In a recent development, the Saudi Arabian Ministry of Finance has sanctioned a series of amendments to the income tax and Zakat regulations. These changes, published in the Official Gazette on September 12, 2023, are expected to substantially impact businesses operating in or with Saudi Arabia. Here, we delve into the nuances of these amendments and what they signify for the corporate sector.

Corporate Income Tax

The amendments brought about significant changes in the corporate income tax sector, as follows:

Interest Expense Threshold Formula: 
The new regulations exclude interest costs used to finance capital assets from the allowed interest expense threshold formula. Essentially, borrowing costs capitalised under IAS 23 will no longer be included in the permitted interest calculation and will instead adhere to tax depreciation rules. This adjustment may alter the financial dynamics of corporations, especially in terms of tax planning and compliance.

Clarification on Unfunded Liabilities: 
The amendments have clarified the definition of "unfunded liabilities". This clarification pertains to deducting employer contributions to an authorised retirement fund as an expense, potentially offering more transparency and ease of business compliance.

Appeal Procedures: 
The articles governing appeal procedures have been repealed. The appeal processes will now be governed by the operating rules of the Tax Disputes Resolution Committees, essentially formalising the current appeal procedures followed in practice.

Withholding Tax

The withholding tax segment has also witnessed significant amendments, as outlined below:

Technical or Consultancy Services: 
Payments made to head offices or associate parties for technical or consultancy services or international telecommunication services will now incur a withholding tax (WHT) of 5%, a substantial reduction from the previous 15%. This applies irrespective of whether the payments are made to related or third parties.

Airline Tickets: 
A 5% WHT will be levied on payments to non-residents for airline tickets, but only for flights departing from Saudi Arabia. International flights departing from other countries are exempt from this WHT, potentially encouraging international business relations and tourism.

Freight Services: 
Importantly, payments made to non-residents for air or maritime freight services from abroad to Saudi Arabia are now excluded from the scope of WHT, which might foster smoother trade relations and logistics operations.

Zakat Regulations: Strengthening Compliance

The Zakat segment has also seen pivotal changes aimed at enhancing awareness and compliance:

Awareness and Compliance: 
ZATCA is set to issue guidelines and publications to foster understanding and bolster compliance with the Zakat regulations. 

Public and Private Rulings: 
ZATCA retains the authority to issue public and private rulings, adhering to specified procedures. These rulings will be binding prospectively from the date of issuance, except in specific scenarios. 

Limitations on ZATCA's Authority: 
The amendments clearly state that ZATCA has no right to grant any exceptions, exemptions, privileges, discounts, or other advantages beyond what is permitted by the provisions of the Zakat regulations.

It is worth noting that on September 19, 2023, ZATCA proposed further amendments to the Zakat regulations, which are currently open for public consultation. Interested parties can view and respond to these proposals through the public consultation platform (Istitlaa) polling until October 17, 2023. 

We strongly recommend businesses engaged in or with Saudi Arabia carefully assess these amendments' implications on their operations. It is crucial to stay abreast of these changes to ensure compliance and to adapt business strategies accordingly. 

These amendments mark a significant shift in the Saudi Arabian tax and Zakat landscape, potentially heralding a new era of transparency and compliance. Businesses should remain vigilant and proactive in adapting to these changes to foster sustainable regional growth.