KSA Monthly Tax Snap - January’ 24

As we welcome a fresh phase, we're delighted to engage once again with our valued clients and partners throughout Saudi Arabia. This newsletter edition is a reservoir of enlightening updates, seasoned viewpoints, and essential insights within the ever-evolving realm of accounting and taxation.

ZATCA Issues Update on Income Tax for Individuals in Saudia Arabia

?? On December 31, 2023, the Zakat, Tax, and Customs Authority (ZATCA) released a comprehensive update regarding income tax for natural persons in the Kingdom of Saudi Arabia (KSA). This bulletin succinctly outlines the key aspects of income tax application for resident individuals in the KSA, covering residency criteria, the significance of permanent residence, and specifics on taxable income, tax rates, and tax base as per the Kingdom's Income Tax Law and Executive Regulations.

?? As per the established legal framework, an individual is classified as a tax resident in the KSA if they maintain a permanent residence and spend a minimum of 30 consecutive or separate days during the tax year. Alternatively, residency is conferred if an individual stays in the KSA for a cumulative total of 183 days, even without possessing a permanent residence.

?? Fractional days are considered full days, and permanent housing encompasses owned homes, properties rented for at least a year, or housing secured by another party for a minimum of one year. Notably, Saudi nationality holds no relevance in determining residency; the focus solely rests on meeting the specified residency conditions.

?? Non-Saudi resident individuals engaged in commercial activities are subject to income tax, with a standard tax rate of 20% for resident natural persons. Those involved in oil and hydrocarbon production face varying rates based on their total capital investments in the KSA.

?? The tax base for resident natural persons encompasses taxable income from KSA sources, deducted from allowable expenses. Individuals have the flexibility to choose between the cash or accrual basis for accounting methods, with a mandatory shift to the accrual basis if annual income exceeds five million riyals.

?? Residents subject to income tax are required to register with the Authority before the conclusion of their first fiscal year. Businesses operating across the KSA must deduct tax from payments to non-residents related to their activities. Income tax returns must be submitted within 120 days from the end of the tax year, accompanied by prompt payment of associated taxes. Non-compliance may result in fines and penalties imposed by the Authority.

?? In conclusion, this update offers valuable insights into the application of income tax for resident individuals in the KSA. It elucidates residency criteria, taxable income, and tax rates, providing clarity on the standard 20% tax rate for resident individuals and specific variations for different sectors. The bulletin also underscores the importance of income tax registration and outlines critical deadlines for filing returns and making payments.

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?ZATCA Introduces New Bonded Zones Regulations in Saudia Arabia

??? On January 26, 2024, the Zakat, Tax, and Customs Authority (ZATCA) unveiled updated regulations governing the licensing and operations of Bonded Zones in the Kingdom of Saudi Arabia (KSA).

?? These recently issued rules meticulously outline the procedures for obtaining licenses, engaging in activities within bonded zones, and the prerequisites for license applications. Furthermore, they elucidate the responsibilities of operators and delineate ZATCA's oversight and supervisory functions pertaining to bonded zones.

?? Serving as pivotal facilitators for the seamless movement of goods and international trade, KSA bonded zones empower importers and exporters to store goods and conduct logistics operations, all while deferring fees and taxes until the goods are either introduced into the local market or re-exported.

???? Supervised by ZATCA and managed by licensed operating companies, the core objective of bonded zones is to establish a professional logistic environment that supports the movement, storage, assembly, redistribution, and export operations, positioning the KSA as a global logistics hub.

?? The advantages of engaging with bonded zones are multifaceted, encompassing the ability for non-resident merchants to operate without a Saudi commercial register, flexibility in customs and clearance procedures, streamlined logistics operations, heightened operational efficiency, and effective liquidity management.

?? ZATCA issues licenses for bonded zones with distinct classifications based on the nature of activities:

1. Bonded Zones License: Involves storage, handling, and value-added operations such as packaging, coding, sorting, and labeling.
2. Specialized Bonded Zones License: Encompasses storage, handling, value-added operations, e-commerce, assembling, maintenance, mixing, and combination.
3. Bonded Zones Tanks License: Focuses on the storage of liquid petroleum, petrochemical derivatives, and bulk products, including mixing and combination.
4. Temporary Bonded Zone License: Allows all activities within bonded zones for a maximum period of 6 months.

?? In summary, these updated regulations represent a significant step forward in fostering a conducive environment for international trade and logistics within the KSA. The detailed guidelines provided by ZATCA aim to enhance operational transparency and efficiency within bonded zones, contributing to the broader goal of positioning Saudi Arabia as a global hub for logistics excellence.?

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Finance Minister Al-Jadaan Affirms KSA’s Stand Against Personal Income Tax

On January 20, 2024, Finance Minister Mohammed Al-Jadaan, speaking at the World Economic Forum in Davos, reiterated the Kingdom of Saudi Arabia’s steadfast commitment to abstain from introducing a Personal Income Tax (PIT). This stance aligns with the ongoing economic reforms and adjustments integral to the Vision 2030 agenda.

?? Al-Jadaan provided clarity on the KSA's tax framework, emphasizing its continuation with the existing system comprising Value-Added Tax (VAT), Corporate Income Tax (CIT) applicable to foreign investors, and Zakat for local entities. By eschewing PIT, the KSA aims to safeguard residents' disposable income, potentially fostering increased consumer spending and bolstering economic growth.

?? Concurrently, the KSA is strategically positioning itself to attract the regional headquarters (RHQ) of multinational enterprises (MNEs), a strategic move in line with Vision 2030 objectives. This initiative forms part of the broader plan to establish the KSA as a central commercial and business hub in the Middle East.

??? Minister Al-Jadaan's insights into project prioritization shed light on the KSA's methodical approach to Vision 2030. Projects are categorized based on their immediacy, short-term goals (up to 2026), medium-term goals (up to 2030), and long-term goals (extending to 2035). This phased implementation underscores the KSA's dedication to sustainable development, harmonizing present needs with future ambitions.

?? In essence, the decision to forego PIT, coupled with strategic fiscal management and prioritization of Vision 2030 projects, underscores the KSA's profound commitment to economic reform and sustainability. This approach positions the Kingdom as a role model for harmonizing fiscal responsibility with robust economic growth, enhancing its allure as a preferred destination for global investors and businesses.?

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KSA Council of Ministers Enacts Decision on RGQ Program

On December 26, 2023, the Council of Ministers of the Kingdom of Saudi Arabia (KSA) introduced Decision No. 461, effective from January 1, 2024, focusing on the Regional Headquarters (RHQ) program. This decision holds significance for government entities engaging with international companies lacking RHQs in the KSA.

?? The KSA government has implemented controls governing contracts between government agencies and companies without an RHQ in the KSA. This decision delineates specific controls for contracting, exemptions, and reporting requirements, underscoring the government's commitment to streamlining business operations and ensuring adherence to local laws.

?? In detail, contracts with companies lacking RHQ are permissible under specific conditions. The total estimated cost for works and purchases should not surpass one million Saudi Arabian Riyals (SAR), and these activities must be conducted outside the KSA, involving international procurement.

?? Companies without RHQ in the KSA, along with their affiliates, can participate in public tenders launched by government agencies, subject to certain criteria for proposal acceptance.

?? Direct contracts with companies without RHQ in the KSA are generally prohibited, except in instances where the required purchases are exclusive to these companies or in emergency situations necessitating immediate contracting.

?? Government agencies in the KSA can engage with companies lacking an RHQ in the KSA or their affiliates for specific projects or durations, contingent upon approval from the "Committee on Exemption from the Controls of Government Agencies Contracting with Companies without RHQ in the KSA and the Related Parties."

?? Agencies involved with such companies are mandated to report the rationale for these contracts to the General Court of Audit and Government Expenditure within 30 business days of contract signing.

?? The latest regulations from KSA call for compliance and operational adjustments, prompting companies to assess their business strategies and weigh the benefits of establishing an RHQ in the Kingdom.?

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ZATCA’s Circular on VAT Treatment for Private Educational Services

On January 2024, in accordance with Royal Order No. A/86 issued on April 4, 2018, the Zakat, Tax, and Customs Authority (ZATCA) released a Circular Letter elucidating the VAT treatment of private educational services offered to Saudi Arabian citizens.

?? The Circular Letter outlines the VAT-exempt status for the following entities:

• Accredited private and international schools.
• Educational services, encompassing tuition fees and the cost of textbooks provided by schools.
• Private universities under the Ministry of Education's supervision (Bachelor).
• Tuition fees and textbook costs directly sold by universities.
• Education and training programs overseen by the General Corporation for the Technical and Vocational Training Company (equivalent to study certificates from the Ministry of Education, provided the training duration exceeds two years).
• Tuition fees and textbook fees sold by accredited educational organizations as part of an educational program.

?? Outside the scope of VAT exemptions – generally subject to VAT – are non-compulsory education and training services for citizens if the duration exceeds two years. Additionally, short-advanced courses lasting one month or less, as well as qualification courses spanning one month to one year, are excluded from VAT exemptions.

?? The Circular Letter emphasizes the obligations of private educational service organizations when issuing tax invoices to Saudi citizens. This involves verifying citizens' identity, preserving their national identity data, including services in files, and submitting them to the Authority upon request.

?? Tax invoices must include mandatory information such as the Saudi national identification number and contact details of citizens benefiting from special educational services. Notably, a declaration of the supply related to these services should be made on the VAT Authority website under the "Sales to citizens - Private education" section without the requirement to pay the tax due.

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ZATCA Unveils New Insights on VAT in Loyalty Programs

In November 2023, the Zakat, Tax, and Customs Authority (ZATCA) released its second guidance on the VAT treatment of loyalty programs in the Kingdom of Saudi Arabia (KSA), aligning with the principles of the Gulf Cooperation Council (GCC) VAT Agreement.

?? Loyalty programs, particularly prevalent in credit cards and financial services, are integral marketing tools for financial institutions. ZATCA's latest guidance provides comprehensive insights into potential tax implications related to loyalty points, transactions with participating merchants, and the redemption of points.

?? The guidance underlines fundamental principles for financial institutions managing loyalty programs, emphasizing the importance of individual contractual arrangements to ensure accurate tax treatment.

?? Introducing the concept of a "qualified voucher" — a transferable document with a specific cash value exchangeable for goods or services — the guidance offers clarity on various scenarios:

1. Financial Institution Purchasing Qualified Vouchers:Sale of vouchers from merchants to financial institutions is generally VAT-exempt unless the consideration exceeds the nominal cash value, triggering VAT on the difference.
2. Issuing and Redeeming Loyalty Points:Issuing loyalty points without separate cash consideration is not considered a separate supply. However, when customers redeem points for vouchers and subsequently obtain goods or services, VAT becomes applicable.
3. Direct Purchase and Redemption of Goods/Services:Financial institutions purchasing goods/services for customers using loyalty points incur VAT on the supplied goods/services. Subsequent supply to the customer without additional consideration does not trigger VAT implications for the institution.
4. Issuing Air Miles for Travel Ticket Purchases:Redeeming air miles for vouchers and ticket purchases aligns with the VAT considerations outlined for loyalty points and voucher redemption.
5. Converting Loyalty Points to Cash:Cash redemption of loyalty points hinges on the contractual relationship between the financial institution and the customer. VAT implications are transaction-specific, demanding a meticulous understanding of acquisition, redemption, and corresponding tax considerations.

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January Business Takeaway KSA

Saudi Arabia Stands Firm on January 2024 Deadline for International Firms Headquarters Relocation. The Finance Minister affirmed on Wednesday that Saudi Arabia remains committed to enforcing its January 2024 deadline. This mandates international firms seeking government contracts in the kingdom to establish their regional headquarters in Riyadh. The announcement, made in February 2021, aimed at discontinuing contracts with companies without regional headquarters in the kingdom by January 1, 2024. This strategic move aligns with Saudi Arabia's economic diversification objectives, fostering local job creation and addressing escalating regional competition.

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