In a groundbreaking move, the Zakat, Tax and Customs Authority (ZATCA) in Saudi Arabia has unveiled proposed amendments to the Income Tax Law and the Zakat and Tax Procedure Law. These changes are geared towards modernizing the tax landscape, adhering to global standards, and bolstering investment and transparency.
Main Objectives:
Alignment with International Best Practices:
The primary goal is to align Saudi Arabia’s tax regulations with international best practices, placing the Kingdom at the forefront of global tax cooperation.
Encouraging Foreign Investment:
The proposed Tax Law is strategically designed to attract foreign investment by offering favorable tax treatment. This aligns with the ambitious Vision 2030, aimed at diversifying the economy and reducing reliance on oil.
Promoting Domestic Economic Growth:
Beyond attracting foreign investment, the laws aim to stimulate domestic economic growth. Tax incentives and favorable treatment for businesses are intended to create a conducive environment for entrepreneurship and expansion, fostering economic development and job creation.
Here is an overview of the main new features of the proposed Income Tax Law and the ZAKAT & Tax Procedures Law.
Income Tax Law
The law also defines residency criteria, introduces a Service Permanent Establishment, and imposes penalties on non-compliant Zakat payers. It addresses BEPS standards, hybrid mismatches, and adopts a Principal Purpose Test. The law also clarifies terms, treats Partnerships as non-transparent, and extends the statute of limitations for audits and refunds to five years. The effective date is expected in Q2 2024, impacting GCC-held businesses, and potentially aligning with Pillar 2 rules on Global Minimum Tax.
- Profit Shifting and Tax Avoidance (Preferential Regimes)
The proposed tax law introduces measures to address profit shifting and tax avoidance. It establishes a preferential tax regime with special provisions for transactions between related parties involving jurisdictions with tax rates below 15% or lacking certain agreements. Preferential Tax Regimes are defined by criteria such as income tax below 15%, lack of information exchange agreements, and granting tax benefits without requiring economic activities. A joint decision by ZATCA Board and the Ministry of Foreign Affairs will create a blacklist, most probably affecting the UAE, Bahrain, Qatar, and Kuwait as those countries impose no or low-income tax rates. Withholding tax rates for such preferential regimes are set at 20%.
- Transfer Pricing
The proposed new Income Tax Law introduces significant changes to Transfer Pricing (TP) rules. It focuses on applying the arm’s length principle to related party transactions, aligning with existing TP Bylaws. Entities engaged in cross-border related party transactions must assess whether their counterparts operate in such regimes. Additionally, changes in Withholding Tax rates emphasize the need for entities to reassess TP policies.
3. Withholding Tax
All residents, regardless of taxpayer status, and every Permanent Establishment (PE) in the Kingdom are required to withhold taxes from payments made to Non-Resident Persons. The withholding tax rates are as follows:
– 5% on dividends, rental payments, and income from debt claims between related companies. Profit transfers from a PE to any other Related Person in another jurisdiction are considered dividends.
– 10% on payments for services (excluding employment-related compensation).
– 15% on royalties, including intellectual property rights.
– 20% on payments to a Resident Person or PE situated in a jurisdiction with a preferential tax regime
- Other Provisions
The proposed tax legislation includes provisions on taxable income (with income derived from employment still being exempt), expanding the definition and treatment of partnerships (non-transparent tax treatment), clarifying terms, and considering entities like endowments and investment funds as legal persons. It outlines limits on deductible cash expenses, including real estate transaction tax and non-recoverable input VAT. Certain capital gains and participation income are exempt under specified conditions. The interpretation of undefined terms involves references to accounting standards, by-laws, international agreements, tax laws, and regulations. Criteria for establishing a Permanent Establishment (PE) for non-residents are detailed, and the source of income is specified for various activities. Special provisions exclude gains or losses from merger and demerger transactions from taxable income under specific conditions. Tax credits and incentives, including a credit for foreign tax paid abroad and incentives for green investments, are introduced.
ZATCA and Tax Procedures Law
- Assessment Authority and Timing:
ZATCA is granted the authority to issue assessments on a deemed basis if the return is not filed within the statutory period. However, this action cannot be taken before 60 days from the statutory filing date, except for cases specified by the by-law. - Assessment Time Limit:
ZATCA is prohibited from conducting assessments for Zakat or Tax periods three years after the calendar year in which the return submission period expired. This duration can be extended to ten years in cases of non-compliance, tax evasion, or with the written agreement of the taxpayer. - Fines for Non-Payment and Unlawful Refund:
Non-payment or unlawful refund of Zakat or Tax within the prescribed period results in fines. A fine equivalent to 2% of the unpaid amount is imposed for every month or part thereof, not exceeding 50% of the unpaid Zakat or Tax. The fine is calculated from the day following the expiration of the specified period for payment. An additional fine of 1% may be applied if ZATCA amends the Due Zakat or Tax after 30 days from the amendment notification. - Penalties for Evasion:
The penalty for committing or participating in tax evasion ranges from 100% to 300% of the due Zakat or Tax.
The proposed penalty regime of the draft Zakat and Tax Law Procedure may apply to TP non-compliance, including failure to file disclosures and documentation.
Encouraging Foreign Investment and Domestic Economic Growth:
Favorable Tax Treatment:
The proposed Tax Law ensures favorable tax treatment for investment funds, partnerships, and Micro-Enterprise taxpayers, fostering a welcoming environment for both local and foreign investors.
Special Provisions:
Introducing special provisions for residency transfers, re-investment reserves, merger and demerger transactions, and handling taxes paid outside the Kingdom aims to simplify procedures and facilitate business operations.
Transparency and Compliance:
The emphasis on tax compliance and transparency through streamlined procedures and penalties aims to create a reliable and trustworthy business environment, further attracting foreign investment and supporting domestic economic growth.
How TME Services Can Support Your Business
The proposed Tax Law and Zakat & Tax Procedures Law signify a significant stride in reshaping Saudi Arabia’s tax landscape. With a focus on international alignment, encouragement of foreign investment, and promotion of domestic economic growth, these changes reflect the Kingdom’s commitment to being a leader in the global tax arena.
TME Services is a team of 45 professionals in legal-, tax-, accounting and compliance with over 18 years of experience. We advised a significant number of SMEs in the context of the implementation of the tax framework in the UAE and KSA over the last decade to make sure that our clients are well-oriented in the new and fast-evolving tax landscape and to reduce the legal liability of managers which may arise in connection with non-compliance.
