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Navigating the Proposed Changes in Saudi Arabia's Tax Landscape

As Saudi Arabia continues to align its economic framework with Vision 2030, significant proposed changes to the Income Tax Law (ITL) and related regulations have been introduced for public consultation. This Q&A aims to shed light on these developments, emphasizing that these are proposed drafts and not yet enacted laws.

Q1: What are the key provisions of the proposed new tax law in Saudi Arabia?
The proposed law represents a significant reform, aiming to modernize the tax system in line with global best practices. It introduces specific provisions for tax residency, detailing criteria for transferring residency into and out of the Kingdom. The draft law also redefines legal persons, including endowments, investment funds, and various partnerships, under its purview. Notably, it exempts income from employment for natural persons on their salaries, which was always the case, but today we see that mentioned explicitly in the law. The proposed law mandates tax residents and entities with taxable activities in the Kingdom to adhere to stringent filing requirements.

Q2: How does the proposed law address income sources, exemptions, and deductions?
Income derived from sources within Saudi Arabia forms the crux of taxable income under the proposed law. It offers exemptions on certain capital gains, particularly those resulting from restructuring transactions, aligning with economic development goals. Deductible expenses have been broadened to include real estate transaction tax and non-recoverable input VAT, among others. The law also introduces limits on cash expenses eligible for deductions, promoting transparency and accountability.

Q3: What are the implications of these changes on Saudi Arabia's economy and fiscal policy?
These changes are pivotal for Saudi Arabia’s economic trajectory, particularly in fostering foreign investment and domestic growth, cornerstones of Vision 2030. The emphasis on tax compliance and transparency is expected to bolster tax revenues and enhance fiscal stability. The introduction of tax incentives for green investments marks a significant step towards environmental sustainability, reflecting a global trend.

Q4: Can you elaborate on the tax payment, filing timeline, and penalties for non-compliance?
The proposed law reduces the statute of limitations for tax assessments to three years down from five years, with provisions for extensions in specific scenarios. Penalties for non-compliance have been significantly increased, especially for tax evasion, where fines can range from 100% to 300% of the due tax or Zakat. These measures underscore the Kingdom's commitment to enforcing tax compliance.

Q5: What are the proposed amendments to the ITL regarding withholding tax (WHT) and research and development expenses?
The amendments to the ITL introduce new clauses to exempt certain payments from WHT and adjust WHT rates. This includes exemptions on dividends by listed companies to nonresident shareholders and a 10% WHT on services-related payments to nonresidents. Additionally, the amendments propose a 5% WHT on payments for loan fees to related parties. Changes to Article 16 will govern the treatment of expenses related to research, development, and innovation, reflecting the Kingdom's focus on technological advancement.

Q6: What should taxpayers do in light of these proposed changes?
Taxpayers, both businesses and individuals, should closely review these changes to understand their impact on compliance and tax planning. Engaging with tax professionals for tailored advice is highly recommended. The proposed laws also call for more rigorous documentation and disclosure, preparing taxpayers for a more transparent tax environment. We note that the Zakat, Tax and Customs Authority (ZATCA) has previously initiated Phase Two of the E-invoicing Project. This phase integrates taxpayers' E-invoicing systems with ZATCA's FATOORA platform, marking a significant step in Saudi Arabia's journey towards digital transformation and enhanced tax compliance. 

It is crucial to remember that these are proposed drafts open for public consultation. Stakeholders are encouraged to participate in this process, contributing their insights to help shape effective and equitable tax legislation in Saudi Arabia.

This Q&A was originally written for Arabian Business. The full article here: Saudi Arabia begins 'significant' income tax reform Everything you need to know. 

This article was written by corporate lawyer and focuses on income tax in Saudi Arabia. 

BSA is a regional law firm in the Middle East with offices in the UAE, Oman and Saudi Arabia. As a full-service law firm our practice areas include litigation, arbitration and corporate services, including M&A, banking & finance, Intellectual Property, TMT, Fintech, employment and insurance.

Published on 23 November, 2023.

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