VAT Return Filing Process in Saudi Arabia

In January 2018, Saudi Arabia introduced VAT at a rate of 5%, which was increased to 15% in July 2020 due to the aftereffects of COVID-19. The aim behind the initiation of VAT was always to nourish the KSA economy and lessen the reliance on oil. To fulfil this goal, every business in Saudi Arabia has to acknowledge VAT and file it on time, whether they have just started a business or already have an impressive reach in the Saudi market. If any company fails to do so, it is exposed to adverse legal consequences and inquiries from the Zakat, Tax and Customs Authority (ZATCA), the body legally responsible for supervising taxes in KSA. In writing, we will further explore every stage of the VAT filing process, highlight registration details, and identify common shortcomings businesses must avoid.

Who Must Register for VAT?

The first and foremost step of filing a VAT return is to register with ZATCA, which itself can be a demanding process if not done correctly. Registration is done through the ZATCA’s official e-portal for every business that falls under the mandatory threshold and has annual revenues equal to or above SAR 375,000. Businesses with lower revenues can also register voluntarily, but for that, they must also have an annual profit of at least SAR 187,000. Every non-resident business must also register with ZATCA, irrespective of how much annual revenue they are generating, and appoint a local tax representative. As mentioned, this registration is completed through the digital portal, where applicants have to fulfil all the necessary requirements and upload relevant documents like the commercial registration, business activity information, bank account details, and contact information. After verification and upon successful registration, ZATCA issues a tax identification number (TIN) and a certificate, which are later used to file taxes regularly.

VAT Filing Periods: Monthly vs. Quarterly

One thing that confuses many businesses, particularly the ones that have just registered, is understanding how frequently they have to file their VAT. ZATCA has offered different filing periods depending on its annual taxable turnover. If a business has an annual turnover equal to or above SAR 40 million, then they must file their returns monthly; if a business has a turnover less than SAR 40 million per year, they will file the returns quarterly. Any business that crosses the limit of SAR 40 million threshold is notified by the ZATCA, and they have to keep up with the filing requirements accordingly. Having to choose how a company prefers to file is not yet a part of the Saudi taxation system; it is, however, strictly supervised by ZATCA, and every business has to follow its guidelines.

Step-by-Step: How to File a VAT Return

Filing VAT return in Saudi Arabia includes several different steps, from collecting the records to filing and record keeping. Each step we will explain below:

1.    Collect all Necessary Documentation

Having properly maintained paperwork is essential to stay compliant, this include all the sales invoices, purchase invoices, import documentation, credit notes and bank statements. Companies must organize and categorize each transaction, such as the standard-rated, zero-rated, exempt, and out-of-scope. This will ease the filing process later.

2.    Reconcile your accounting records

To prepare your VAT returns, you must reconcile your VAT account in your current accounting system. You have to ensure that your accounting data is perfectly matched and accurate; if you find any differences it must be investigated and corrected right away before they lead to any severe outcomes.

3.    Compute your Output Tax

The output tax is calculated by adding all the taxable sales and multiplying it with the standard VAT rate of 15%. Zero-rated supplies have no output tax, but still, they must be stated. Exempt supplies are also stated separately.

4.    Calculate the Input Tax

Input tax is computed by adding all the applicable VAT paid for business purchases and imports. It is also important to keep all the invoices to present to ZAKAT for claiming the input VAT. If there are any exempt supplies, companies must also implement the exemption VAT rules.

5.    Sign in to the ZATCA website

Log in to the website of ZATCA at zatca.gov.sa by using the credentials and TIN, and then move to the VAT return section on the portal, click the tax that you want to file your tax for. You will then get a return form, which you have to file carefully and double-check every minor detail before proceeding further. At last, it’s time to submit, and you are done.

The process doesn’t just end here; you have to archive all the files to assist you during any audit trail or legal proceedings. If the documents are not securely saved, it is a huge possibility that you may end up with legal obstacles, even with clear financial records.

Penalties for Non-Compliance

ZATCA never misses any gap in VAT compliance and takes a serious notice of it. They take legal actions that lead to fines, penalties, and even suspension of licenses in some severe cases. Hence, to keep their operations, finances, and reputation safe, every business must understand the drawbacks of non-compliance. Such as:

• For the late filing of the VAT return, businesses can get fines of 5% to 25% of their unpaid taxes
• For a delay in the payment of VAT, companies have to pay 5% of the unpaid tax every month, which can be up to 25%
• In case of not registering for taxes at all, penalties of up to SAR 10,000 can be imposed
• Not having clear and adequate records results in severe penalties of up to SAR 50,000
• For tax evasion, the fine is triple the unpaid tax and may result in critical cases.

ZATCA can conduct the tax audits within 5 years of the relevant tax period. Hence, businesses must keep their records saved, including the invoices, contracts, and import/export data for at least 6 six years.

E-Invoicing (Fatoora) and Its Impact on VAT Returns

Saudi Arabia started the Fatoora E-invoicing in December 2021 in two phases; it has an immediate impact on VAT return filing and preparation. ZATCA receives and validates the invoices in real time; hence, businesses must make sure that all their accounting and ERP systems are fully merged with the ZATCA Fatoora platform, and every B2B invoice that exceeds the given threshold should be cleared through the platform before delivering it to the customers.

Common Mistakes to Avoid

Errors in VAT returns mean costly mistakes. These errors can be made even by experienced finance teams, and the most frequent mistakes are usually due to:

• Not classifying the products correctly, like treating exempt supplies as zero-rated, which leads to incorrect input VAT recovery and errors in output tax calculations
• A single delay means late filing and late payment, so you must schedule your calendars proactively to keep everything done before the deadline arrives
• Many companies don’t declare their VAT on import at the point of importation and don’t show it on their returns. This is particularly done for the goods that are brought under the deferred payment customs arrangements
• When a business buys their services from any non-resident supplier, the Saudi recipient has to file the tax under the reverse charge mechanism, which most of times business fails to do
• If the data of the returns filed is not complete or reconciled, it also results in subsequent penalties and amendments.

Let’s Solve Your Tax Compliance Challenges Together

SS&Co offers all-in-one VAT tax compliance services that help you always stay compliant and away from any compliance stumbling blocks. We aid you by

• Reviewing all your business requirements
• Get in touch with you to offer you solutions that are specifically for you
• Streamline your compliance by getting insights into your compliance weaknesses
• Merging your systems with the ZATCA Fatoora platform for e-invoicing compliance
• Training your teams and offering them dedicated support for more fruitful outcomes

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