trade facilitation worldwide. One of the main features of this framework is the Authorised Economic Operator (AEO) programme, where Customs authorities can accredit businesses that have a high-quality internal process to prevent tempering goods in international transport.
As Saudi trade is growing rapidly along with the rest of world, it has developed its own AEO programme to facilitate stakeholders involved in the import and export of goods. The Saudi AEO programme lists certain requirements for a business to be part of AEO such as the existence of a robust electronic record keeping system, financial solvency, and effective policies and procedures related to safety of goods and staff training.
A business recognised as AEO would have a number of advantages over non-recognised businesses, including a dedicated fast line for Customs clearance, priority over non-AEO shippers in the processing of Customs-related requests, a reduced ratio of the physical inspection of imported goods, the right to use an AEO logo and a dedicated Saudi Customs account manager. This list of requirements and advantages in not exhaustive.
Further to the government’s vision to transform Saudi Arabia into an international logistics centre, Saudi Customs is implementing an audit after the clearance initiative programme. The aim of this programme is to ensure that importers comply with Customs regulatory requirements. Such a Customs audit would focus on a wide range of issues, including examining the transaction value, bank statements, sales contracts, inventory papers, financial statements, non-financial records, payment terms, goods classification and Customs duty payments.
Saudi Customs recently introduced a self-correction programme enabling importers to declare and pay Customs duties on any historic non-compliance with Customs legislation. When applying for self-correction within the specified conditions and timing, the taxpayer would pay only the outstanding Customs duties and taxes and would not be subject to any additional penalties. The initiative is effective from January 1, 2020 until June 30, 2020.
The GAZT introduced the excise tax regime in June 2017. The excise duty rate is 50% on soft drinks, and 100% on energy drinks and tobacco products.
The excise tax was further amended in mid-May 2019, when the applicability of the tax was expanded to include additional products. According to the changes, sweetened beverages are subject to a 50% excise levy, and e-cigarettes and their associated liquids are taxed at a rate of 100%. The effective date for application of the amendments was May 15, 2019 for e-cigarettes and December 1, 2019 for sweetened beverages.
A sweetened beverage has been defined as any product infused with a source of sugar or other sweeteners, produced for the purpose of drinking as a beverage — whether ready for drinking, or as a concentrate, powder, gel extract or any form that can be converted into a drink.
Saudi Arabia has announced the establishment of new special integrated logistics zones. The first such zone will be situated at King Khalid International Airport in Riyadh. Other similar zones would be established after approval by the Council of Economic and Development Affairs. The zones intend to provide preferential tax treatment for the specified activities to be carried out in the zones.
Key features of the preferential tax treatment include:
• Non-residents conducting activities directly related to specified goods inside the zone shall not be treated as having a PE in the Kingdom;
• Goods situated inside the zone will be under Customs suspension – therefore Customs duties and VAT should not apply while goods remain in the zone;
• VAT will not be charged on supplies of goods in the zone; and
• Temporary transfer of goods between mainland and the zone for the purposes of repair and maintenance shall not be subject to VAT. Specified activities that would enjoy preferential tax treatment include:
• Repair maintenance, processing, etc. of goods;
• Sorting, repackaging and similar actions in relation to goods, including simple manufacturing processes;
• Imports, exports and re-exports;
• Logistics and after-sales services; and
• Certain recycling activities.
Social insurance contribution is collected by the General Organisation for Social Insurance (GOSI). The social insurance is levied on salaries at the following rates (see table): the minimum and maximum amounts used to calculate GOSI are SR1250 ($333) and SR45000 ($12,000).
Wage Protection System
The Ministry of Labour (MoL) has implemented a wage protection system (WPS) in Saudi Arabia. Under the WPS entities are required to disburse salaries to their employees using a standard wages or electronic payroll file provided by the MoL. Each entity is required to submit a completed wages or electronic payroll file to its bank in Saudi Arabia for the disbursement of salaries to its employees. A copy of the electronic file provided to banks in Saudi Arabia is also required to be filed with the MoL.
Effective 2018 all businesses are required to prepare annual financial statements under the International Financial Reporting Standards (IFRS) as adopted by the Saudi Organisation for Certified Public Accountants (SOCPA). Saudi banks and insurance companies have been already preparing their financial statements under IFRS.
According to the Tax Law and by-laws, all zakat/taxpayers are required to maintain necessary commercial books and accounting records locally inside Saudi Arabia in Arabic to support their tax declarations.
The GAZT emphasises the need to keep necessary books of accounts in Arabic inside Saudi Arabia by all companies, branches of foreign companies and individuals, with the exception of filers under a deemed profit method. The GAZT may not accept any return from any company, branch or individual that does not keep books of accounts in Arabic.
Furthermore, the GAZT is reluctant to receive any responses to their queries if the response includes extracts from the ledger or journal vouchers in a language other than Arabic.
The Ministry of Commerce and Investment issued a circular to the SOCPA to re-emphasise that auditors should comply with the requirement of issuing a limited review report certifying that an audit client is maintaining books and records in Arabic.
In December 2018 the GAZT issued the draft Transfer Pricing (TP) By-laws. In mid-February 2019, the GAZT formally released the final version of the by-laws. On its website the GAZT has also posted various frequently asked questions and their respective answers. Early March 2019 the TP guidelines through the GAZT. The TP guidelines have a wider approach and represent the GAZT’s view on how it wants to apply the TP By-laws in the Kingdom. In December 2019 the GAZT launched its portal for country-by-country reporting (CbCR). This short overview highlights how active the GAZT has become in the field of TP.
In the final version of the TP By-laws, there is no specific mention of any reporting in respect of the year ended December 31, 2018, which was still the case in the draft version. However, the GAZT addresses this question as part of their frequently asked questions. TP documentation requirements are applicable to the reporting year which ended on December 31, 2018 and all subsequent reporting years. The answer further clarifies that the GAZT also retain a right to seek documentation in respect of transactions undertaken during the years prior to 2018. However, in all cases, the taxpayers would be allowed at least 30 days for submitting the requisite information and documentation.
Persons Subject to TP Regulations
The TP By-laws are applicable on all taxable persons, as defined in the Tax Law. This includes entities that are jointly owned by GCC and foreign (non-GCC) shareholders (mixed entities).
Companies that are owned 100% by GCC nationals, and are subject only to zakat, are not subject to TP documentation requirements relating to master file, local file and DFCT. Such entities are subject to requirements relating to the filing of the CbCR, provided they meet the threshold requirement for global gross revenues being in excess of SR3.2bn ($853.1m).
Transactions Subject to TP Regulations
From a Saudi perspective, all controlled transactions should be documented. A controlled transaction is any transaction between related parties or parties under common control. Individuals are considered related parties if they are relatives (up to the fourth degree) or partners in a partnership.
To determine if an individual is related to a juridical person, the GAZT uses the concept of control. If the individual is able to control the juridical person, they should be considered as related.
Two juridical persons are related for Saudi TP purposes if one person has effective control over the other, or a third person has effective control over both juridical persons. The GAZT provides a long list of examples of how effective control could be established between persons. Ultimately, the GAZT concludes that effective control can be established by governance, funding or business.
This approach is extremely wide and is not fully aligned with the OECD guidelines. Under the GAZT approach, any exclusivity agreement will lead to the conclusion of a related party scenario and potential TP documentation requirements. Another important aspect is the fact that the Kingdom’s TP regulations also include domestic transactions.
In Article 7 of the TP By-laws, the GAZT lists the approved methods, which are identical with the five OECD TP methods. The GAZT highlights the fact that there is no hierarchy that the taxpayer should follow when applying a TP method.
Taxpayers may even use a non-approved method, if he can demonstrate that the non-approved method delivers better results than the traditional TP methods.
As mentioned earlier, documentation requirements vary according to tax status. While taxpayers or mixed companies are subject to documentation obligations as defined by the new OECD approach, zakat payers are subject to CbCR obligations only.
DFCT: undefined • The DFCT is required to be filed along with tax returns for the year that ended December 31 2018.
This is on the basis that the filing requirement – a procedural matter – arises after the issuance of the TP By-laws. The GAZT retains the right to seek additional information in support of a tax return. Within the DFCT the following detailed information needs to be submitted:
• Details of all controlled transactions undertaken for or without monetary consideration, such as barter arrangements; and
• A list of all shareholders. For listed entities, information of all shareholders, directly owning more than 5% shares would need to be disclosed.
• Where there has been an internal reallocation of functions, assets and risks within a group, the same needs to be reported as part of the DFCT for the reporting year relevant to the change. The DFCT shall form part of an annual tax declaration and be submitted electronically by every person engaged in controlled transactions, irrespective of their value. Along with the DFCT, taxpayers would also be required to produce an auditor’s certificate confirming that the TP policy of a multinational enterprise (MNE) has been consistently applied by and in relation to the taxpayer.
The GAZT has adopted the new OECD three-tier approach for preparing TP documentation. Taxpayers need to prepare: (i) a master file, (ii) a local file and (iii) a CbCR, if applicable to them.
The master file should contain information on the global business operations and TP policies of the MNE group to which the taxable person belongs. With respect to any intangibles, the master file should provide the identity of legal and de facto owners of intangibles.
The local file should contain detailed information on all controlled transactions of the taxable person and should also contain information with respect to any business restructurings – transfers of risks, functions, tangible or intangible assets impacting directly or indirectly the taxpayer in Saudi Arabia – in the current year or in the preceding year.
The requirement to maintain a master file and local file is not necessary for the following:
• Natural persons;
• Small-sized enterprises, which are entities with an arm’s-length value of controlled transactions not exceeding SR6m ($1.6m) in a 12-month period.
The CbCR and the notification need to be submitted by members of an MNE group with consolidated group revenue exceeding SR3.2bn ($853.1m) as per consolidated financial statements of the MNE group. While the notification remains part of the annual tax return, the CbCR needs to be uploaded onto the GAZT’s CbCR portal.
The CbCR portal went live in December 2019 and requires a separate one time registration. The XML schema required by the GAZT is equivalent to the OECD v1.0.1 schema. An update to the most recent version is expected soon.
The Kingdom has signed the Multilateral Competent Authority Agreement (MCAA) and has activated exchange agreements with 49 countries. This number will soon increase, as the GAZT is in discussion with multiple countries to increase its CbCR exchange network.
Where CbCR is being filed in another country that has signed the MCAA and the Qualifying Competent Authority Agreements, the filing of the notification to the GAZT should suffice. However, if the foreign country systematically fails to provide a copy of CbCR to the GAZT, then the local constituent entity is required to provide a copy of the CbCR submitted in the foreign jurisdiction.
The DFCT needs to be filed together with the annual tax declaration no later than 120 days after the end of the financial year.
The GAZT may seek a taxpayer to provide a copy of their master file or local file or any part thereof at any time by issuing a notice of no less than 30 days. As mentioned above, only with respect to the financial year that ended 2018, taxpayers were given an additional extension of 60 days for providing master file or local file or any part thereof.
For controlled transactions undertaken during the years prior to 2018, the GAZT may also require any information or documentation.
CbCR needs to be filled 12 months after the financial year end of the reporting entity.
Foreign Account Tax Compliance Act
In line with its efforts to improve international tax compliance and transparency, the Kingdom has signed several exchange of tax information agreements. The Foreign Account Tax Compliance Act Intergovernmental Agreement Model 1 (IGA) with the US to exchange information on US accounts and the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters ( Multilateral Convention) covers various means of exchanges including the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA).
Under the Model 1 IGA, Saudi Arabia would annually exchange information on financial accounts held by US-specified persons and maintained by Saudi financial institutions. This agreement is OBG would like to thank KPMG for its contribution to THE REPORT Saudi Arabia 2020 non-reciprocal, i.e., the US will not exchange similar information with the Kingdom.
Contrary to the signed IGA, under the CRS MCAA, the Kingdom has concluded a wide range of reciprocal exchange agreements. For the 2019 tax year, 67 countries will receive information from Saudi Arabia on financial account holders who are tax residents in those countries and have bank accounts maintained by Saudi financial institutions, while 94 countries will send the same information to Saudi Arabia on Saudi tax residents that have financial accounts outside the Kingdom. Some countries made the decision not to receive information. Under the CRS, tax residency – not nationality – matters, as a person, individual or entity can have more than one tax residency.
Information to be Reported
For individual Saudi tax residents, the Kingdom will receive the name, address, tax identification numbers (TIN), date and place of birth, account number and name of the financial institutions where the account is held and the balance or value of the accounts.
For entity Saudi tax residents, the Kingdom will receive the name, address, TIN, account number, name of the financial institutions where the account is held and the balance or value of the accounts. In the event that this entity is a passive entity and controlled by a reportable person, the Kingdom will receive in addition to the above-mentioned entity details, the name, TIN, and date and place of birth for each controlling person. A controlling person is determined as per the local anti-money laundering rules. In all the above cases, income such as gross interest, gross dividends or other income, gross proceeds and full or partial surrenders paid to the corresponding accounts will be exchanged.