Saudi Arabia’s withholding tax applies at different rates on payments made to non-resident parties by a resident or a permanent establishment of a nonresident from a Saudi Arabian source of income. For example, the withholding tax applies to any amount paid from within Saudi Arabia for services provided by a non-resident enterprise. Services are defined to mean anything done for consideration other than the purchase and sale of goods and other property.
The consequences of failing to meet Saudi withholding tax obligations are severe. Late payments are penalized at a rate of 1 percent of unpaid tax for each 30-day period following the due date for which the amount remains outstanding. Even worse, the Department of Zakat and Income Tax (DZIT) has the right to not issue tax and Zakat certificates for non-compliant businesses, which would prevent them from conducting further business in the country.
Saudi withholding tax must be remitted within the first 10 days of the month following the month of payment to the recipient. For related parties, a withholding tax obligation does not only arise when an actual payment is made. The Saudi tax authorities have said that where remuneration between a resident payer and a foreign related payee occurs through settlement of debit and credit accounts instead of actual payment, withholding tax is payable upon payment or deemed payment (i.e. on clearance or settlement of accounts). The date of settlement is considered to be the date of payment unless the settlement is between related parties; in that case, it is the date of book entry.
Broad interpretation of ‘source in Saudi Arabia’
According to the Saudi tax authority, payments for services performed fully outside the country are not subject to withholding tax – with some important exceptions. These include:
- Where technical and consulting services are provided to a Saudi resident entity.
- Where a Saudi resident entity pays management fees to a non-resident entity.
- Where the service may be construed as being similar to technical and consulting services, such as research and study expenses, most types of advertising, and legal expenses.
This aspect of the rules is particularly costly for foreign companies doing business in Saudi Arabia’s burgeoning oil and gas and energy, procurement and construction industries.
Technical services – different withholding rates for related vs. unrelated parties
Payments to non-residents for technical services generally are subject to a 5 percent withholding tax rate. The rate jumps to 15 percent on payments for services from a branch to its head office or by a company to a related party (except for rent, royalties and dividend payments).
As a result, withholdings on payments to related parties for technical services are subject to the higher 15 percent rate. Although one taxpayer has succeeded persuading the courts to agree that the 5 percent rate should apply regardless of the payer-payee relationship, the law and administrative practice are unchanged.
However, note that the tax authorities have confirmed in writing that rents, dividends and interest payments made to related parties would be subject to withholding tax at the 5 percent rate.
Treaty-based reductions only available by refund
Saudi Arabia’s tax treaty network is growing, and the country has signed agreements with over 20 countries in Europe, Asia-Pacific and Africa to date. The Saudi tax authority requires companies to withhold tax on all affected payments at the domestic rate and file a refund or credit claim to recover overpayments, even where a tax treaty entitles the payer to withhold at a lower rate. This process can create cash flow issues for taxpayers and administrative inefficiencies for taxpayers and the tax authority alike.
Companies have challenged this policy for securing treaty-based withholding tax breaks, and the tax authority has opened the possibility to allow taxpayers to obtain advance rulings in order to apply tax treaty rates. Thus, one way to obtain the treaty benefit upfront would be to seek a ruling from the DZIT regarding the application of the treaty rates.
New e-filing system
The Saudi tax authority introduced a new electronic filing and remittance system in 2011. Unfortunately, serious bugs remain in the system, creating significant potential for errors that are often difficult to correct. Until this situation changes, companies are advised to make physical payments and obtain paper receipts. As noted, the tax authority issues tax compliance certificates to compliant taxpayers – and without this clearance, Saudi business registration can be disallowed.
Review contracts for potential withholding tax issues
The issues discussed above are just a few of the difficulties that foreign companies may encounter when dealing with Saudi Arabia’s withholding tax system. Other problems range from a lack of clarity over the nature of certain items for withholding tax purposes (such as air and freight forwarding costs) and resulting inconsistencies in interpretation. Advance rulings may be available but they may not be binding, and it can take a lengthy amount of time to resolve issues through the country’s tax objection and appeal process.
Foreign companies doing business in Saudi Arabia should review their proposed contracts carefully to identify and mitigate any withholding tax issues. They should also secure local tax advice to help ensure all tax compliance bases are covered.
Top five Saudi withholding tax issues
Five of the most troublesome withholding tax issues for companies making cross-border payments in Saudi Arabia are as follows:
- Related-party settlements trigger withholding tax obligations.
- An overly broad interpretation of ‘source in Saudi Arabia’ catches certain foreign activities.
- For payments for technical services, different withholding rates for related vs. unrelated parties.
- Treaty-based reductions generally are only available by refund.
- New electronic filing and payment system is prone to errors.
At a glance – Saudi withholding tax rates
|Payments against services to the head office or to a related party passenger cards and cargo vehicles
|Rent, consultancy or technical services, air tickets or airfreight or sea freight, international telecommunication services, dividends, interests on loans, insurance or re-insurance installments
|Any other payments
Source: KPMG International, 2012.
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