Saudi Arabia’s Proposed New Zakat and Tax Procedures Law
In a significant stride towards economic diversification and in line with its Vision 2030 initiative, Saudi Arabia is poised to enact substantial reforms to its income tax and zakat regulations. The proposed Draft Laws aim to create a more welcoming business environment, encourage foreign investment, and align the Kingdom with international best practices. This article provides a detailed examination of the key provisions in the Draft Laws and their potential implications for taxpayers and zakat payers.
Proposed Amendments to Saudi Arabia's Zakat Implementing Regulations
Article 17: The annual Zakat return filing deadline is proposed to be extended to 180 days, up from the current 120 days, from the conclusion of the Zakat year.
Article 21(1): The statute of limitations is set to be reduced from five years to three years from the expiration date of the statutory deadline for submitting the Zakat return.
Article 23: The reassessment period, in cases where incorrect information is provided by a Zakat payer, is poised to be shortened to three years from the date of ZATCA's awareness, contrasting with the current five-year timeframe.
Article 30: ZATCA aims to enhance awareness among Zakat payers by issuing guidelines or bulletins. Furthermore, ZATCA retains the authority to issue public and solicited rulings following specified procedures. The interpretations in these guidelines, bulletins, or rulings will carry binding status prospectively from the date of issuance.
Key provisions in the Draft Laws
Residency Criteria and Taxation of Non-Saudi Natural Persons:
The Draft Laws introduce new residency criteria for natural persons, with an emphasis on a 90-day presence within a tax year and an aggregate of at least 270 days within three tax years. This shift aligns with global norms and underscores the Kingdom's commitment to attracting international talent and business expertise.
For non-Saudi natural persons conducting independent and regular activities in Saudi Arabia, detailed procedures for computing income tax are outlined. Notably, income from salaries and similar compensation is excluded from taxable income, subject to specific conditions, fostering an environment conducive to skilled expatriate professionals.
Force-of-Attraction Principle and Source of Income:
The limited force-of-attraction principle is now proposed to be restricted, emphasizing direct business dealings with Saudi customers. Additionally, gains from the indirect sale of shares in a Saudi entity and remote services through electronic means are considered as Saudi-source income, aligning with the evolving nature of global business transactions.
Expanded Definitions and Exemptions:
The Draft Laws expand the definition of related persons in line with transfer pricing regulations and introduce the concept of a preferential tax regime. Capital gains tax computation undergoes changes, and certain income types, including dividends and capital gains from shares, are proposed to be tax exempt under specific conditions.
Deductions, Depreciation, and Hybrid Mismatch:
Several changes in deductions are proposed, such as restricting interest deductibility to 30% of taxable profit and changing the tax depreciation method to straight line. Gains on the disposal of depreciable assets become non-taxable under certain conditions, and hybrid mismatch rules apply to related persons holding financial instruments.
Tax Incentives, Mergers, and Alternative Tax Calculation:
The Draft Laws introduce tax incentives for green investment, exempt profits and losses from mergers or demergers under certain conditions, and offer alternative tax calculation methods for micro enterprise entities. Approved carry forward losses are no longer restricted, and taxes paid outside Saudi Arabia can be deducted, subject to conditions.
Withholding Tax and Refunds:
Proposed changes to withholding tax (WHT) rates include a 5% rate for interest on debts from related parties, dividends, and rental payments. A self-assessment system for filing returns within a stipulated timeline is introduced, along with a reduced statute of limitations. The Draft Laws also outline a new structure for computing fines, emphasizing the importance of compliance.
The proposed Draft Income Tax and Zakat Laws represent a significant step towards modernizing Saudi Arabia's fiscal framework, aligning it with international standards, and creating an attractive business environment. As businesses prepare for potential implementation, a careful review of the Draft Laws is essential to understand their implications and ensure compliance in this evolving tax landscape. The Kingdom's commitment to fostering economic growth and diversification is evident in these forward-looking reforms, signaling a new era for taxation in Saudi Arabia.