July 24, 2024

Demystifying the New Tax Law in Saudi Arabia

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Demystifying the New Tax Law in Saudi Arabia (Representational Image-Image from rawpixel.com on Freepik)
Demystifying the New Tax Law in Saudi Arabia (Representational Image-Image from rawpixel.com on Freepik)

Many people and businesses in Saudi Arabia are uncertain about their tax responsibilities as a result of recent revisions to the country’s tax code. Reactions to the new tax law’s rollout in Saudi Arabia have been conflicting. Some fear it would negatively affect people and businesses, while others see it as an essential step towards economic transformation. People find it challenging to understand the intricacies of the law because of the abundance of false information and misconceptions around it. We will provide you with a comprehensive grasp of the main elements of Saudi Arabia’s new tax law by unravelling it in this article. Keeping up with the latest developments is crucial for both individuals and business owners to ensure legal compliance and sound financial decision-making. Let’s examine the specifics and dispel the myths surrounding Saudi Arabia’s recently passed tax legislation.

Representational Image (image from rawpixel.com on Freepik)
Representational Image (image from rawpixel.com on Freepik)

The Need to Break Boundaries

The aim of the recently enacted tax legislation is to bring Saudi Arabia’s tax laws into line with global best practices, enhance transparency, and standardise the procedures for tax and zakat regulations. This will enable the laws to be in line with the Kingdom’s Vision 2030 economic framework. The Income Tax Law Draft, which intends to reform the KSA’s income tax system now governed by the Income Tax Law, was published on October 25, 2023, by the Zakat Tax and Customs Authority (“ZATCA”) on the Istitlaa Portal. The law puts defensive mechanisms in place to prevent dealings with tax havens. The main objective of the proposed law is to make income tax more applicable to both residents and non-residents who engage in business, investment, or real estate-related operations.

Key Changes and Practical Insights

Residential Status

Since non-Saudi citizens are subject to income tax, the proposed law separates residents and non-residents in addition to elaborating on legal and natural residents. Entities with their effective principal place of management situated in the Kingdom will also be recognised as Legal Persons, in addition to those lawfully established in Saudi Arabia. Furthermore,  Natural Resident Persons are those who have their domicile in Saudi Arabia, a residence permit, and live in the Kingdom for thirty days continuous or aggregate during a 365-day period, or, in the absence of either, those who spend 183 days continuous or aggregate in the Kingdom during a tax year, or who stay for 90 days continuous or aggregate in a tax year in addition to spending a total of 270 days continuous or aggregate during the last three tax years.

On these lines, it will be easier to understand who are considered to be taxable people.

Taxes

Tax w.r.t. being a Legal Person: Any legal entity that engages in any activity connected to the production of oil or hydrocarbons, natural gas investment, or any interest or units held directly or indirectly by any non-Saudi entity will be deemed taxable.

Tax w.r.t. non-resident persons: Even if a person is considered to be a non-resident and is conducting business through Permanent Establishments (PE), they are deemed to be taxable. Furthermore, non-resident natural persons who open bank accounts in the Kingdom or trade or invest in stocks of listed companies, as well as non-resident individuals who do not have a permanent establishment but nevertheless receive income from sources in Saudi Arabia, will be regarded as taxable persons.

Income sources, Exemptions, and Deductions

Under the proposed law, the majority of taxable income comes from sources inside Saudi Arabia. It provides exemptions from paying taxes on some capital gains, especially those that come from transactions involving restructuring that support the objectives of economic development. The list of deductible expenses has been expanded to include non-recoverable input VAT and real estate transaction tax, among other things. In an effort to increase accountability and transparency, the rule also places restrictions on the amount of monetary cost that can be deducted.

Changes to the ITL pertaining to WHT (withholding tax)

The ITL modifications include new provisions that modify WHT rates and exempt specific payments from WHT. This includes a 10 percent WHT on payments made to non-residents for services rendered and exclusions from listed firms’ payouts to non-resident shareholders. The proposals also suggest a 5 percent WHT on loan fees paid to connected parties. To better reflect the Kingdom’s emphasis on technological advancement, modifications to Article 16 of VAT implementing regulation will control how costs associated with research, development, and innovation are treated.

Penalties and Compliance

The proposed bill provides for extensions under certain conditions and lowers the five-year statute of limitations for tax assessments to three years. The consequences of non-compliance have been greatly raised, particularly in the case of tax evasion, where fines can amount to 100% to 300% of the unpaid tax or Zakat. These actions demonstrate the Kingdom’s determination to uphold tax compliance.

Representational image(Image from rawpixel.com on Freepik)
Representational image(Image from rawpixel.com on Freepik)

Impact of the new law on Saudi Arabia’s economy

The changes are a necessity for Saudi Arabia’s economic future, especially in terms of promoting both domestic and foreign investment. It is anticipated that the focus on tax compliance and transparency will increase tax receipts and improve economic stability. Here is a closer look.

On Businesses

One of the primary motivations behind the proposed changes in Saudi Arabia’s tax law is to increase government revenue. The proposed changes in the tax law are likely to have a significant impact on the business environment in Saudi Arabia with the introduction of value-added tax (VAT) and increased corporate tax rates. These measures could lead to increased costs for businesses operating in the country. However, it is important to note that the government has also announced various incentives and exemptions to support businesses in the transition period.

On Foreign Investment

Foreign direct investment (FDI) plays a crucial role in driving economic growth and development in Saudi Arabia. The proposed changes in the tax law could influence the attractiveness of the country as an investment destination. Higher corporate tax rates might make Saudi Arabia less competitive compared to other countries in the region.

On Fiscal Policy

The changes in Saudi Arabia’s tax law will have significant implications for the country’s fiscal policy. With increased revenue from non-oil sectors, the government will have more resources to invest in infrastructure development, social welfare programs, and economic diversification efforts. These measures are expected to stimulate economic growth and reduce the country’s dependence on oil.

Conclusion

The draft Income Tax Law of Saudi Arabia is a major step towards modernising the country’s tax system and bringing it into compliance with international norms. Foreign companies and investors conducting business in the Kingdom will need to carefully assess how the impending tax change will affect their activities in Saudi Arabia. This dynamic framework, which may undergo modifications after public comment, offers opportunities as well as challenges to Saudi taxpayers and foreign businesses.

Blog by Tamanna Shaikh

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