presentation subjects - الرئيسية · new jobs through creation of a new profession within...

VAT & Withholding Tax || Presented by Dr. Mohamad Afaneh (2)

Presentation Subjects

VAT Ratio + calculation's

Affected Divisions

VAT Process

Payments Special Cases

Records

Accountings Entries Fines

Tax Period

Capital Assets

Cases

Supply Place

Vat Applications

Withhold tax

Invoices

(3)VAT & Withholding Tax || Presented by Dr. Mohamad Afaneh

Chapter one

• Introduction to VAT

• Its goals

• Government agencies that will collect It


Workshop # 1 Each Group Kindly Talk About VAT Definition and concepts


VAT Introduction

VAT is an indirect, transaction-based tax that is collected at each stage of the value

chain – companies effectively act as tax agents while the end consumer bears the

tax burden


What is Value Added Tax?

Indirect tax imposed at each stage of production and supply.

• In general, the final consumer is the one who bears the full cost of this tax while the

business collects and calculates the tax and pays it in favor of the state.

• Imposed at 5% of the stages of the multiple economic cycle with the right to deduct taxes

on inputs from the taxes paid on the outputs.

• They are met at each stage of the economic cycle (import, production, distribution, retail)


VAT Calculations

TaxpayerSold(net)

Paid(net)

Value-Added

VAT Collected

VATPaid

Remit GAZT Cumulative

Raw MatSuppliers

100 0 100 5 0 5 5

Manufacturer 200 100 100 10 5 5 10

Wholesaler 400 200 200 20 10 10 20

Distributor 800 400 400 40 20 20 40

Consumer 840 Final Consumers can’t claim it back; Total tax paid


.11. Budget Goal: - In the management of real financial resources to meet the increase

in public expenditure in the areas of education, health, housing, public utilities, etc.

2. Social target: - Tax is imposed on all goods and services, but some tax systems exclude

some of them to be taxed to achieve Social and economic objectives Although the tax on

essential goods used by all individuals is a considerable sum, this tax is considered unfair

because limited income earners pay the same value as those with high incomes. Most

countries tend not to impose taxes on this type of income. Tuberculosis

VAT Goals


3. Encouraging exports: - By subjecting these exports to tax by zero, in order to encourage

domestic investment, face competition in foreign markets and increase the country's

foreign exchange revenues.

4. Control of imports: Value added tax (VAT) is a good tool to control the movement of

goods between countries, in particular to limit the import of some undesirable goods or

services or to stimulate other desirable ones. Or undesirable for one reason or another by

focusing on VAT on a particular sector or commodity by raising the tax rate or imposing

special treatments.

VAT Goals


• Expected outcome• KSA’s 2 main principles• OECD Guidelines

Global standards & principles of policy design in KSASimple taxation and fair administration policy supported by OECD guidelines mitigate the implementation challenges of the VAT program

1

NeutralityVAT system in KSA will be neutral across all forms of business activity

2

EfficiencyCompliance costs for businesses and GAZT are to be kept to a minimum

3

Certainty and simplicity VAT rules are designed to be clear and simple to understand, making it easier for businesses to comply

4

Effectiveness and fairness VAT system results in right amount of tax, avoiding both double taxation and unintentional non-taxation

5FlexibilityVAT rules are designed to be flexible enough to keep pace with tech. and commercial advances

Simple taxation KSA applies a broad standard taxation (applying the standard VAT rate) across sectors with a limited number of exceptions.

1

Fair administrationKSA introduces tax payer friendly policy measures to support businesses - considering the Ease of Doing Business

2

Decreased complexity of taxation:

1. Reducing administrative challenges2. Maximizing compliance


VAT Advantages

1. Provides a generous and regular tax revenue to the Government.

2. Its tax burden can be transferred (indirectly) as it does not affect the gross and net profit

ratios of the project.

3. Achieve competition among traders.

4. A neutral tax where there is no double taxation, since no tax is collected by any person

not registered with VAT.

5. As they are applied to goods and services within the territory of the State or submitted to it from abroad.


VAT Launch in KSA

The Kingdom of Saudi Arabia has committed to implement VAT on January 1st 2018

“Achieving budgetary balance …… strengthening financial governance,

increasing non-oil revenues and improving spending on programs and

projects.”

January 1st 2018

Confirmed launch date of VAT in the KSA

Key facts of theVAT implementation

A critical contributor to the Vision 2030

5%

Standard VAT rate for products and services

SAR 375,0001

As a mandatory threshold for VAT registration

1

Reduction of the cash-based and shadow economy and thus

greater transparency for market participants

VAT expected to be one of the largest revenue source after oil &

gas

New jobs through creation of a new profession within the

accounting industry

Significant benefits

Relative to other taxes, VAT is designed to be a stable and efficient tax

1. Persons whose value of annual supplies exceeds the Mandatory Registration Threshold but does not exceed one million (1,000,000) riyals are exempted from the requirement to register in the Kingdom until 1 January 2019.


• Administration of VAT requires close collaboration and clear assignment of roles & responsibilities among government entities

Administration of VAT in KSA: roles and responsibilities

1 Primary principles relating to the design of VAT and the objectives being pursued under it are defined by Ministry of Finance of the KSA

2 The implementation, administration and enforcement of VAT in the KSA will be the responsibility of GAZT (General Authority of Zakat and Tax)

3Administration and enforcement of VAT collected on imports, and other movements of goods into or out of the KSA belong to responsibilities of the Customs Department

Roles and responsibilities


VAT Policy and Legal Framework

ROYALDECREE

KSA VAT POLICY

KSA VAT LAW

KSA VAT REGULATIONS

INTERNAL DIRECTIVES

PROCEDURES &INSTRUCTIONS

LEGALFRAMEWORK

Approved by:

Royal Court

KSA Shura

KSA Cabinet or MoF

MoF or DG

GAZT DG IT SYSTEM AND INFRA

OPERATIONALFRAMEWORK

HR, Org and Training

GCC VAT Treaty


• Tax is a compulsory levying of money by a public authority for public purposes,

enforceable by law

• Tax is not a payment for services rendered

• Taxes in most jurisdictions are either:

– Direct taxes: collected from the person who bears the cost of the tax

e.g. Personal Income Tax, Corporation Income Tax, Capital Gains Tax

– Indirect taxes: collected from one person but borne by others

e.g. Hotel/Tourist tax, Customs duties, VAT

What is tax?


Indirect Taxes:

• Excise Tax (ET)

• Value-Added Tax (VAT),

• also known as GST – Good and Service Tax (in Australia, New Zealand, Canada)

• Direct Taxes:

• ZAKAT

• Corporation Income Tax (CIT

GAZT Main Domestic Taxes


• CIT is mandatory for every non-Saudi company in KSA

• For company owned by a mix of Saudi and non-Saudi, CIT will apply on the portion of

taxable income attributable to the non-Saudi interest

• Corporation must file once a year at the end of April and provide their financial

statement usually presenting their revenue and expenses and the net taxable income

is taxed at 20%

Corporation Income Tax – CIT in KSA


• Following goods are subject to ET on retailed selling price:

• Tobacco products: rate 100%

• Energy drinks: rate 100%

• Carbonated soft drinks: rate 50%

• Tax is levied on

a) imports of these excisable goods at Customs

b) from domestic manufacturers when the goods are released from their tax warehouses

• Taxpayers (importers or manufacturers) must register for ET with GAZT and file periodically

Excise Tax - ET in KSA


Workshop # 2 Each Group Kindly Talk taxable goods: zero, exempt and

out of scope ... and the person subject, and when tax is imposed?


KSA follows a broad taxation policy with limited number of zero-rated and exempt items

Scope of VAT and taxable persons

VAT Rate Output tax Input tax deductible Areas of application

Standard rated 5% Majority of goods and services

Zero rated 0%

Supply of any qualifying medicine or qualifying medical equipment

Intra-GCC and international transport

Supplies of investment gold, silver, and platinum that are at least 99% pure

and tradable in international bar market

Exports outside the GCC

Exempt nil Rental of residential real estate

Financial services with no explicit fee, commission or commercial discount

Out of scope N.A. N.A. Government services (e.g. public healthcare, public education etc.)

Supply of real estate that was used or intended for use as a permanent

dwelling by the Person, or by a related person

KSA taxation policy summary


Taxation Policies – Mandatory treatment according to GCC Agreement

• List of sectors mentioned in the GCC Agreement – Mandatory by Agreement

Supply of medicine and medical equipment

Intra-GCC / international Transportation

Supplies outside the GCC Territory

(including financial services to customers

outside the GCC)

Supplies of investment gold, silver, and platinum

GCC Agreement Article (31):

Mandatory zero-rated

according to unified controls

proposed by the Ministers of

Health Committee of the

Member States1


Mandatory zero-rated for

Intra-GCC and Extra-GCC

transportation


Mandatory zero-rated if goods

are exported outside the GCC

territory


Mandatory zero-rated if they

are at least 99% pure and

tradable in international bar

market

KSA: Mandatory zero-rated KSA: Mandatory zero-rated KSA: Mandatory zero-rated KSA: Mandatory zero-rated

1. In the absence thereof, such classification may be issued by the Ministry of Health or any other competent authority


• List of sectors mentioned in GCC Agreement – Discretionary

Supply of basic food items Certain Sectors

(Domestic transportation, Real estate,

Education and Healthcare )

Oil, oil derivatives and gas sector

Domestic Financial Service

Article (31): Voluntary zero-

rate food items mentioned

under unified controls

Article (29): Voluntary

exempt or zero-rate

Article (29): Voluntary zero-

rate

Article (36): Financial

Services: Voluntary exempt or

zero-rate

GCC Agreement Direction

All food including items within

GCC list.

Low-income citizens subsidized

e.g. via Citizens Account

• Domestic transportation

• Private edu. and healthcare

• Commercial real estate

• Sale of residential RE

Domestic consumption Fee and commission based

productsStandard ratein KSA

Exempt in KSA

No exemptions Rent of residential real estate No exemptions • All margin-based products

• Capital markets activity

• Life insurances

Outside of the scope

- • Public edu. and healthcare

• Sale of RE that was used as

a permanent dwelling by the

Person, or by a related

person

- -

Taxation Policies – Mandatory treatment according to GCC Agreement


• VAT Taxation Scope for Medicine & Medical Equipment under suggested unified Controls

Health Care

Public sectorA

Private sector

B

Type of product / service offered

Out of VAT scope

Zero-rate VAT under unified controls

Standard rate VAT

Supply of medicine & medical equipment

2Healthcare services1

Standard rate VAT for others

Unified controlssuggestion

Supplies listed by MoH1

1. Ministry of Health or any other competent authority


• VAT treatment of residential Real Estate• VAT treatment of commercial Real Estate

Commercial Real Estate Residential Real Estate

Sale Rent Sale Rent

5% 5% exempt

Sale of residential RE is standard rated except: It is not an Economic Activity (thus outside the VAT scope) if:Prior to supply, RE was used or intended for use as a permanent dwelling by the Person, or by a related person [Article 9 (7) of Impl. Regulations]

All commercial real estate activities (sale and rent) are subject to the standard VAT rate of 5%

Definition of real estate and real estate related services, as well as taxation of all economic activity explained in the Regulations [Article 23 of Impl. Regulations]

Supply by way of lease or license of Residential Real Estate is exemptfrom VAT[Article 30 of Impl. Regulations]

5% out of scope

Standard Exception

Real Estate Activities


KSA VAT Implementing Regulations

Financial Services

Article 29: Financial services

1. Supplies of Financial Services listed within this article are exempt from VAT, except in cases where the Consideration payable in respect of the service is by way of an explicit fee, commission or commercial discount.

2. Financial Services include the following services: (…)

d) financial instruments, such as derivatives, options, swaps, credit default swaps and futures.

6. The issue or transfer of a debt security, equity security, or any other transferable document recognizing an obligation to pay a monetary amount to the bearer will be considered an Exempt Supply of Financial Services.

!Majority of financial services are VAT exempt


• Definition of Economic Activity

• KSA VAT Implementing Regulations

Government Activities (1/3)

Any activity exercised by a government body in its capacity as a public authority shall not be considered to be an Economic Activity for the purpose of the Law and these Regulations.

“

”! Government activities for public

service are out of VAT scope


• Article (1) – Taxable Person

• GCC Agreement

Government Activities (2/3)

Supply of Goods and Services:

In a capacity other than their capacity as a public authority?

• Article (9) – Economic activity

• VAT Implementing Regulations

A Person that conducts an Economic Activity1 independently for the purpose of generating income, who is registered or obligated to register for VAT in accordance with the provisions of this Agreement.

1. An activity that is conducted in an ongoing and regular manner including commercial, industrial, agricultural or professional activities or Services or any use of material or immaterial property and any other similar activity. [GCC Agreement]

“ ”

…shall not be considered to be an Economic Activity for the purpose of the Law and these Regulations.“ ”

…that government body or entity shall be regarded as carrying on an Economic Activity.“ ”

Outside of scope VAT taxed

Government as a seller


Workshop # 3 Each Group Kindly Talk About Tax Registration Limit - Taxable Person Criteria


Scope of VAT and taxable persons

• Definitions on Economic Activity & Taxable Person

Economic ActivityA

• Activity that is conducted in an ongoing and regular manner

• Includes commercial, industrial, agricultural or professional activities or Services or any use of material or immaterial property and any other similar activity.

Taxable PersonB

• A Person that conducts an Economic Activity

• Independently for the purpose of generating income

• Registered or obligated to register for VAT

VAT concerns economic activities conducted by taxable persons


• VAT Grouping• Registration Thresholds

Annual turnover in SAR

Registration Thresholds & VAT GroupingRegistration Thresholds & VAT Grouping are detailed in Implementing Regulations

VAT Group

Annual turnover

SAR 375’000

SAR 187’500

No registration Voluntary registration Mandatory registration

• Mandatory Registration Threshold – 375’000 SAR1

The lower limit of the value of actual supplies at which the Taxable Person becomes obligated to register for Tax purposes.

• Voluntary Registration Threshold – 187’500 SARThe lower limit of the value of actual supplies at which the Taxable Person may apply to register for Tax purposes

• 2 or more KSA residents2 can register as a VAT Group in case 50% or more of the capital of each legal Person, or ownership or control of 50% or more of the voting rights or value, in both or all of the legal Persons, is held by same Person or group of Persons, whether directly or indirectly)

• VAT Group is treated as a single Taxable Person with consolidated Supplies and joint responsibility

1. Persons whose value of annual supplies exceeds the Mandatory Registration Threshold but does not exceed one million (1,000,000) riyals are exempted from the requirement to register in the Kingdom until 1 January 2019.2. Both conducting an Economic Activity in its own right and at least one of the legal Person is a Taxable Person


Who is Required to Register?

من

Who?

.الشخص املقيم الذي يمارس نشاط اقتصادي ربحي، أو الشخص امللزم بسداد الضريبة•

• Resident Person who engage profitable economic activity, Or person which obligated to pay tax

الحد االلزامي

Mandatory Limit

ريال سعودي، ويعفى من االلتزام بالتسجيل لغاية375,000تجاوز توريدات املقيم السنوية الفعلية أو املتوقعة مبلغ •.من توريداته ال تزيد عن مليون ريال سعودي1/1/2019

• Exceed the resident actual or expected supplying 375,000 SAR, & person whose value of supplies does not exceed one million SAR is exempted from

the obligation to register until 1-Jan-2019.

التسجيل االختياري

Voluntary Registration

(.ريال187,500)من الحد االلزامي % 50املصاريف الفعلية أو املتوقعة /بلوغ التوريدات•

•Actual or expected supplies/ expenses reached 50% of the mandatory limit (SR 187,500).

الضوابط

Controls

%0يستثنى من التسجيل االلزامي من كانت جميع توريداته خاضعة لنسبة • .، ويجوز التسجيل اختياريا

•Any person is Exempt from Mandatory registration in case all of his supplies are subject to 0%, however it allowed to register Voluntarily.


Tax Period

The tax period: a Calendar month starting from the first day and ending on the last day

of the same month (for those whose annual supply exceeds 40 million riyals) and three

months for those whose supplies are less than that. The period of delivery of the TR

and payment shall be on the last day of the month following the end of the tax period

as a maximum.


• Filing Thresholds

• Annual taxable supplies in SAR

Saudi Arabia VAT Implementation timeline

Below SAR 1MM SAR 1MM to 40MM Above SAR 40MM

Start: January 2019

Filing frequency: Quarterly

First filing period: Jan-Mar 2019

First deadline: 30-Apr 2019

Start: January 2018

Filing frequency: Quarterly

First tax period: Jan-Mar 2018

First deadline: 30-Apr 2018

Start: January 2018

Filing frequency: Monthly

First tax period: Jan 2018

First deadline: 28-Feb 2018

Note: a taxable person whose annual value of Taxable Supplies does not exceed the value of SAR 40MM may also submit an application electronically to file monthly


Tax Records Requirements

.ضريبيةفاتورةتحرير•

سجالت ودفاتر محاسبية مسك•

مدعمةنظامية باللغة العربية

.سنوات6ملدةباملستندات والفواتير

لهيئةيا لدور اإلقرارات الضريبية تقديم•

.املدة القانونيةضمن

• Issuing a Tax Invoice.

• Keeping regular Accounting

Records & Books in Arabic

Language with related Documents

& Invoices for a period of 6 years.

• Periodical Submission of Official

Tax Returns to tax authorities in

time.


Deregistration

In any case, a request to cancel this registration may be submitted only after 12 months

of registration. The cancellation of registration shall be as follows:

First: - Cancellation of registration in a mandatory manner: Application for cancellation of

registration must be submitted in one of the following cases:

- The taxable person (both resident and non-resident) shall cancel his economic activity.

-The taxable person (non-resident) shall cease to make any purchases in the Kingdom

subject to tax during the preceding twelve months.


VAT due date / Trigger

عند توريد

السلعة

Upon Product Delivery

عند قبض الثمن

Upon Receiving Cash

عند اصدار

الفاتورة

Upon Invoice

Issuance

Reverse Taxation:

Reverse taxation mechanism:

When applied, the recipient of the goods

or service declares all his purchases (VAT

inputs) and the vendor's sales (VAT

output) in his tax return. In this manner,

both of which eliminate each other.


The value of the supply includes all other taxes or charges in respect of that supply (including excise tax and customs duties)

Prices for goods and services supplied to consumers or in retail transactions must be stated as the VAT inclusive amounts

• Value of supply

VAT becomes due at the earliest of the following:

1. The date where goods are delivered or made available or performance of service is completed;

2. The date when any tax invoice is issued in respect of the supply or

3. Partial or full receipt of consideration, to the extent of the amount received

• Tax point (time)

Place, time and value of taxation

The place of supply (where tax is ultimately levied) is the jurisdiction where the final consumption occurswhich does not necessarily have to be the country where the value is created

Destination principle Earliest of…1 2 3

Delivery Invoice Payment

Price tag

Price includes all other taxes

States VAT inclusive amount

Place, time and value are three key elements to be considered in tax administration

Place of Supply


Taxpayer Considerations – to ease Compliance

Simplified Tax Invoice may be used by retailers or if invoice valued < SAR 1000

Companies with annual supplies < SAR 5 MN can use cash accounting

Cash accounting

Simplified invoicing

2 or more KSA residents can register as a VAT Group in case they are under common controls

Contracts not anticipating VAT are treated as zero-rated until the earlier of expiry/ renewal or 31st Dec 2018 (provided contract was entered into before 30th May 2017)

Grandfathering of contracts

VAT grouping


Workshop # 3

Each Group Kindly Talk About the input and output tax and the

mechanism of refund of the tax ... and adjusting the value of supply?


Refund of VAT

A tax return credit balance:

(The input tax is greater than the output tax).

Tax Refund Cases: -

Persons subject to other Member States

Persons who are subject and not resident in the

GCC States: Submission of a tax declaration less than the amount paid.

- The existence of credit balance with the

Commission.

Foreign governments, international

organizations, diplomatic bodies and missions

Non-resident tourists

Founder in a country that applies the value added

tax system or similar system that allows the refund

of the tax by a similar mechanism (reciprocity)


Tax Return & Period & Payment

Tax return: A financial report to calculate the value added tax on the taxable

person. Each taxpayer shall provide the net tax paid for its sales and purchases of

goods and services subject to VAT


Tax Return Form

• Company A: Hardware store for Tax period: January 1 to January 31, 2018

• VAT collected on sales:

• Sales: 200,000 VAT collected (5%):

• VAT paid on Supplies:

• Domestic purchase of input:30,000 VAT paid to suppliers: 0000

• Import products: 60,000 VAT paid on imports: 0000

• Total VAT paid on supplies: 0000

• Net VAT to remit to GAZT: 000


Example 2


• VAT collected on sales:• Sales: 200,000 VAT collected (5%): 10,000

• VAT paid on Supplies:• Domestic purchase of input: 30,000 VAT paid to suppliers: 1,500• Import products: 60,000 VAT paid on imports: 3,000

• Total VAT paid on supplies: 4,500

• Net VAT to remit to GAZT: 5,500


Example 3


• VAT collected on sales:

• Sales: 200,000 VAT collected (5%): 10,000

• VAT paid on Supplies:

• Domestic purchase of input:30,000 VAT paid to suppliers: 1,500• Import products: 400,000 VAT paid on imports: 20,000

• Total VAT paid on supplies: 21,500

• Net VAT to remit to GAZT or Refund: - 11,500

Company A imported for 6 months of stock in January (stock piler)


Supply Value Adjustment

Modification of the supply value: is a subsequent adjustment (+ increase or reduction) on the value of a

given previous taxable supply.

Such as: cancel supply, change the nature of supply, modify the value of supply, return goods and services

Modification of supply value due to non-payment: It is a subsequent adjustment (reduction) to the value of a previous taxable supply due to written off Debt.

Either in whole or in part). The output tax may be reduced to the extent of the unpaid part, and all the following conditions shall be met:

Previous and previous payment of the output tax Paid, supply not to a related person, 12 months' pass on delivery,

certificate from a legal auditor, Provide evidence (such as a judgment, bankruptcy, or court order proving the claim)

for amounts exceeding 100,000 riyals


In the event of a change in the accounting basis, the effective date shall commence from the date of the tax period immediately

following the period in which the application is approved

VAT Calculation

General rule: - Calculated on the basis of the invoice (accrual), unless the person subject to the calculation is required on a cash basis.

Exception: - may be calculated on a cash basis provided that all the following conditions are met: -

1- The annual supplies subject to (previous or expected) shall not exceed SR 5 million.

2- To comply with the provisions of VAT during the last 12 months (if he has not received notice from the Authority that he

does not comply)

3. Applicant to the Authority and approved by the same body (this may be requested through registration application or

other application).

Return to the invoice system optionally: - Return to the calculation on the basis of the invoice provided that all the following conditions are met: -

1. A 24-month period of use of the cash basis method.

2 - Applicant to the Authority and approved by the same body

Return to Invoice System: -If one of the above conditions is met, the Authority must be notified within 20 days from the date of cancellation of the

condition.


(5%) (amount )X

(vat input accrued )-(vat output accrued)(vat input paid )-(vat output paid)

VAT Calculation

Cash basis invoice basis

(5%)(100% +5%)

X( amountا)

To calculate the tax on each supply (supply excluding

tax)

To calculate the tax on each supply (supply including

tax)

VAT Calculation


VAT Group Registration


•2 or more KSA residents2 can register as a VAT Group in case 50%

or more of the capital of each legal Person, or ownership or control

of 50% or more of the voting rights or value, in both or all of the

legal Persons, is held by same Person or group of Persons, whether

directly or indirectly)

•VAT Group is treated as a single Taxable Person with consolidated

Supplies and joint responsibility

VAT Group Registration


Accounting entries


VAT %’s and their financial Impact

5%

DescriptionAmountVAT Impact

Revenues 1,00050

Purchases 600(30)

Operating profit 40020

Admin, exp1000

marketing50(2.5)

rent60(3)

Net19014,5

0%

AmountVAT Impact

1,0000

600(30)

400(30)

1000

50(2.5)

60(3)

190(35.5)

Exemptمعف

AmountVAT Impact

1,000

630

370

100

52.5

63

154,5


Accounting Entriesالقيود املحاسبية

قيد املشتريات(تكلفة املشتريات)املشتريات / حـ: من مذكورين

(ضريبة مدخالت)الضريبة القابلة للخصم/ حـالنقدية أو البنك أو املوردين/ حـ:إلى

(التوريد)يبيعات املقيد"العمالء"النقدية أو البنك أو املدينون / حـ:من

(بدون ضريبةسعر البيع)املبيعات / حـ: إلى مذكورين(ضريبة مخرجات)على التوريد الضريبة املستحقة/ حـ

قيد التسوية(ضريبة مخرجات)على التوريد الضريبة املستحقة/ حـ:من

(ضريبة مدخالت)الضريبة القابلة للخصم/ حـ: إلى مذكورينأو حوالةالنقدية أو البنك / حـ

(ليف الشحنةحسب تكتكلفة املشتريات)املشتريات / حـ: من مذكورينقيد االستيراد(ضريبة مدخالت)الضريبة القابلة للخصم/ حـ

أو حوالةالنقدية أو البنك أو املوردين/ حـ:إلى

يبل املوردتدفع الضرييبة هنا وفق الفاتورة الضريبية الصادرة من ق

تدفع الضرييبة هنا وفق اليبيان الجمركي الصادر من قيبل الجمارك

ةتدفع الضرييبة هنا وفق اإلقرار الضريبي املقدم للهيئر من اليبائعتستوفى الضرييبة هنا وفق الفاتورة الضريبية الصاد

قيد مردودات املشترياتة تكلف)املشتريات مردودات / حـ: إلى مذكورينالنقدية أو البنك أو املوردين / حـ:من

(املشتريات(ضريبة مدخالت)الضريبة القابلة للخصم/ حـ

يجب ان يتم هنا اصدار اشعار مدين للمورد

(التوريد)قيد مردودات امليبيعات مردودات املبيعات/ حـ: من مذكورين

(ضريبة مخرجات)على التوريد الضريبة املستحقة/ حـ"العمالء"النقدية أو البنك أو املدينون / حـ:إلى

يتم اصدار اشعار دائن للعميل


Accounting Entriesالقيود املحاسبية

Purchases transaction DR : Cost of Purchases 5000

deductible tax (input tax) 250 CR / 5250 Cash or bank or suppliers or transfer

Sales TransactionCR / 2400 Cash or bank or suppliers or transferCR :sales (sale price without tax)2000

Tax payable on delivery (output tax)400

Adjustment Entry Tax payable on delivery (output tax)DR) CR:deductible tax (input tax)CR /Cash or bank or suppliers or transfer

Imports transaction DR :Cost of Purchases 3000 deductible tax (input tax) 150 CR / 3150 Cash or bank or suppliers or transfer

The tax is paid here according to the tax invoice issued by the supplier

The tax shall be paid here in accordance with the customs declaration issued by the Customs

The tax is charged here according to the tax invoice issued by the seller

The tax shall be paid here in accordance with the tax return submitted to the Authority

Purchases Return TransactionCR / 3150 Cash or bank or suppliers or transferCR :Purchases Return 3000

deductible tax (input tax) 150

A notification to the supplier must be issued here

Sales Return TransactionDR : Sales Return 4000

Tax payable on delivery (output tax) 200CR / 4200 Cash or bank or suppliers or transfer

A notification to the customer must be issued here


Capital Assets


Capital Assets

Capital assets: The tangible and intangible assets that form part of the assets of the business and are

intended for long-term use as a business tool or means of investment.

ستخدم يجوز خصم ضرييبة املدخالت على األصول الرأسمالية عند شرائها اذا كانت ت: ضرييبة املدخالت لألصول الرأسمالية

.لغايات النشاط االقتصادي

Such as cars, machinery, production lines, buildings, intangible assets, and any asset used for more than one

calendar year

In the case of assets under construction, such as a person creating a capital asset (construction of a building,

installation of a production line, etc.), and this construction requires time to become a ready-to-use asset,

then the input tax is deducted for the expenses and materials necessary for construction Ready


Capital assets: The tangible and intangible assets that form part of the assets of the business and are

intended for long-term use as a business tool or means of investment.

ستخدم يجوز خصم ضرييبة املدخالت على األصول الرأسمالية عند شرائها اذا كانت ت: ضرييبة املدخالت لألصول الرأسمالية

.لغايات النشاط االقتصادي

The amendment period is (6) years for movable assets, (10) years for immovable assets (attached to land or

construction) or life span whichever is less

(And determines the useful life in accordance with the accounting practice used)

Capital Assets


Fines


Example conditions under which a penalty is imposed1 Level of penalty

Failure to register for VAT SAR 10,000

Failure to submit VAT returns when due 5%-25% of the value of the unpaid tax

Failure to pay the Tax when due5% of the value of unpaid tax for each month or part thereof

Issue of a VAT invoice as an unregistered person SAR 100,000 or less

Failure to maintain the prescribed tax invoices, books, records and accounting documents

SAR 50,000 or less

Submission of false, forged or artificial documents, declarations, records and information

Not less than 100% of tax due

Entering or attempting to enter and removing or attempting to remove goods outside of KSA without paying tax

< 3X value of goods and services subject of evasion

Obstruction of GAZT officer from performing duty SAR 50,000 or less

1. If the same violation is repeated within three years from the date of issuing the Authority's decision of the violation, it ispermissible to double the fine imposed on the offender under that decision.

Penalties to discourage non-compliance


Websites forms


Website www.vat.gov.sa


Self-Registration Form

Example registration form


Invoice Requirements

Example VAT invoice and key requirements in accordance with regulations

VAT InvoiceFrom: Company NameAddress Line 1Address Line 2

From: Receiving Company NameAddress Line 1Address Line 2VAT number

Issue Date 01 Jan 2018

Invoice number 00001

Due date 31 Jan 2018

VAT no. of supplying company 0000000001003

Ser.Code(SKU)

Item Description

Date of supply Qty.

Total price excl. VAT

VAT %

VATSAR

Total SAR

1 0001 First item 01/01/18 10 100.00 5 5.00 105.00

2

3

Notes SAR

Total excl. VAT 100.00

VAT 5.00

Total 105.00

Balance due 105.00

Legal name and the address of the Supplier and of the

Customer

A sequential number uniquely

identifies the Invoice

Tax amount payable, shown in

riyals

If a customer is required to self-account for VAT on

the Supply, the Customer's VAT Number and a

statement that the Customer must

account for the Tax is to be included

VAT number of the Supplier

Narration explaining the VAT treatment of the Supply in case

a different rate than the standard rate is applied


VAT Tax Return (actual draft)

Illustration – Extract of draft VAT return form

1

3

4

5

6

2

Standard rated domestic sales

Zero rated domestic sales

Zero rated exports

Exempt sales

Total Sales

Sales to registered customers in other GCC states

VA

T o

n S

ales

7

10

11

12

8

9

Standard rated domestic purchases

Zero rated purchases

Exempt purchases

Total purchases

Imports subject to VAT paid at customs

Imports subject to VAT accounted for through the reverse charge mechanism

Total VAT due for current period

Corrections from previous period (between SAR ±5,000)

VAT credit carried forward from previous period(s)

13

14

15

VA

T o

n P

urc

has

es

Net VAT due (or reclaimed)16

Amount (SAR) Adjustment (SAR) VAT Amount (SAR)


Requirements for changing the accounting and organizational system in companies to implement VAT


ضرييبة القيمة باملتأثرة األقساماملضافة

Departments Affected By VAT

Finance & Accountin

g

Sales

Procurements

Marketing

IT

HR

Warehouses


• There are a number of key reasons for the need for early planning and an assessment of VAT:

• Understand the challenges: Review existing business structures to determine their efficiency to accommodate VAT related business, identify resources, process adjustments and automated system requirements

• Obtain legal opinions in advance and consider the necessary changes and develop an implementation plan for the project to avoid errors and fines when applying

• Advance Value Added Tax Planning: Identifying the correct operating and recording mechanisms for VAT to protect profit margins that may be affected by non-refundable VAT costs and stay in the lead and avoid competition in pricing products

Consider the details of the industry in which the company operates and its tax effect.

Ensure the timely implementation of tax when imposed and the completion of tests in a timely manner to ensure proper compliance with the implementation of each entity level of the company.

Early assessment and preparation to develop a good understanding of the impact of VAT on business and the implications of various sub-sectors, processes and functions.

Early start and risk assessment will allow the company to keep abreast of developments, obtain opinions in advance and manage change efficiently and effectively


current

• Supplier contracts• Customer contracts• Files of major goods

and services• Customer invoices• Supplier invoices• Audit balance and

adjustments• Revenue Transaction

Types• Types of expenditure

transactions• System Preparation

Document• Transactions between

companies• GCC imports

Planning

• Gap Analysis• hazard identification• work plan• Modify the system• Encoding suppliers• Encoding clients• Modifying report

formats• Registration• Policies and

procedures• Accounts guide

Transfer

• System design• Design reports• Design of models• Main data

consistency

Launching

• Tax declaration• Reverse

feedback and process modification

General framework for work in the project stages


GAZT is a government agency

headquartered in Riyadh and

organizationally linked to the Ministry

of Finance. The aim is to tax non-

resident parties earning income from a

source in the Kingdom.

Introduction to withholding tax in Saudi Arabia


WHT will be deducted from

payments made to the consultant

/contractor in accordance with the

law and tax regulations of KSA

(explained in more detail below).



The client is required to declare and

make payment of the relevant amount

of WHT direct to the General

Authority of Zakat and Tax (GAZT).

The client is obliged to file and settle WHT monthly tax returns to GAZT

within 10 days of the month-end in which the payment is made and is

required to submit an annual WHT return at the fiscal year end.



Failure by the client to withhold

WHT or pay the WHT to GAZT

timeously will result in the client

being liable to pay ‘late submission

fines’ in the WHT that was initially

due.



Double Taxation rules may provide relief to withholding taxes

payable. If you have a concern that double taxation relief may apply,

you should take independent advice from a tax specialist.

WHT is due irrespective of whether the related cost is deductible for

tax or Zakat purposes or not.



Note:- Zakat is an obligatory payment originating from the religious

rules of Islam. Originally, the requirements were addressed to

individuals and only in recent times have rules for corporate zakat

payers been developed.



The client whilst engaging with

consultants/contractors should

establish clear definitions of the

payment terms within their contracts

to ensure there is no dubiety when it

comes to paying for services rendered

in line with the WHT conditions.



All service contracts with non-resident

entities should be reviewed from a tax

perspective before signing (i.e. the wording

and definition of the Scope of Services, the

tax liability clause, etc.)



If a supply contract includes a service portion, the value for the

services should be stated clearly to avoid deemed taxable profit

computation. The non-resident service provider maybe entitled to

tax credits in their home countries against the WHT borne in KSA.



Consultant WHT

During the contract award, determine the percentage of

WHT to be applied to different services, be it 5%, 10%,

15%, or 20% and secondly to separate out those

portions of payments which are for goods/equipment

which are exempt from WHT.

WHT Rates differ between 5%-20% based upon the type

of service and whether the beneficiary is a related

party, as follows


Consultant WHT


During the contract award, whether traditional or lump

sum, it is in the suppliers’ interest to provide a

breakdown of the tender price to determine the labor,

plant and materials costs, as construction materials are

exempt from WHT, minimizing the tax exposure.

WHT rates range from 0%-5% based upon the type of

service and whether the beneficiary is a related party,

as follows;

Consultant WHT


Consultant WHT


The Method of Fee Calculation

1. The client will deduct and retain the

‘Withholding Tax’ WHT element of all

international payments due to the

consultant / contractor (in the manner

set out in the example below).


2. The client will pay the WHT

payments directly to the GAZT and

will supply the consultant/contractor

with auditable document reports to

confirm that the payments have been

affected.



3. Where specifically directed and authorized by the

consultant/contractor, the client will make stage and

interim fee payments directly to the appointed sub-

consultants which are licenses within KSA –

consequently these payments will be free of KSA

WHT regulations. All direct payments will be made

in full compliance with KSA Tax, applicable

regulations and Laws.



• WHT will be applicable on “(D)”, the gross

amount payable to the consultant/contractor.

* Payment to the consultant is calculated gross

value x 95%



Worked Example of Payment to ‘Out of Kingdom’(non-resident/registered) consultants/contractors


Methodology of withholding tax in Saudi Arabia

The tax system in Saudi Arabia is basic but not

simple. Tax regulations are fairly brief and their

provisions are relatively clear in respect to items

that they deal with directly. However, many areas

remain open and subject to interpretation, and

businesses should take a position on unclear areas

and be prepared to defend their position during

tax audits.


Requirements are reasonable but non-

negotiable; for example, only one

corporate income tax return per year is to

be filed, but there are no deadline

extensions or adjusted resubmissions

(except for correcting arithmetic errors)

without penalties.



Tax legislation can be characterized

as stable. Taxpayers can comfortably

plan their tax affairs and budget tax

costs for the foreseeable future – an

advantage that very few economies

offer these days.



The tax law was enacted in 2004, 11 years

ago, yet it is commonly called the New

Income Tax Law. The stability of tax rules is

notable given the constant reforms in

recent years in many other areas of society

and business regulation, e.g., foreign

investment, labor, immigration, finance and

securities market.



However, although fundamental

principles, tax rates and key concepts

have remained unchanged, taxpayers

have been witnessing and experiencing

the introduction of amendments and

additions to various parts of the tax

rules.



The changes have been introduced in various

forms: interpretations of the Department of

Zakat and Income Tax (DZIT) in the form of

their response to frequently asked questions

posted on their website, decisions of appeal

organs of various levels, changes to

implementing by-laws and, finally, changes to

the law itself.



Very little reliable data from public

sources is available at present on

timing, rate, territories (entire GCC or

individual states), etc. However, if VAT

is introduced there will, needless to

say, be a material change for

businesses and consumers.



Saudi Arabia operates two parallel tax

systems. Different tax regimes apply to

companies owned by Saudi/GCC nationals

and to the rest: resident companies

owned by Saudi/GCC nationals are subject

to zakat payment, all other firms pay

corporate income tax.

Introduction to the KSA tax system


Zakat liability for corporates originates

from Islamic religious rules. Regulations

require “looking through” Saudi

resident companies to identify their

ultimate beneficiary owners.



However, this requirement does not extend to

foreign holding companies located outside of

the GCC. In other words, if a Saudi company

(or group) is owned by an entity outside of

the GCC, irrespective of the nationality of the

ultimate beneficiaries, this Saudi company will

normally be subject to corporate income tax.



“Mixed companies”, i.e. companies

jointly owned by Saudi/GCC national(s)

and foreign individuals/entities, are

subject to both zakat and corporate

income tax, applied to the respective

shares of shareholders in the business.



Foreign companies that have created a

permanent establishment (PE) in KSA are

subject to corporate income tax via self-

assessment in a manner similar to Saudi

companies; foreign companies that earn

income from Saudi sources without creating a

PE are subject to tax by way of withholding.



All corporate employers are liable for their share of social insurance contribution.

• There are no other corporate taxes in KSA.

• The DZIT is the government body responsible for the implementation of policies, the collection of dues and ensuring compliance by zakat/taxpayers.

• The General Organization for Social Insurance (GOSI) has similar responsibilities for social taxes.



The new draft zakat regulation was approved

by the Shura Council in June 2014. It includes

certain changes to the basis of zakat

computation as compared to the current

practice, which is likely to be changed further

before the regulation comes in force. Some

salient features of draft regulations are:

Certain updates on Zakat Regulations


It will apply to:

1. Resident natural Saudi/GCC individuals;

2. Closed investment funds (treated as capital

companies);

3. Owners of properties available for sale or rent;



It will apply to:

4. Charitable societies and non-profit organizations

are exempted from zakat; and

5. Properties, real estate and land held for trading or

leasing purposes, including vacant or developed

land owned by individuals and business entities,

will be subject to zakat.



Zakat base computation will be shifted from its

current focus on equity and long-term assets/

liabilities to a working capital basis.

There are some items which will be included in

zakat, for example receivables, stock of goods

and raw materials and so on. Deduction from

the zakat base will be available for liabilities

connected to the zakatable base.



It is proposed that zakat will be computed at

2.577% for companies following the Gregorian

year (as against 2.5% for companies following

the lunar year). Further, zakat payers will be

allowed to pay up to 20% of their annual zakat

liabilities to registered charitable institutions

and societies that are authorized to receive

zakat.



A delay penalty of between SR100 ($26.65) and SR25,000

($6662.50) per year is proposed to be imposed for not

filing zakat returns on time (i.e. within 120 days of the

year-end).

It is proposed to levy a zakat evasion penalty of twice the

zakat due, whereby the zakat payer and certified public

accountant (CPA) are jointly liable for the penalty

settlement.



Zakat and tax advisors may be required to certify the

returns if the capital is SR500,000 ($133,250) or more

and/or if revenue for the year is SR5m ($1.33m) or more.

OVERVIEW OF CORPORATE INCOME TAX REGIME

Regulatory Framework: Corporate 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).



In addition, the Ministry of Finance issues

resolutions concerning tax and zakat, and the

DZIT regularly issues circulars and responses to

frequently asked questions containing its

interpretation/position on various parts of the

tax system.



Tax administration and enforcement practices in

the Kingdom can be characterized as being both

substance and form driven. The tax authorities

may (and often do) scrutinize transactions to

understand their substance and may challenge

taxpayers if they view transactions as tax driven.

At the same time, documentation (contracts,

invoices, etc.).



International Agreements: Generally, provisions

of international agreements to which KSA is a

party prevail over the provisions of domestic tax

legislation. An exception to such provisions is

made under the anti-avoidance rules contained

in Article 63 of the Tax Law (please see further

discussion in the Double Tax Treaties section

below).



Tax Accounting: The tax system is mainly based on

financial accounting and reporting, which should be based

on Saudi Generally Accepted Accounting Principles

(GAAP) – standards issued by the Saudi Organization of

Certified Public Accountants. The Tax Law sets its own

rules with respect to some specific areas, e.g.

depreciation method, accounting for long-term contracts,

etc.



The Saudi riyal is the currency for tax accounting. The tax

year is a Hijri calendar year (i.e. lunar year). The Gregorian

calendar year or a different calendar tax year may be

used, with the latter being subject to certain restrictions.

Books must be maintained in country and in the Arabic

language. Persons Subject to Tax: Under the Tax Law, the

following persons are defined as subject to tax in KSA:



• A resident capital company in respect of the shares of non-

KSA/GCC nationals.

• A resident non-GCC individual who conducts business in KSA.

• A non-resident who conducts business in KSA through a PE;

• A non-resident with other taxable income from sources

within the KSA.

• A person engaged in the field of natural gas investment; and



• A person engaged in the field of oil and hydrocarbons

production Tax Residents: A natural person is resident in

KSA if one of the following conditions is met:

o He/she has a permanent place of residence in KSA and resides

in KSA for at least 30 days in a tax year; or

o He/she resides in KSA for at least 183 days in a tax year

without having a permanent place of residence. A company is

considered resident in KSA if one of the following conditions is

met:



Disposal of shares in a resident company or a resident

partnership;

Lease of moveable properties used in KSA;

Dividends, management fees or director’s fees paid by a

resident company;



• It is formed in accordance with the KSA Companies Law; or

• Its central management is located in KSA. Taxable Income &

Tax Base: Generally, taxable income is the gross income

including all revenues, profits or gains of any type and of any

form of payment resulting from carrying out an activity,

including capital gains and any incidental revenues less

exempted income.



• The Tax Law provides that income from the following specific

types of activities/sources is considered taxable in KSA:

o Use of license in KSA for industrial or intellectual properties; this

category of income also covers software licences;

o Activities within KSA;

o Immovable property located in KSA, including gains from the

disposal of an interest in such immovable properties;

o Services rendered by a resident company or PE to the company’s

head office or to an affiliated company;





o Payments made by a resident for services performed in whole or in

part in KSA; and

o Income of a Saudi PE. Taxpayers are required to prepare financial

statements under Saudi GAAP and are expected to have them

audited. Net income according to those financial statements, as

adjusted for tax purposes, is the base subject to corporate income

tax. Tax Rates: Standard corporate income tax is charged at a flat

20% rate.





o A special 30% rate applies to income of taxpayers engaged in only

“natural gas investment activity”. Another special 85% rate applies

to income from production of hydrocarbons.



The GCC established a common external tariff of 5 %

for most imported goods. There are no other duties or

taxes for products going to Saudi Arabia.

Saudi law prohibits importation of the following

products: weapons, alcohol, narcotics, pork,

pornographic materials, distillery equipment and

certain sculptures.

Customs duties


Other Taxes

There is no form of stamp duty, transfer pricing, excise,

sales, turnover, production, real estate, property or other

material taxes that currently apply to businesses in KSA.

Tax Status of Individuals in KSA

Both the Tax Law and zakat regulations mention individuals

as payers of respective payments. Income Tax: A number of

articles of the Tax Law contain references to individuals.

Customs duties


As indicated in the corporate income tax part above,

persons subject to tax include:

• A resident non-GCC individual who conducts business in

KSA,

• A non-resident with other taxable income from sources

within the KSA, Tax residents include:

o He/she has a permanent place of residence in KSA and

resides in KSA for at least 30 days in a tax year; or

Customs duties


o He/she resides in KSA for at least 183 days in a tax

year without having a permanent place of residence.

Further, the definition of “activity” in the Tax Law,

income from which is subject to tax in KSA, is quite

broad and also contains types of activity that would

be undertaken only by individuals: an activity is a

commercial activity in all its forms, or any vocational,

professional or other similar activity for profit.

Customs duties


As indicated in the corporate income tax part above, persons

subject to tax include:

Non-residents (who do not have a branch or PE) deriving

income from a Saudi source are assessed withholding tax

(WHT) at 5% to 20%, depending on the nature of the income

derived. This is discussed further in this article.

Customs duties


There are a number of WHT rates applicable to

income from sources in KSA discussed further in

this article. Loss Carry-Forward: Tax losses may be

carried forward indefinitely until fully utilized.

Deduction of tax losses is limited and should not

exceed 25% of the tax base of a particular year.

Customs duties


In the event of a change in control of 50% or

more of the shares or voting rights of a

taxpayer, all carried-forward losses will forfeit.

Loss carry-backs are not allowed.

Customs duties


Based on our recent tax audit experience, the DZIT has

been disallowing the off-set of carry-forward losses which

were incurred in the initial years of setting up of a

company and where the revenue is nil. The DZIT believes

that since the company did not generate revenue during

such period, the cost incurred is pre-operative in nature

and does not meet the expense deductibility criteria as

per the By-Laws of the Tax Law.

Customs duties


However, in practice the Tax Law has never

been interpreted and enforced to charge

income tax to individuals. Irrespective of

duration of stay and status of residence, to

date employment income of individuals has

remained free from taxation in KSA.

Customs duties


That said, tax agents will deduct tax from

income subject to WHT even if it is paid to

individuals. Zakat: As per the original rules of

Islam, zakat is the responsibility of an

individual. Application of zakat on corporates is

seen as the “help” by the government to

individuals to fulfil their obligation.

Customs duties


However, similar to income tax, the Saudi

Arabian authorities do not enforce the rules to

ensure compliance by individuals. In practice,

only corporate zakat payers have the

responsibility to meet the requirements before

the DZIT.

Customs duties