Is e-invoicing mandatory in Saudi Arabia?
Once considered an underdeveloped country, KSA has now revolutionized into one of the most advanced countries in the world. This modernization has evolved many traditional practices and digitized routine business operations. E-invoicing is one of such initiatives that has not just kept the country in line with global practices but also helped to enforce tax compliance around the Kingdom. E-invoicing is not an optional choice but a legally mandatory requirement, supervised by ZATCA. To smooth the way, ZATCA implemented e-invoicing in numerous phases, which made it hassle-free for businesses to position e-invoicing in their routine operations, as non-compliance brings massive penalties. While e-invoicing is still new for businesses, many still find it hard to grasp it fully. This guide explains the basics of e-invoicing, different phases of e-invoicing, and technical needs that businesses must follow to operate legally.
Understanding the E-invoicing in Saudi Arabia
E-invoicing is a complete process of generating the tax invoices electronically and archiving these invoices in the applicable e-format. This system is designed to elevate transparency, reduce tax evasion, and streamline audit procedures. It not only impacts large businesses but also small and medium-scale companies, making compliance mandatory for businesses of all scales and sizes. The Saudi E-invoicing system is managed through the FATOORA platform, which is a part of ZATCA’s system used for the verification, clearance, and reporting of e-invoices. E-invoicing in KSA was legally introduced in December 2020, making it essential for all the VAT registered taxpayers. These guidelines clearly define that:
- Manual invoices must no longer be acceptable
- Tools like Word, Excel, or paper-based invoices are strictly prohibited
- All the systems used must be electronic
The Saudi e-invoicing mandate corresponds to international standards and aims to modernize tax administration, improve compliance, and lower the risk of fraud.
Evolution of E-Invoicing in Saudi Arabia
E-invoicing in Saudi Arabia was not introduced overnight; it followed a carefully planned timeline. Previously, KSA was considered a tax-free country, but over time, taxes were introduced, and with them came the goals to integrate e-invoicing. This complete process from the initiation of VAT to the phased rollout will be covered here:
1. Pre-2020: Foundation for Digital Tax Transformation
One of the noteworthy steps that open the way towards e-invoicing was the introduction of VAT in 2018. It initially started at the rate of 5% but was later increased to 15% in 2020, due to COVID-19 negative outcomes on the economy. The expansion of VAT demanded a digital tax filing system to strengthen compliance; therefore, the foundation of the e-invoicing system was laid.
2. 2020: Legal Introduction of E-Invoicing
On 4th December 2020, the Zakat, Tax and Custom Authority (ZATCA) legally announced the launch of the e-invoicing system and regulations. According to these regulations, there was a defined mechanism and legal policies that businesses were mandated to adhere to. E-invoicing in Saudi Arabia was rolled out in two phases, making KSA one of the emerging countries in the Middle East to implement e-invoicing.
3. Phase 1 — Generation Phase (Effective 4 December 2021)
The first and foremost phase was the generation phase, which became mandatory on 4th December 2021. The main features of this generation phase include:
- The issuance of electronic invoices instead of paper or traditional invoices.
- Utilization of compliance e-invoicing systems
- Insertion of QR codes on tax invoices
- Archiving of electronic invoices electronically
This phase was mainly about the digitalization of invoice creation and its storage, but didn’t include the merging in real time with ZATCA. This phase set the direction for the upcoming phase 2.
4. Phase 2 — Integration Phase (Effective 1 January 2023)
The second phase, which was the integration phase, began on 1st January 2023. This phase included:
- Real-time merging with the Fatoora Platform of ZATCA.
- Creating clear invoices and reporting them to the ZATCA authorities
- Addition of e-signatures and cryptographic stamps.
- Compulsory integration of systems with systems
This phase includes the simple steps for digitization for the continuous transaction controls (CTC) and was divided into different waves, each wave for a designated business size.
5. 2023–Present: Wave-Based Expansion
The ZATCA phase 2 was implemented in various waves, which covered the large enterprises initially, then the medium-scale companies, and at the end it covered the small-scale VAT-registered businesses. ZATCA is further working to expand the waves and has announced 20+ integration waves for lower revenue thresholds. Through this approach, KSA has established a more controlled taxation system with reduced technical risk, flexible and adaptable national e-invoicing adoption.
Why E-Invoicing Became Mandatory in KSA?
1. Increased VAT Collection
One of the core objectives of e-invoicing in Saudi Arabia was to tighten the collection of VAT around the Kingdom. When all businesses follow the same structured format, ZATCA will be able to keep track of taxable transactions and report them. This will protect the businesses from underreporting, lowering the risks of manual labor errors, and elevating the overall reliability of VAT proclamation. Hence, the government can benefit from better compliance rates and persistent tax revenues.
2. Reduced Shadow Economy
Often, businesses hide their transactions by not maintaining proper documentation to avoid taxes, which leads to the informal economy. E-invoicing plays a pivotal role in bringing down the shadow economy by fostering a transparent and verifiable record of each business transaction, which makes it nearly impossible to hide sales or change records. This facilitates bringing more businesses to support the formal economy and encourages fair competition by making all businesses share a fair part of their tax burden for economic growth.
3. Better Data Visibility
When the authorities can check and validate the transactional data in real time, it allows them to have a clear picture of their financial transactions. This gives ZATCA a deeper analysis of every activity across different industries and regions. With transparency in data, they can even conduct analytics that help them to detect trends, help them find compliance risks, and assist them in making thoughtful economic decisions based on precise and on-time data availability.
4. Improved Tax Enforcement
With the use of a standard format, the authorities can double-check every transaction that has taken place between the buyer and the seller. This allows them to promptly underline any discrepancies, fake data, and tax evasion planning. Through the automation tools and verifications, ZATCA can conduct audits digitally to lower the dependence on manual checkups, which gives ZATCA the possibility to work on refining the tax governance as a whole.
5. Digital Transformation
One of the vital elements of Vision 2030 is the goal to evolve the country digitally; the aim is to reduce paper-based systems and shift to digital processes. This aim is fulfilled by implementing e-invoicing systems, which not only modernize tax practices but also improve overall business efficiency. The phased rollout has encouraged businesses to also adopt and evolve by shifting from traditional systems to the latest digital tools and ERP systems. This technology-driven system encourages long-term economic growth.
Technical Requirements for Saudi E-Invoicing
- All the systems must be integrated with the ZATCA e-portals to upload and verify invoices in real time or near real time.
- To stay compliant, businesses must utilize the systems that are compatible with ZATCA’s guidelines; they must follow the XML format, use cryptographic stamping, e-signatures, and UUID.
- All invoices must be tamper-proof and securely stored electronically to keep a transparent track record and avoid any legal consequences.
- All the invoices should cover the seller’s VAT number, the buyer’s VAT number, the invoice time and date, the VAT amount, the total amount, and the QR code.
Prohibited Practices
ZATCA strictly restrains the businesses from sending the invoices in the old Excel or Word formats, or editable PDFs with a manual number on invoices. Once the invoices are uploaded, they are not permitted to edit or modify them. Likewise, backdating the invoices or duplicate invoice numbers is also forbidden. In case any business fails to comply with these obligations, ZATCA can impose hefty fines or penalties, or conduct strict audits that not just disrupt business operations and finances but also damage the reputation. This makes it clear that non-compliance with e-invoicing is not an option; it’s a mandatory responsibility that businesses must satisfy to operate legitimately in Saudi Arabia.
Why does hiring SS&CO ease the process?
Onboarding SSCOKSA facilitates the businesses in not just understanding the e-invoicing protocols but also upgrading the traditional internal systems into more advanced ones that are eligible for e-invoicing. No matter the scale and size of your business, our qualified experts know what it takes to train your teams and keep your operations in line with the ZATCA e-invoicing regulations.