The taxation system in Saudi Arabia has commonly been misconceived as a low tax area and even believed to be non-existent tax area. However, managing tax in Saudi Arabia can be complex and challenging, creating uncertainty, confusion and an increase in risk. The introduction of VAT from 2018 has increased the complexity for companies in the region especially for those in the Kingdom who are are importing and exporting.
Corporate tax in Saudi Arabia is dependent on which category your business falls under. Business entities are in one of two categories; a non-resident entity, businesses who are outside of the GCC operating in the Kingdom without a SAGIA license or a resident entity, those businesses registered in Saudi or a GCC country.
Those categorized as non-resident entities are required to pay 20% tax on the income derived from commercial activities within Saudi Arabia. Resident entities are required to pay 2.5% tax on income derived from commercial activities within Saudi Arabia, also known as Zakat, derived from Islamic law, which is charged on their net worth. But because Zakat is governed by decree and not by law, its precise interpretation is left to individual officials, which can create uncertainty about current and future likely liabilities.
Companies that have split or dual ownership and that fall into both tax categories are required to pay the taxation rate on a pro-rata basis, depending on the percentage of each owner. However, exceptions do exist for companies in the oil or natural gas sectors. Companies who produce oil or hydrocarbons are required to pay tax at an 85% rate and those in the natural gas investment field are required to pay tax at a 30% rate.
Every organization in Saudi Arabia has their own fiscal year, which is dependent on the issuance of the commercial registration or license. Although, companies can request a different fiscal year depending on a number of operating criteria if applicable. Zakat and corporate tax, are both filed once a year based on the audited financials through the GAZT (General Authority for Zakat and Income Tax) also referred to as DZIT (Department of Zakat and Income Tax).
Zakat is applicable on capital which is not invested in long term investments or fixed assets. Other areas to be mindful of are service accruals, depreciation, owner’s capital, owner’s outstanding profit share accruals, statutory reserves and end-of-service indemnities. Additionally, dividends received in the Kingdom are also deemed as income and are subject to the aforementioned treatment for tax purposes. There is also a 5% withholding tax applicable on dividends paid to non-residents and non-resident third party entities engaged for technical services and this rate increases to 15% for related parties engaged for technical services.
VAT was introduced from January 1 2018, at a rate of 5%, in Saudi Arabia and the United Arab Emirates with the remaining GCC countries looking to establish their VAT framework during 2018 making it likely that it will be GCC wide by 2019. For the GCC governments looking to reduce their economy’s dependence on oil, VAT will bring a substantial revenue stream and Saudi Arabia is no exception.
Businesses which make an annual taxable supply of goods and services in excess of SAR 375,000, are required to register for VAT and should have done so by 20th December 2017. Following registration, they are required to charge and remit VAT collected to The General Authority for Zakat and Tax (GAZT) on a periodic and regular basis. Corporations whose supplies of goods and services exceed SR40 million annually to file their tax returns on a monthly basis whilst those whose supplies of goods and services total SR40 million or less are required to file tax returns every three months.
Companies must complete the tax return form issued by GAZT completing both sections, the first is for the tax due on revenues (output tax) and the second is for tax due on purchases (input tax). Following submission, a tax invoice will automatically be issued by GAZT containing the invoice number and tax amount due for the business to pay the tax amount due into GAZT’s bank account via the SADAD online payment portal or ATM.
Charging VAT on supplies of goods and services requires businesses to issue VAT invoices. VAT invoices must be produced and issued by VAT registered businesses to provide evidence of the sale of goods and services in compliance with VAT law. A VAT invoice is also required for documentary evidence to support VAT credit claims made by the business i.e. VAT incurred on the acquisition of goods and services for the purposes of the business can only be claimed if the business holds a valid VAT invoice from the vendor.
In addition to the general overview mentioned above, there are a number of requirements for record keeping to support VAT amounts filed on the return and for VAT compliance.
Correct use of electronic records, preparation of VAT audit files, time and format of records to be accessible for a VAT audit and maintaining physical records are other considerations that companies are required to meet. It is recommended that businesses implement a combination of automated processes and tools in order for them to produce a VAT audit file upon request from the tax authorities.
The remitting of VAT is a serious business consideration in view of the potential cash flow implications for the business.
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