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Understanding Tax Compliance in Saudi Arabia

Understanding Tax Compliance in Saudi Arabia

With the largest economy in the middle East, Saudi Arabia hold a significant wealth that utterly transformed the landscape within the last few decades. Saudi Arabia primarily over depended on its oil resources, and the only legal law followed was Islamic law (Sharia) and zakat which was mainly used for welfare and charity, however over the time, for the development of country without the reliance on oil, taxation system was introduced. Initially, corporate taxes were implemented on foreign companies operating in the KSA, but in 2018 VAT was established which was mandatory for consumers to pay on consumption of good and services.

It radically contributed to diversifying the economy and technological advancements which were the major goals of KSA’s Vision 2030 initiative. Today, The Zakat, Tax and Customs Authority (ZATCA) is the prime agency overseeing tax regulations and enforcement in Saudi Arabia. ZATCA execute robust digital tools to streamline tax proceedings alongside the prominent Fatoora e-invoicing system. In this blog, we will comprehensively explicate the tax compliance in Saudi Arabia and how top accounting firms plays their part in observance with statutory regulations

Saudi Arabia’s Tax Framework

There are some major taxes that KSA is prioritising and are crucial for business to acknowledge to ensure compliance. For a thorough understanding of KSA Tax laws, lets discus some of the essential taxes enforced on businesses are,

  • Corporate Income Tax (CIT): A 20% CIT is mainly applicable on international businesses, the local and GCC companies are not subjected to corporate tax but a 2.5% of zakat on their net revenues.
  • Value Added Tax (VAT): Businesses with profit greater than SAR 375,000 annually, are required to pay 15% of VAT by remitting it to ZATCA
  • Withholding Tax: Ranging from 5% to 20%, withholding tax is paid on the payments made to non-residents or international companies for their services.
  • Excise Tax: Imposed on only limited goods that have dreadful impacts on health and environment, such as tobacco, carbonated and energy drinks, this tax range in mostly 50% to 100% to discourage their rising adoption
  • Customs Duties: Applied on the imported goods, their range normally vary as per the product category.

Promoting tax compliance across KSA

To achieve the Vision 2030 initiative, KSA is emphasizing on the core areas that need attention and Tax compliance is one of them, to enhance and facilitate tax adoption and handling across the region KSA executed several measures,

  • Digitalization: The adoption of advance technological platforms, like online portals for filing, monitoring tax payments, reducing administrative load and making compliance simplified and user-friendly for taxpayers.
  • Targeted Audits: Audits more focused on Risk-based analysis approved and conducted by ZATCA, done by analysing data and detecting potential non-compliance areas. It encourages the business to focus on high-risk sectors for tax observance.
  • Trainings and Campaigns: The awareness campaigns and trainings are done across the region to educate the taxpayers regarding the tax filings and benefits of it, which helps in ensuring transparency and liability.
  • Coordination and Insights Sharing: ZATKA is a business-friendly organization open to collaboration and communication which enables data exchange, risk assessment and strengthen overall tax system.

The Necessity of Tax Compliance and Legal Penalties for Non-Compliance

Tax Compliance in KSA

The observance of tax laws in an efficient manner is essential to ensure that your company stay away from penalties and audits, which not just impacts financial health but also encourages reputational damage. ZATKA tax authorities aids in compliance by providing support and guidance. Moreover, they deeply review the records of taxpayers and categorize them as per their compliance level and impose penalties and fines if tax filings are avoided or inaccurate.  That being said, it is crucial for companies to fully follow the tax laws as the major reasons that contribute to non-compliance are,

  • Inability to register or file tax before the given deadlines
  • Submitting improper tax filling by neglecting to disclose full income sources
  • Failure to present the required documentation and poor record-keeping.

Tax errors can be sometimes unintentional due to lack of sufficient knowledge and lack of tax laws understanding. Some of the non-compliance consequences include,

  • Delayed filing and registration penalties
  • A fine ranging from 5% to 25% is imposed on misreporting or tax dodging
  • Suspension of business permits and further legal actions

Essential Tax Compliance Guidelines

Some of the requirements for tax compliance for businesses operating in KSA include,

  • Register your company for VAT or other applicable taxes if revenue threshold meets the demand of Tax registration
  • Manage detailed financial data, including tax returns and invoices for at least 6 years
  • Establish Fatoora E-invoicing system to provide and maintain e-invoices aligning with the ZAKTA standards.
  • A frequent monthly or quarterly filling of tax returns normally due within 120 days after the end of the fiscal year.

How Top Accounting Firms Navigate Tax Compliance Challenges

Hiring qualified tax advisors and top accounting firms in KSA help in minimizing the risks that comes with tax compliance if the inhouse accounting teams are not well skilled. They not just hold expert knowledge but are also equipped with latest tools that guides in adhering to continuously evolving tax laws. Some significant gains of hiring outsourced accounting partner include,

  1. Experts in Regulations: With their vast expertise and proficiency in understanding both current legal laws and expected changes. They support companies in timely compliance by staying updated with tax reforms and other legal shifts.
  2. Risk Mitigation: The risk of non-compliance and overpaying taxes are minimized by the utilization of tools and strategies without influencing business’s economic condition.
  3. Technological Innovations: Accounting firms utilize contemporary tools and software that streamline and automates financial operations and offer real time updates on legal law changes by helping in preparing precise and timely tax returns.
  4. Customized Tax Solutions: Audit firms offer personalized tax solutions depending on the business scope and scale, they guarantee compliance while enhancing tax strategies. To boost financial effectiveness and cut down liabilities.
  5. Audit Defence systems: With their industrial experience in audits and complete grasp on tax laws, they keep the financial data accurately managed and complied for satisfied audit outcomes.

SSCOKSA is one of the top accounting firms that help in assisting clients and planning of tax returns and zakat calculations. To outshine your competitors in Saudi Arabia, you must go for SS&CO’s tax compliance and advisory services.