The Kingdom’s tax administration has, until recently, relied mostly on self-declaration and self-assessment from taxpayers. Very few control tools and mechanisms were employed by the Department of Zakat and Income Tax (DZIT) to enforce compliance by tax- and (religious levy) payers with the rules. Indeed, Zakat and tax certificates were the only effective instruments that forced companies to follow regulations, as without certificates firms could not renew their investment licences, invite foreign staff, or collect receivables from contractors, and so on.
However, there were no other external factors to assist the Kingdom with “keeping the house in order”. In some countries, for example, banks do not open an account for a firm if it does not have a tax registration number; or, in value-added tax (VAT) systems, a company must have a general or VAT number to submit its VAT invoice, which pushes it to be tax registered. In Saudi Arabia, however, a Zakat-payer may be established and do business for many years before registering with the DZIT and settling a Zakat liability. Given that no penalty is charged for late filing/payment of Zakat, unpaid Zakat is equal to an interest-free loan.
However, recent trends show that the situation is changing, with additional measures introduced both in the practices of the DZIT and as part of regulations that will tighten controls over taxpayers. This includes a move in recent years for the DZIT to be able to compare the cost of imports deducted from the Zakat/tax base with Customs declarations, as well as comparing the cost of labour with information filed with General Organisation for Social Insurance (GOSI).
In cases where there is a discrepancy, the DZIT will deny the deduction, unless the difference is reconciled and confirmed by an audit firm. Companies can therefore no longer import goods at low cost (by avoiding Customs duty) and invoice a higher value for tax purposes. Similarly, employers can no longer declare low labour costs for GOSI in order to avoid social payments and deduct higher amounts from their Zakat/tax base.
E-filing was introduced for Zakat returns in 2014 and is also set to reach taxpayers in 2015. This tool will reduce the possibility of any manipulation with double accounting and reporting for financial and tax purposes. The new wages protection programme, meanwhile, which is being put into practice in 2014, will see all salary payments to employees go through a Saudi bank account and prevent firms from paying salaries in cash.
Earlier in 2014, the Saudi Arabian General Investment Authority (SAGIA) issued a circular whereby it specified that companies maintain the following documents ready for submission upon request, namely investment licence, commercial registration, GOSI certificate, Zakat and income certificate, a copy of the Saudiisation certificate from the Labour Office, municipality licence for main entity and branches, licence/ permit from the relevant authority to practise investment activity, Chamber of Commerce and Industry membership certificate, a copy of bank transfer statement for employee salaries in the entity, a record of all direct contracts or subcontracts, procurement, sales, revenues and expenses, and audited financial statements. The requirement for these documents is to ensure full compliance with all tax and social insurance regulations.
In March 2014, a number of changes were made to by-laws, including widening the authority of the DZIT to collect data, allowing the DZIT to use the assistance of law enforcement authorities if taxpayers do not comply with DZIT requirements, and reinforcing joint liability of taxpayers in cases of failure to report data on other taxpayers. These and other measures send a clear signal to the Zakat- and taxpaying community in the Kingdom that the DZIT is targeting improved accountability. Moreover, the consequences of noncompliance are set to increase financially in the future. Indeed, SAGIA may potentially impose a penalty for failure to produce a tax certificate. It is thus essential to keep Zakat and tax affairs up-to-date and comply with the legislation and avoid any penalties that may have a negative effect on businesses in the Kingdom.
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