Withholding tax on payments to related parties
The amended by-laws now clearly distinguish payments to unrelated non-resident persons for technical and consulting services and international telecommunication services from payments for the same services to non-resident related parties. While payments to unrelated parties are subject to withholding tax at 5 percent, related-party payments for the same services are now subject to withholding tax at 15 percent.
Under a longstanding view of the DZIT officials, technical services payments to related parties were always subjected to withholding tax at the higher rate of 15 percent, rather than the general 5 percent rate applicable to certain specified services (including technical and consulting services and international telecommunication services). On the other hand, taxpayers were of the view that the 15 percent rate for payments to related parties only applied to services for which no withholding tax rate was specifically provided for in the law or in regulations. As the implementing regulations specifically stated that technical and consulting services and international telecommunication services were subject to withholding tax at the 5 percent rate, prior to the amendments brought into effect through the MR, the taxpayers argued that the 5 percent rate should apply to such services.
The difference in the two views led to tax litigation in a number of cases. In one decision, the Higher Appeal Committee upheld the taxpayers’ view.
While related-party payments for technical and consulting services are now clearly subject to withholding tax at 15 percent, taxpayers might still argue that payments for international telecommunication services should still be subject to withholding tax at 5 percent, which is provided for in the tax law (not the by-laws), as the by-laws cannot override the tax law.
Withholding tax on interest payments by banks
The MR clarifies that interbank deposits received for up to 90 days do not give rise to any Saudi-sourced income. Accordingly, if an interbank deposit is repaid within 90 days, any interest paid on such deposit should not be subject to a withholding tax. However, in order to avail of the relief, the bank must provide the DZIT with an annual statement certified by the Saudi Arabian Monetary Agency (SAMA), setting out the details of qualifying short-term deposits and the names of correspondent foreign banks.
Before this specific amendment, income from short-term interbank deposits was also considered tax-exempt. However, the DZIT officials viewed short-term interbank deposits as deposits held for a day or so. The DZIT officials would subject all other interbank deposits to a 5 percent withholding tax by treating the related income as Saudi-sourced. This posed serious problems for banks in Saudi Arabia and made it difficult for them to obtain liquidity from foreign banks on a competitive basis. Banks in Saudi Arabia had approached SAMA to resolve this matter.
The MR’s wording seems to restrict the concession to Saudi resident banks only. It will be interesting to see whether the relief is also extended to interest paid by branches of foreign banks.
Transfer pricing regulations on the way
While transfer pricing has been a long-time focus of the DZIT officials, until now they have relied on the tax law’s general anti avoidance provisions in carrying out tax assessments.
The MR now requires the DZIT to issue transfer pricing regulations. How the DZIT will frame these regulations will be interesting to see, as the tax law only allows the Minister to issue implementing regulations and instructions and to take measures needed for implementing the tax law. The tax law issued under the Royal Decree does not give any powers to the Minister to delegate the issuance of regulations to the DZIT.
Interest paid by foreign bank branch to head office
Previously, the DZIT officials disallowed deductions for interest paid to head offices by branches of foreign banks in certain cases. In line with global practices, an amendment in the MR confirms the deductibility of such interest payments. The withholding tax would still apply to these payments, as discussed above.
Transport sector – The net profit for branches of foreign airlines and land and maritime freight companies working in Saudi Arabia is estimated at 5 percent of their revenues. The amended by-laws now clarify that gross revenues include sale of passenger tickets, excess baggage of passengers, freight and postal or any other income resulting from voyages embarking from Saudi Arabia.
Capital gains – Previously, in a sale of share transaction by a non-resident, the seller was required to inform the DZIT and settle any tax on pre-sale period profit and resulting capital gains. Under the amended by-laws, the seller’s obligation is now restricted to paying tax on capital gains only and no tax payment on pre-sale profits is required. Also, now only the purchaser and seller are jointly liable for any outstanding tax in relation to the sale of shares – the company itself is no longer jointly liable.
Small businesses – Previously, the by-laws prescribed a 15 percent deemed profit rate for estimating the income in the case of small businesses. The amended by-laws apply the profit rate for small businesses after taking into account the nature of activity or profession. The profit rate would not be less than the prescribed rates2, which range from 10 percent to 80 percent.
DZIT’s right to seek taxpayer information and assistance from other tax authorities
The amended by-laws clarify that DZIT officials are authorized to seek tax-related information from any person, whether or not such person is a taxpayer. DZIT officials are also empowered to seek help from other executive authorities of the government in order to enforce compliance by a non-cooperating person.
11776 dated 18-5-1435H (corresponding to 19 March 2014).