Until recently, Saudi administration relied on the selfassessment of taxpayers. Very few tools and mechanisms were employed by the Department of Zakat and Income Tax (DZIT) to enforce compliance. While certificates for tax and zakat(Islamic alms) were key, they were the only effective instruments that forced firms to follow regulations, as without certificates they could not renew their investment licences, invite foreign workforce or collect receivables from contractors.
However, there were no other external factors that would assist the Kingdom with “keeping the house in order”. For example, in some countries banks would not open an account for a company without a tax registration. Otherwise, in value-added tax (VAT) systems, a company would require a VAT number for its invoices, which would push it to be tax registered. A zakat payer, for example, may be established and do business for a number of years before registering with the DZIT and settling zakat liability. Given that no penalty is charged for late filing and payment of zakat, unpaid zakat is effectively equal to an interest-free loan.
Recent trends show that a series of new measures and regulations will tighten control over taxpayers. First, for the past couple of years the DZIT has started comparing the cost of imports deducted from the zakat and tax base with Customs declarations on the one hand, and the cost of labour with information filed with the General Organisation for Social Insurance (GOSI) on the other hand. In case of any discrepancy, the DZIT will deny the deduction unless the difference is reconciled and confirmed by an audit firm. Therefore, companies can no longer import goods at low cost to avoid Customs duties, while invoicing a higher value for tax purposes. Similarly, employers can no longer declare low labour costs for GOSI to avoid social payments, while deducting higher amounts from the zakat/tax base.
E-filing was introduced for zakat returns in 2014, and is expected for taxpayers in 2015. This significant development will eliminate the human factor in compliance process and reduce the possibility for manipulation with double reporting for financial and tax purposes. Moreover, a new wages protection programme has been adopted and was gradually put into practice in 2014. The key requirement is to ensure that all salary payments to employees must be made to a Saudi bank account. As a result, it will no longer be possible for companies to pay salaries in cash.
Earlier in 2015, the Saudi Arabian General Investment Authority issued a circular requiring companies to maintain certain documents ready for submission upon request, including an investment licence, commercial registration, zakat and income certificate, a copy of the Saudiisation certificate from the Labour Office, a municipality licence for the main entity and its branches, a copy of a bank transfer statement for employee wages, a record of all direct contracts, procurement, sales, revenues and expenses, and audited financial statements. These requirements are meant to ensure compliance with tax and insurance regulations.
In March 2014 a number of changes were made to by-laws, including three amendments focusing on the compliance situation. These widen the powers of the DZIT to collect data, allowing it to use assistance from law enforcement authorities if taxpayers do not comply with DZIT requirements and reinforcing the joint liability of taxpayers in the case of failure to report data.
Finally, in March 2015 the government announced measures to encourage the development of unexploited lands. These steps will take the form of a fee imposed on the landholder. While the details for the calculation of the fee, the application date and the land it applies to have yet to be published, the issue is a priority for the authorities. These and other measures send clear signals to zakat and taxpayers in Saudi Arabia that the DZIT will get better at detecting non-compliance.
As a result, the consequences of non-compliance will also expand, including penalties for the failure to produce a tax certificate. It is therefore essential for taxpayers to remain compliant with legislation to avoid any penalties that negatively affect their businesses.
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