Tax, or the lack thereof, has long been a selling point for companies looking to expand into the Middle East. Over the last couple of decades, Saudi Arabia has slowly introduced a taxation system into the country to facilitate their revenue generating streams. After the oil market crash, diversifying revenue away from oil was essential for the government to continue developing the country.
The taxation system has transformed over the years to accommodate the needs of the economy, incorporating both direct and indirect tax. Introduced taxes are; Zakat in 1950, withholding tax in 2004, corporate tax in 2005, excise tax in 2017 and value added tax (VAT) in 2018.
Zakat was the first effective tax in the Kingdom in 1950, known as a form of religious alms of 2.5% that all Muslims should pay on the income they earn. This extends to GCC business owners operating in the Kingdom, for the revenue they earn, and is paid to the General Authority of Zakat and Tax (GAZT). In December 2016, GAZT announced a restructuring of the Zakat system in the Kingdom which was later declined.
Next was withholding tax, due by non-residents, including GCC parties who’ve earned income in the Kingdom, and is set between 5 and 20%, depending. Those responsible to pay withholding tax are Saudi Arabian resident entities, whether or not they’re a tax payer, permanent establishment of a non-resident and payments related to business activity.
Corporate tax, is paid by foreign entities by the percentage of ownership of the company, if co-owned with a GCC national. It’s set at 20% and companies are required to pay this annually.
Excise tax was released in 2017, and was created for a greater purpose, to “be imposed on goods that are deemed harmful to human health and the environment, and on luxury items”. This includes products such as tobacco products, soft drinks, energy drinks, other sweetened beverages and electronic smoking devices.
Most recently is the VAT which is applicable on most goods. It came into effect on 1 January 2018 and it meant companies need to pay VAT to their suppliers which is then charged to the consumer. This is set at 5% and is posed on most goods and services, with a list of exceptions including; daily necessities, bread and milk, books, medical supplies and transactions relating to the exported goods.
The taxation system in Saudi Arabia has evolved to accommodate the economy’s needs and to help develop the country into the ambitious nation of Vision 2030. The catalyst for the majority of the Kingdom’s change will likely continue to push the nation forward in its’ economic growth.