Joining international efforts to crack down on tax offenders, Saudi Arabia has signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The agreement provides for spontaneous exchange of information, simultaneous tax examinations and assistance in tax collection.
Continuing in its drive to attract foreign investors, Saudi Arabia recently signed a double taxation avoidance treaty with Luxembourg. The treaty’s provisions open certain tax planning opportunities, especially in the areas of debt financing and Islamic finance.
In the past, the Saudi Department of Zakat and Income Tax (DZIT) followed a “pay-first-claim-later” approach to withholding taxes, requiring payers to withhold amounts under domestic law and then requiring non-resident recipients to file a refund claim to obtain treaty benefits.
Under a newly issued circular, Saudi resident payers now have an option to apply withholding tax at reduced treaty rates, provided the following conditions are met:
- the payer reports all payments to non-residents to the DZIT monthly
- a formal request for treaty relief is made, along with evidence supporting the claim
- the payer assumes responsibility for any withholding taxes and fines arising out of an incorrect claim.
The DZIT has recently shifted its focus from desk audits to field inspections on a random basis. Previously, the DZIT requested information by issuing queries and raising assessments via desk audits. In a field audit, the first step of DZIT inspectors usually is to ask taxpayers to produce Arabic books of account, which are required by the tax regulations.
This requirement should be kept in mind by foreign companies with interests in Saudi Arabia, as most international companies keep their books of account in other languages.
The Minister of Finance has approved the use of the straight-line method for depreciating fixed assets for Zakat payers. The fixed assets are distributed among five categories and depreciation rates. Certain Zakat payers may need to meet certain conditions or have other options available for this purpose.
In a recent decision regarding a contract for supply and installation of equipment, the DZIT imputed an amount of 10 percent as service element. The 10 percent service element was determined on each service portion of the contract, which included installation and maintenance. These 10 percent imputed service portions were then subjected to withholding tax at the rate of 5 percent.
The Saudi Arabia courts recently rendered some important appellate decisions in favor of Zakat / tax payers related to:
- deduction of loan receivables for Zakat purposes in intercompany financing arrangements
- application of 5 percent withholding tax rate (instead of 15 percent) on technical services to related parties
- non-applicability of withholding tax due to a mere accounting accrual.
To verify a taxpayer’s salaries expense, the DZIT generally requires a certificate from General Organization of Social Insurance (GOSI) and an auditors’ certificate. In light of the current drive to correct employee visas, taxpayers should ensure their employees’ documentation is up to date.
DZIT is taking a new, proactive position to engage with Zakat and taxpayers so that outstanding tax and Zakat assessments can be finalized through discussion and settlement, to reduce the need to resolve issues through the appeals process.
When filing returns, taxpayers and their advisers often encounter these issues:
- DZIT requires taxpayers to provide copies of all corporate and withholding tax payment receipts for the year, even though are already available to DZIT within its systems
- DZIT often insists on the submission of customs lists for foreign purchases, even though this not mandatory
- tax and Zakat returns are not accepted in the absence of audited financial statements prepared in Arabic
- DZIT may require completion of all schedules, even those that are not applicable.