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  • Service: Tax
  • Type: Business and industry issue
  • Date: 1/23/2014

Saudi Arabia – Tax revenues, efiling of Zakat returns and more 

This article features updates on developments of interest to foreign investors in Saudi Arabia, with the latest news on Saudi tax and Zakat collections, electronic filing of Zakat returns, tax treaties, tax appeals, and new requirements of the Saudi Arabia General Investment Authority.

Surge in Zakat and tax revenues


In the first eight months of 2013, Saudi Arabia’s Zakat and tax revenues reached 20 billion Saudi riyal (SAR) and are poised to achieve 10 percent growth by the year’s end. At the end of August, Zakat and tax revenues stood at SAR 14 billion and SAR 6 billion respectively.


Electronic filing of Zakat returns


Continuing with their efforts to automate the Zakat and tax process, the Department of Zakat and Income Taxes (DZIT) recently introduced mandatory electronic filing for all Zakat declarations. Going forward, the DZIT will not accept a paper-based Zakat. The DZIT has requested all Zakatpayers and taxpayers to register with the DZIT online or update their registration information if already registered.


Among other features, the new electronic filing system allows Zakatpayers to track the status of their Zakat declarations online, view their statements of account and print their Zakat certificates.


According to KPMG in Saudi Arabia, this DZIT initiative appears to be part of a larger reform project that eventually may see the electronic filing system rolled out to cover all types of filings.


Treaty news – Tunisia, Kyrgyzstan and Barbados


The tax treaty signed between Saudi Arabia and Tunisia has entered into force. The treaty, which became effective from 1 January 2014, generally follows the OECD model treaty (2008) and provides concessionary withholding tax rates for royalty payments (5 percent, against 15 percent normally applicable) and bank interest payments (2.5 percent, against 5 percent normally applicable).


On 25 November 2013, the Saudi Arabian Cabinet authorized the Ministry of Finance to sign income and capital tax treaties with Algeria and Kyrgyzstan.


In a recent press release, the tax authorities of Barbados expressed the country’s intentions to start negotiations for a tax treaty with Saudi Arabia.


Taxpayer wins appeal on capital gains on non-resident’s sale of shares


The Preliminary Appeal Committee recently ruled on the method of calculating capital gains tax on the sale of shares by a non-resident shareholder in a Saudi company. The Committee rejected the DZIT’s method of calculating capital gains tax by comparing the highest of market value, book value and contract value with the par value of the shares. The Committee said this method is appropriate only where the company does not hold books and accounts.


The Committee ruled that where a foreign shareholder sells shares in a Saudi company, the proceeds should be first allocated to retained earnings, reserves and any shareholder loan or current account balance. Then the remaining proceeds should be compared with the share capital to arrive at the capital gain. In other words, the cost base of the disposed shares should include retained earnings, reserves and current account.


While this development is significant, KPMG in Saudi Arabia’s view is that the attribution of sale proceeds to retained earnings and reserves might be considered as a realization of the value of retained earnings and reserves by the seller and thus deemed to be a receipt of dividend by the seller. If so, this would trigger the 5 percent withholding tax that is applicable on dividend payments to non-residents.


Complying with SAGIA’s new Code of Conduct


The Saudi Arabia General Investment Authority (SAGIA) introduced sweeping reforms to the Foreign Investment Act in March 2013, including penalties for SAGIA-registered foreign investors who fail to comply with its new Code of Conduct for Foreign Investors.


The new Code sets out different types of breaches that may be committed by foreign investors operating and conducting business in the Kingdom of Saudi Arabia, such as:


  • Differences between the name in the commercial registration and the name in the SAGIA license
  • Failing to notify SAGIA about changes in address, correspondence and contact details
  • Selling visas issued to the legal entity to workers or other entities.
  • Failing to initiate business in services projects within six months from the license issuance date.

In all, the Code sets out about 60 forms of breaches. Penalties include fines and cancellation of the legal entity’s license, and so complying with the Code should be treated as part of the entity’s ongoing obligations. Entities should keep all records up-to-date and conduct regular monitoring and compliance checks.


New SAGIA license renewal requirements


In December 2013, SAGIA issued new requirements for renewal of SAGIA licenses. Among other things, the legal entity now must send a copy of its last two financial statements to SAGIA so SAGIA can monitor the entity’s financial performance and its effective contribution to the Kingdom of Saudi Arabia. There are unlikely to be any exemptions to this requirement.

 

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  • KPMG’s TaxNewsFlash series provides a summary of the latest tax developments being reported by KPMG firms from around the globe including the MESA region.
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