What is phase 2 of KSA e-invoicing?

E-Invoicing today has become a mandatory part of many advanced countries’ legal systems. KSA has also implemented E-invoicing practices in December 2020 and is still evolving it in line with global E-invoicing practices. This implementation rolled out in two phases to not confuse the users. With this 2-phase strategy, many traditional businesses got a chance to fully prepare and understand the guidelines of KSA E-invoicing before finally executing it. The guidelines for Phase 2, however, might still be demanding for many businesses, specifically SMEs. This blog will comprehensively discuss phase 2 of KSA e-invoicing, but let’s first briefly understand the difference between the phases.

Understanding the Phased Implementation of KSA E-Invoicing

The Saudi E-Invoicing System is locally called Fatoora, which was implemented by the Zakat, tax, and customs authority (ZATCA) to revamp the old practices of submitting VAT. This system not only helped in assuring a transparent, compliant system but also reduced the risks of tax evasion and elevated digital reporting. The two phases of Fatoora came with a purpose to simplify this process and encourage businesses to integrate it effortlessly.

1. Phase 1 (The Generation Phase): This phase was initiated in December 2021, which mandated the VAT-registered businesses, excluding the non-residents, to issue and save their invoices digitally using the right compliant electronic system. This phase played an important role in making the businesses fully grasp the process of e-invoice generation, storing, and preparing important documents as per ZATCA
2. Phase 2 (Integration Phase): This was the connectivity phase, which was the extension of Phase 1. In this phase, businesses were obliged to integrate with their system with ZATCA’s systems in real time or near real time for reporting. It was effective from 1^st January 2023 and rolled out in waves depending on the scale and turnover of the taxpayer.

Major Shifts in Phase 2 Compared to Phase 1

Phase 2 of e-invoicing in KSA was the most critical part of the entire e-invoicing system. It includes added guidelines for phase 2, which were not a part of phase 1, such as merging of systems and some additional data fields like formats, security & cryptographic features, real-time or near-real-time submission/reporting. Let’s further explore these key features for better understanding.

1.     Interconnection

• The electric invoicing systems must be interlinked using API or compatible with ZATCA’s platforms.
• Reporting and clearance in real time for B2B and B2G e-invoices with ZATCA before passing on to the buyers or during the issuance to comply with the reporting rules.

2.     Additional Formats

• Standard Tax Invoices were required to be in XML formats or PDF/A-3 formats with embedded XML. Simplified invoices also have certain requirements for formats
• Extra mandatory fields to ensure that the invoices are authentic, include: UUID (Universally Unique Identifier), hash, cryptographic stamp / digital signature, etc.
• QR codes must be placed in the right place with all the necessary information for standard invoices and simplified invoices.

3.     Reporting Duration

• For B2C simplified invoices, businesses must submit to ZATCA for reporting within the time space of 24 hours after the invoices are issued.
• For B2B/B2G standard invoices, invoices must be submitted ahead of issuance or during issuance through the real-time clearance platforms as per the ZATCA rules.

4.     Record Keeping of Invoices

E-Invoices must be stored on digital platforms to comply with the VAT legislation, and should be available for audits and investigations of legal teams

5.     Security Requirements

• All the invoices have e-signs, cryptographic stamps, a UUID, and a hash to keep them protected from tampering and for the right identification of the issuer.
• The solution used in the generation of invoices must be compliant with the technical requirements published by ZATCA to protect them from any data breaches and risks.

6.     Compliance Needs and Deadlines

• Six months before the deadline approaches, ZATCA sends a notification to the registered taxpayers when they are eligible for phase integration.
• As there are many waves, each comes with its own revenue thresholds and deadlines, businesses must recognize which wave they fall into for precise compliance.

Roll-Out Waves and Deadlines

As mentioned above, Phase 2 is rolled out in waves with defined taxpayer groups as per their taxable turnover. ZATCA enforces that each group must comply with their wave during the given duration of 6 months. We have here presented a chart for each wave, along with the taxable turnover it is eligible for.

No.	Criteria	Year Considered	Commencement Date
Wave 1	SAR ≥ 3 billion	2021	From 1 January 2023
Wave 2	SAR ≥ 500 million	2021	From 1 July 2023
Wave 3	SAR ≥ 250 million	2021/2022	From 1 October 2023
Wave 4	More than SAR 150 million, ≤ SAR 250 million	2021/2022	From 1 Nov 2023
Wave 5 to Wave 9	More than SAR 100 million, to ≤ SAR 40 million (varies per wave)	2021/2022	From 1 Dec 2023 to June 2024
Wave 10 to Wave 20	More than SAR 25 million to SAR 1.75 million	2022/2023	From 1 Oct 2024 to November 2025
Wave 21	Between SAR 1.25 million and SAR 1.5 million	2022/2023/2024	Deadline by 30 Nov 2025
Wave 22	SAR ≥ 1 million	2022/2023/2024	Deadline by 31 December 2025
Wave 23	SAR ≥ 750,000 (and less than 1 million)	2022/2023/2024	31 March 2026

 

ZATCA defines which taxpayer falls into which category of wave. Even after the deadlines, ZATCA gives flexibility in some cases to comply; however, non-compliance results in hefty fines and penalties.

Steps-by-Step Process to Prepare or Implement Phase 2

1. Discover: Find out if your business is suitable for the targeted wave by comparing your taxable turnover with the relevant year’s calendar. Stay current with ZATCA announcements and pay attention to your deadline
2. Analyze: Examine your existing invoicing systems, like ERP, POS, and billing tools, to know if they are in sync with the newest phase 2 guidelines. If they don’t fit, it’s time to evolve them according to the ZATCA instructions
3. Preparation: Gather all the required data and make sure they support the XML formats, determine if you can generate e-stamps and signatures, and also be competent enough for technical specs like UUID, hash functions, QR code generation, and real-time reporting
4. Internal Preparedness: Once you know you fit the technical requirement, it’s time to train your finance and accounting teams and plan for backups and alternate systems in case of any system downtime, system failure, etc. Also, implement internal controls for the issuance of invoices, validation, and double-checking before processing.
5. Monitoring: Analyze if your systems meet ZATCA requirements and keep updated with any recent modifications in the rules.
6. Risk Assessment: know the forthcoming risks and proactively prepare for them, let your vendors know how the invoices will be accepted to keep them protected from any legal troubles.

Why KSA E-Invoicing Phase 2 Matters?

Even though Phase 2 can be burdensome, it comes with several advantages, such as:

1. Better Control and Clarity: It gives control to the tax authorities to detect any fraudulent invoices with real-time access. This helps in staying away from non-compliance and underreporting of data.
2. Lower risks of Tax evasion: invoices cannot be updated or changed once they have cryptographic stamps, e-signatures, and distinct IDs.
3. Standardized Approach: All businesses have to follow a standard format for invoices, with essential data fields and QR codes that facilitate audits and help in reconciliations
4. Enhanced Productiveness: With less paper clutter, faster procedures, and fewer manual submissions, teams get time to look after other critical matters.
5. Digital Transformation: To ensure the integration with phase 2 guidelines, businesses digitally evolve, which also aligns with the goals of Vision 2030 for innovation and better governance.

Challenges that Come Along

The common challenges that most businesses go through during the integration phase 2 are,

• Technical complexities like upgradation of systems, getting digital certificates, and deploying the real-time API connections can be difficult for SMEs or traditional companies
• Putting money into software, infrastructure, training, and hiring new teams can be financially burdensome
• Implementation of compliant solutions that support services and are compatible with the existing systems can be difficult
• Managing the change can be hard, and businesses might face resistance from teams, which might lead to errors and delays
• Many companies might find issues in keeping the data integrated in real time due to connectivity issues and frequent downtimes due to legacy systems

It is important that businesses, specifically SMES, start working on Fatoora before the wave starts; they must upgrade their systems and update their software to keep them in line with ZATCA. For the safety measures, they should implement security measures and do a complete budget to stay away from any financial challenges later. If the internal teams seem uncompetitive, companies can go for external service providers who are not only more cost-effective than hiring new teams but also more skilled and equipped with advanced tools.

Your Next Step: Contact Us!

From the assessment and advisory to implementation and monitoring, we handle it all. SSCOKSA, being one of the leading accounting services providers around KSA, understands the requirements of Fatoora E-invoicing KSA, which is why we facilitate you with the best solutions that are not just compliant with ZATCA but also help to streamline your day-to-day finance operations. With the top-tech tools and automation software, we keep your business always ahead of the legal needs and market demands. Get in touch and let us be your partner in compliance!