Value-added tax (VAT) and excise tax

VAT Law and implementing regulations have been published and are applicable from 1
January 2018.

VAT is imposed at a rate of 5% for most goods and services, with certain exceptions
applicable. Effective 1 July 2020, the standard VAT rate was increased by the government to
15%.

The Excise Tax Law became effective on 11 June 2017 in Saudi Arabia, with only tobacco
products (at 100%), soft drinks (at 50%), and energy drinks (at 100%) selected as goods
subject to the excise tax in Saudi Arabia.

In order to comply with the Saudi Arabian Excise Tax Law, manufacturers and importers of
excisable goods are required to register with ZATCA. Businesses that qualify to be under the
scope of the Excise Tax Law that fail to register and comply with the guidance issued by
ZATCA will be considered as tax evaders and will be imposed penalties.

Social insurance tax

Social insurance tax is paid monthly based on (i) basic wage, (ii) cash or in-kind housing
allowance, and (iii) commissions, with an upper limit of 45,000 Saudi riyals (SAR), is
computed at 2% for non-Saudi employees, and is paid by the employer. For Saudi employees,
the rate is 21.5% and is paid by both the employee (9.75%) and the employer (11.75%).

Interest income
Interest income is subject to income tax at the normal income tax rate. Interest paid to a non-
resident party is subject to WHT at 5%.

Pension fund
Employers’ contributions to employees’ pension funds or savings funds established under
Saudi Arabia’s rules and regulations are deductible, provided that such contribution, one
payment or in aggregate, is not in excess of 25% of the employee’s income before the
employer’s contributions and that the fund meets the following criteria:

 The fund is established according to special provisions that clearly stipulate

conditions of subscription and rights of subscribers.
 Such obligation is stated in the employment contract or in the Articles of Association
of the establishment.
 The fund has a character independent of the establishment and has separate accounts
audited by an independent CPA.

A capital company is allowed to deduct its contribution to a retirement fund, a social

insurance fund, or any other fund established for the purpose of settling employee end-of-
service benefits or to meet staff medical expenses, provided they meet certain conditions. It
should be noted that there is a notification requirement to ZATCA in order to claim any
deduction of the contribution.

Taxable period
Tax filings are based on the company’s fiscal year.

Tax returns
Returns are due to be filed with ZATCA within 120 days after the taxpayer’s year-end. The
system is one of self-assessment.

According to the tax authority, companies that are owned by Saudis only, or by Saudis and
non-Saudis, must file audited financial statements along with the tax return.

Payment of tax
Final tax due must be paid within 120 days after the taxpayer's year-end.

Three equal advance tax payments are required to be made on the last day of the sixth, ninth,
and 12th months for a current tax year, provided that the taxpayer has earned income during
the year. Each advance payment is equal to 25% of the amount resulting from the taxpayer’s
tax liability based on the previous year return minus the withheld tax on reported income, if
any. The taxpayer is not required to make advance tax payments if the result of the said
formula is less than SAR 500,000. Late payment of an advance payment is subject to a delay
penalty of 1% of the amount due for every 30 days of delay.

Tax audit process

There is no specific audit process followed by ZATCA; however, the most common ways for
ZATCA to select companies for tax audits are the size of the company, the companies’
shareholders nationality (totally owned by foreigners and branches of foreign companies),
and certain risk assessment measures.

ZATCA recently introduced what they call the 'risk engine', which is used to determine the
companies that need to be audited. However, such engine has not been tested yet.

Statute of limitations
ZATCA may, with a reasoned notification, make or amend a tax assessment within five years
from the end of the deadline specified for filing the tax declaration for the taxable year, or, at
any time, upon a written consent of the taxpayer.

ZATCA may make or amend an assessment within ten years of the deadline specified for
filing the tax declaration for the taxable year if a taxpayer does not file its tax declaration or it
is found that the declaration is incomplete or incorrect with the intent of tax evasion.

A taxpayer may request a refund of overpaid amounts at any time within five years from the
end of the overpaid taxable year.

Topics of focus for tax authorities

ZATCA emphasises the reconciliation between the payroll as per the records of the General
Organisation for Social Insurance (GOSI) (i.e. salaries and wages subject to GOSI) and
salaries and wages charged to the taxpayer’s accounts duly certified by a Saudi licensed CPA.

ZATCA focuses on the payments made to non-resident parties to verify compliance with the
WHT regulations by requesting a reconciliation statement for such payments with the annual
WHT form.

ZATCA has also been requesting import value lists from the Customs Authority in order to
confirm the value of goods imported and declared by taxpayers in their annual declarations
during the financial period.