Javed Aziz Khan - ICAPKSA · PDF fileJaved Aziz Khan. Slide 2 22 April 2012 ... Branches of GCC companies in Saudi Arabia are subject to income tax instead of zakat unless central

22 April 2012

Overview of Zakat and Income Tax Regulations in KSA

Javed Aziz Khan

22 April 2012Slide 2

Content

► An overview of fiscal obligations► An overview of Saudi tax regulations► Zakat regulations► Withholding tax► Tax treaties► Other important matters


An overview of fiscal obligations



► Corporate income tax (CIT)

►Withholding tax (WHT)

► Zakat



► TAX at 20% is applied on taxable profits of:- A resident capital company attributable to non-Saudi

shareholding- Non-resident persons carrying on an activity in Saudi Arabia

through a permanent establishment- Separate rates apply on Oil and Gas Companies

► Withholding tax (WHT)- WHT @ 5% - 20% is payable on payments to non-resident

parties earning income from a source in the Kingdom. - Monthly settlement and filing withholding tax return due within

10 days of the month-end in which payment is made► Zakat

Zakat is a religious levy payable in respect of Saudi and GCC shareholders in a resident capital company. Assessed at 2.5% on “net assessable funds” OR the adjusted profit whichever is higher



Department of Zakat and Income Tax (DZIT)

► The DZIT is responsible to collect tax, WHT and zakat► The DZIT head office is in Riyadh with branch offices in

Riyadh, Jeddah and AlKhobar. The DZIT also has branches in other cities of the Kingdom

► The DZIT has the right to information in order for them to collect tax, WHT and zakat

► The DZIT may conduct field examination of the tax/zakat payer’s books and records to ascertain correctness of the liabilities for tax, WHT and zakat


An overview of Saudi tax regulations



► Income Tax Law and By-Laws are applicable to fiscal year of a taxpayer commencing after 30 July 2004

► Withholding tax provisions are applicable to payments made on or after 30 July 2004

► Income tax rate fixed at 20%. Separate rates applicable on Gas and Oil Companies

► Saudi and GCC share in a Saudi capital company is subject to zakat

► Branches of GCC companies in Saudi Arabia are subject to income tax instead of zakat unless central management of such GCC companies is located in the Kingdom of Saudi Arabia in which case it is subject to zakat.



► Annual tax filing due within 120 days from year-end► Annual tax declaration to be “Certified” by licensed

accountant if revenue exceeds SR 1,000,000 (not applicable to 100% Saudi owned companies)

► Not mandatory to file the audited financial statements with the annual tax declarations. However, these may be requested by the DZIT. Audited financial statements are required with the zakat declarations

► To register with the DZIT before the first year end or else a fine is imposed

► Advance tax payable for current fiscal year in three quarterly installments based on the previous year’s tax liability if the previous year’s tax liability was more than SR 2,000,000.



► Suppliers’ contracts exceeding SR 100,000 and any amendment thereto to be reported to the DZIT within 90 days of agreement or amendment by using Contract Information Forms (CIF)

► Capital gains arising on sale of shares by non-resident shareholders are subject to 20% capital gains tax (CGT)

► The seller should inform the DZIT and pay capital gain tax and income tax until the date of sale, within 60 days of the sale of shares.

► Sale of shares listed on Tadawul (Saudi Stock Exchange) are exempt from CGT if:- The shares were acquired after 30 July 2004; and- The sale of shares was carried out in accordance with the

regulations of Saudi Stock Exchange


An overview of Saudi tax regulations- Persons subject to tax

► A resident capital company on the non-Saudi shareholding► A resident non-Saudi natural person who carries-on an

activity in the Kingdom► A non-resident person who carries-on activity in the Kingdom

through a permanent establishment (PE)► A non-resident person (both Saudi & Non-Saudi nationals) on

income subject to tax from an in-Kingdom source► Persons engaged in the field of natural gas, production of oil

and hydrocarbons


An overview of Saudi tax regulations- Residence criteria

► A natural person is considered resident for a taxable year if:► He has a permanent place of residence in the Kingdom,

and physically resides in the Kingdom for 30 days or morein a taxable year ; or

► He physically resides in the Kingdom for 183 days ormore in the taxable year.

► A capital company is considered resident if:► It is formed under the companies regulations in the

Kingdom; or► Its place of central management is located in the Kingdom


An overview of Saudi tax regulations- Tax rates

► A flat tax rate of 20% is applied to the taxable profits of:

► Resident capital companies on the non-Saudishareholding

► Non-resident persons who carry-on an activity in theKingdom through a PE

► A tax rate of 30% is applicable on persons engaged in the field of natural gas

► A tax rate of 85% is applicable on persons engaged in the production of oil and hydrocarbons


Zakat overview


Zakat overview- What is Zakat?► Zakat is a religious levy payable in respect of Saudi and GCC

shareholders in a resident capital company► Assessed at 2.5% on “net assessable funds” OR the net

adjusted profit whichever is higher

The zakat base generally comprises of share capital, statutoryreserves, retained earnings, provisions, shareholders’ creditcurrent account balances, term and shareholder loans less netbook value of long term assets plus the adjusted profit for theyear


Zakat overview- Zakat calculation

Net adjusted profit (loss) for the year XXXXOpening balance of owners’ equity XXXXOpening balance of provisions XXXXLoans obtained to finance deductible assets XXXXLess (deductible assets):Net book value of fixed assets (XXXX)Long term investments (XXXX)

Zakat base XXXX

Zakat due on zakat base @ 2.5% XXXX

Notes:1) DZIT insists on settlement of zakat of the higher of the zakat base

or adjusted profit for the years2) DZIT adds all loans to the zakat base irrespective of their use a

long as the loan has been in the business for a complete year


An overview of Saudi tax regulations- Law applicable to zakat payersThe following provisions of new tax law are applicable on zakat payers:

► Depreciation rules and rates stipulated in Article 17 of new law (will be covered in a separate session)

► Provisions regarding a fiscal year as stipulated in Article 22 of new tax law:► 12 months period► Short and long periods permitted► Change in fiscal year allowed► Group of affiliated companies shall use the same

year


An overview of Saudi tax regulations- Law applicable to zakat payers► Method of accounting as stipulated in Article 23 of new

law:► Accounting basis generally accepted in the Kingdom► Accrual basis► DZIT’s consent to change the basis of accounting► Adjustment due to change in basis of accounting

► Cash basis of accounting (Article 24)► Accrual basis of accounting (Article 25)► For long term contracts, percentage of completion basis

will be accepted as stipulated in Article 26 of law and Article 20 of bye-laws

► Accounting for inventories (Article 27)


An overview of Saudi tax regulations- Law applicable to zakat payers► Return to be filed on specified form and pay zakat due

as stipulated in Article 60 (a)► Return must be filed within 120 days of the year end as

stipulated in Article 60 (b)► To advise DZIT and file a return on cessation of activity

within 60 days as required in Article 60 (d)► Reporting of suppliers contracts exceeding SR 100,000

to DZIT as required under Article 61 of law and Article 58 of bye-laws

► Withholding tax provisions as stated in Article 68 of law and Article 63 of bye-laws


Withholding tax (WHT)


Withholding tax (WHT)

Who is subject to WHT?► Non-residents (including GCC parties) in Saudi Arabia in respect of

income earned from a source in the Kingdom

Who is responsible to withhold?► A Saudi Arabian resident entity whether or not a taxpayer ► A permanent establishment of a non-resident in the Kingdom► A natural person on payments related to business activity

Other rules relating to WHT► WHT is calculated on the gross amount to be paid to the non-

resident (i.e. before deducting any related costs)► WHT is full and final settlement of the tax liability of non-resident. ► WHT is due irrespective of whether the related cost is deductible

for tax or zakat purposes or not► Special consideration for payments to affiliates


Withholding tax (WHT)WHT ratesTypes/nature of Payment WHT rate

1. Management fees 20%2. Royalty or license fees 15%3. Payments for services provided by the 15%

head office or related companies4. Payments for technical and consulting services 5%5. Loan fees (Interest) 5%6. Insurance or reinsurance premiums 5%7. Payments for air tickets, air freight 5%

or marine shipping8. Dividend payments 5%9. Payments for international telecommunications 5%10. Rent 5%11. Any other payments (in-Kingdom) 15%


Withholding tax (WHT)- Obligations of the withholder► Register with the DZIT► Withhold the tax due from non-resident parties ► Submit monthly WHT return form and settle the tax withheld

to the DZIT within the first ten days of the month following the month during which the payment is made

► Submit annual WHT return for withholding transactions► Furnish the payee with a WHT certificate if needed► Maintain for 10 years from payment the records necessary to

verify the correctness of the tax withheld


Withholding tax (WHT)- Penalty provisions for non-compliance► If tax is not withheld, the payer is liable for the amount of

withholding tax► If WHT is not paid within the stipulated period, delay fine is

imposed at 1% per month for each 30 days of delay► In case of evasion of WHT an additional tax evasion fine of

25% is imposed on the unpaid tax► If the tax is not withheld, the non-resident remains liable for

tax due and the DZIT can recover it from him, his agent or his sponsor


Withholding tax (WHT)- Actions to minimize WHT exposure► All service contract with non-residents entities should be

reviewed from 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 in the contract to avoid deemed taxable profit computation

► Discuss with the non-resident service provider the possibility of getting tax credit in their home countries against WHT suffered bearing in mind that WHT is the liability of the non-resident per law

► Consider tax treaties benefits► WHT due as per the law should be paid on time to avoid

delay fines


Withholding tax (WHT)- Actions to minimize WHT exposure - exampleA contract entered into with a non-resident unrelated party for thefollowing services:

Supply of materials SR 85,000,000Engineering SR 5,000,000Installation SR 5,000,000Maintenance SR 5,000,000

Total contract value SR 100,000,000


Withholding tax (WHT)- Actions to minimize WHT exposure - example

Taxation of the contract if value for each service is stated separatelyas above:

Contract element Value per contract

SR

Tax base

SR

WHT due (5%)

SRSupply 85,000,000 -- --

Engineering 5,000,000 5,000,000 250,000

Installation 5,000,000 5,000,000 250,000

Maintenance 5,000,000 5,000,000 250,000

Total 100,000,000 15,000,000 750,000


Withholding tax (WHT)- Actions to minimize WHT exposure - example

Taxation if the contract value is shown as lump sum amount ofSR 100,000,000

Contract element

Value per contract

SR

Tax base @ 10%

SR

WHT due (5%)

SRSupply Not stated separately -- --

Engineering Not stated separately 10,000,000 500,000

Installation Not stated separately 10,000,000 500,000

Maintenance Not stated separately 10,000,000 500,000

Total 100,000,000 30,000,000 1,500,000


Tax treaties


Tax treaties- Objective of tax treaties► Elimination of double taxation

► Provide encouragement and certainty to investors

► Prevent fiscal/tax evasion

► Enable co-operation between fiscal authorities

► Allocation of tax revenue between states


Tax treaties- Tax treaties in force

Austria Japan South Korea

China Malaysia Spain

France Pakistan Syria

Greece Russia The Netherlands

India Singapore Turkey

Italy South Africa UK


Tax treaties- Tax treaties signed but not yet in force

► Belarus

► Uzbekistan

► Vietnam

► Bangladesh

► Tunisia

► Ethiopia

► Malta


Tax treaties- DZIT’s circular # 3228/19The DZIT has issued a Circular No 3228/19 dated09.06.1431H (23.05.2010) advising that the resident partymaking payment to non resident parties should firstwithhold and settle WHT in accordance with the provisionsand rates specified in the Saudi income tax regulations andthen claim a refund of WHT based on the exemptionsavailable in the applicable tax treaty.


Tax treaties- DZIT’s circular # 3228/19If the applicable tax treaty grants exemption or reduction inrespect of WHT rate specified in the income tax regulations, theresident party making the payment would apply for refund ofoverpaid WHT based on the following documents:► A letter from the non-resident beneficiary requesting a refund of

the overpayment attested by the Saudi Embassy and SaudiMinistry of Foreign Affairs

► Valid certificate from the tax authority in the country where thebeneficiary is residing confirming that the beneficiary is residentin accordance with the provisions of Article (4) of the treaty inthat country and the amount paid is subject to tax in the countryattested by the Saudi Embassy and Saudi Ministry of ForeignAffairs

► A copy of the WHT form for the settlement of tax together with abank collection order confirming the settlement of the WHT.


Other matters


Statutory compliance requirement for Saudi LLC or BranchStatutory compliance requirement Statutory deadline

Registration with the DZIT Before end of first fiscal year / period end or first taxable payment made to a non-resident entity

Filing of annual audited financial statements with the MoC / SAGIA

180 days from year-end

Filing of annual tax/zakat declaration with the DZIT

120 days from year-end (audited financial statements are required to be filed with the declaration if the company is fully or partially owned by Saudi / GCC nationals)

Filing of monthly Withholding Tax (WHT) return with the DZIT

10 days from end of month in which payment is made

Filing of annual WHT return with the DZIT

120 days from year-end


Statutory compliance requirement for Saudi LLC or BranchStatutory compliance requirement Statutory deadline

Filing of monthly return with the GOSI 15 days from the end of the month

Contract filing with DZIT Within 3 months of signing the contract or amendments to the contracts signed with suppliers to DZIT (services and materials) if value is more than SR 100,000. Within 1 month of suspension of contract

Filing of advance tax return with the DZIT

Pay advance income tax in three equal instalments calculated at 25% of immediately preceding year’s tax liability, if due, by sixth, ninth and twelfth month of the year. Advance tax is due if immediately preceding year’s tax liability is SR 2 million or more


Current trends

► Implementation of new system including SADAD► Tax/zakat declarations are required to be filed with ► Audited financial statements (Saudi / mixed companies)► AWTR, GOSI certificate► Break-up of purchases► Complete payee details

► Trends in DZIT review► Increasing field audit► Reconciliation of WTR with TZD► Foreign purchases► Detailed scrutiny of payments made to non-residents

22 April 2012

Thank you

Javed Aziz Khan - ICAPKSA · PDF fileJaved Aziz Khan. Slide 2 22 April 2012 ... Branches of GCC companies in Saudi Arabia are subject to income tax instead of zakat unless central

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