Tax workshop

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Tax training sessionSPIMACO ADDWAEIH21 October 2014

Prepared by: Abdullah Almuhana

Prepared by: Abdullah Almuhana 2

Ground rulesPlease

Ask as many questions as you like

Share your experiences and ideas

Feel free to discuss

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Use the opportunity for networking


Agenda


introductionThe new tax law came into effect on 30 July 2004.By-laws (implementing regulations) to the new tax law were issued on 15

August 2004.Except for its withholding tax provisions, the new tax law is applicable in

respect of fiscal periods beginning after 30 July 2004.Withholding tax provisions are effective on taxable payments to non-residents

from an in-Kingdom source from the effective date.Withholding tax is applied on the taxable payment made to non-resident parties.

Withholding tax rate ranges from 5%-20% depending on the nature of taxable payment (discussed later).


Who is subject to WHT?

Non-residents:

(including non-resident GCC parties) not having a permanent establishment in

Saudi Arabia in respect of income earned from a source in the Kingdom.

Permanent establishment:

A permanent establishment of a non-resident in the Kingdom consists of the

permanent place of activity of the non-resident through which it carries out

business, including business carried out through an agent.


The following are considered as permanent establishment

Construction sites, assembly facilities and its related supervisory

activities.

Installations or sites used for surveying for natural resources.

A fixed location where a non-resident natural person carries out business.

A branch of a non-resident company, which is licensed to carry out

business in the Kingdom.


Dependent Agent- if it meets any of the following conditions

Holding negotiation on behalf of the non-resident.

Entering into contracts on behalf of the non-resident.

Having an inventory balance in the Kingdom owned by the non-resident

to meet customers demands regularly on behalf of the non-resident.


Who is responsible to withhold?

A Saudi Arabian resident entity whether or not a taxpayer ( I.e Saudi or

non Saudi entity).

A permanent establishment of a non-resident in the Kingdom.

A natural person on payments related to business activity.


Other rules relating to WHT

WHT is paid on the entire amount paid to the non-resident regardless of

any costs incurred by the non-resident.

WHT is payable on the taxable amount even if this amount is

disallowed.


Withholding tax is full and final settlement of the tax liability of

non-resident

No further taxation

No refund ( unless, tax treaty )

Possible deduction from tax liability in certain cases.


Obligations of a withholderRegister with the DZIT ( we have to register any new structured company in

future )

Withhold the tax due from non-resident parties.

Submit monthly WHT return form and settle the tax withheld to the DZIT within

the first ten days of the month following the month during which the payment is

made.

Submit annual WHT return for withholding transactions

Furnish the payee with a WHT certificate.

Maintain the records necessary to verify the correctness of the tax withheld.


Rates of withholding tax)%(

Nature of payment

5 Loan fees (interest)

5 Rents

5 Air tickets

5 Air freight or marine shipping

5 Technical and consulting services

5 International telecommunications services

5 Dividend payment, profit remitted to head office

5 Insurance and reinsurance premiums (excluding insurance on material imported CIF or FOB)

15 Royalties

15Payments for services made to the head office or a non-resident related party (50% or more ownership)

20 Management fees

15 Any other payments


WHT – Description of Services Dividend Payments: any distribution made by a resident company to a non-resident shareholder and any other profits transferred from a permanent establishment to associated parties subject to the following:Divided payments in companies operating in natural gas, oil or

hydrocarbons investment fields are not subject to withholding tax.Partial or complete liquidation of a company and recovery of its shares

in excess of the paid up capital is considered as a dividend payment.The fact that the distributing company is subject to income tax does not

prevent imposition of withholding tax on the amounts distributed by it.Generally, Saudi listed companies do not deduct WHT on the payments

of dividends to non-resident shareholders.


WHT – Description of Services Management Fees:

Amounts paid under management services contracts such as hotel management and ship management contracts, etc.

Any Other Payments:

Any amounts paid to a non-resident from an in-Kingdom source for services other than those mentioned elsewhere.Payments for staff seconded from a related party Subject to 15% WHT.

Loan Fees:

any amounts paid to a non-resident against usage of funds.

Technical and Consulting services:

Technical, technological and scientific services of any type including studies and researches in various fields, surveys of a scientific, geological and industrial nature, consulting or supervisory services; and consideration for engineering services of any type including the related drawings.


WHT – Description of Services

A non-resident party executing a supply contract with associated technical and consultancy services is subject to withholding tax @ 5% (15% if it is a non-resident affiliate under common control in respect of the technical and consultancy services provided that the value of each element of the supply and offshore services are specifically stated in the contract.

If a supply contract contains other taxable services for which values are not separately specified in the contract, the DZIT will impute the value of the taxable services on the basis of 10% of the total contract value for each element of taxable activity.

In an appeal, the HAC has rejected the PAC’s decision relating to imposition of 15% withholding tax on payments of technical and consulting fee to non-resident affiliated entities.

We understand that the DZIT has filed an appeal before the Board of Grievance against the PAC’s decision.

An authorized person acting as broker/agent for a non-resident investor is required to withhold and settle 5% WHT in this case.


Payment by Saudi entity to parties resident outside Saudi Arabia

Against supply of goods

Saudi residents (including PE)

Non-residentsNo WHT

No WHT

Affiliates for services15% WHT Third parties

Services rendered wholly/partly inside

Saudi ArabiaServices rendered offshore

WHT based on applicable WHT rates

Technical and consulting services

Other services

5% WHT

No WHT

Against services


WHT – Description of Services

Royalties:

payments for the use of or the right to use intellectual property, including

but not limited to copyright, patents, industrial designs and secrets, trade

marks and names, knowledge, trade and business secrets and names, or

for the use of information related to industrial, trade or scientific

expertise, or for exploitation of natural and mineral resources.


Filing Requirements and Fines

Withholding tax should be deposited with the DZIT by the resident paying entity within the first 10 days of the month following the month in which the taxable payment is made.

The resident paying entity should issue a certificate to the non-resident entity stating the amount of payment and tax withheld thereon. The resident paying entity will be required to maintain records as required by the new tax law, to enable the DZIT to determine the resident entity’s withholding tax obligations.

Where the resident paying entity fails to deduct or having deducted fails to deposit with the DZIT any tax as required under the new tax law, such entity will be liable to delay fine at 1% of the tax underpaid/unpaid for each 30 days of delay.

In case of evasion of WHT an additional fine of 25% is imposed on the unpaid tax.


Tax TreatiesSaudi Arabia has signed tax treaties with various countries.

Double tax treaty, Circular 3328/19 requires that tax is withheld on all

payments to nonresidents at the rates required under domestic tax law

(without recourse to the double tax treaty).

To benefit from a reduced withholding tax rate or exemption, the Saudi

Arabian resident taxpayer (that is, the withholder) must submit a request

for refund of “overpaid” tax to the DZIT together with supporting

materials (for example, the tax residency certificate of the nonresident).

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Claiming benefits under tax treaties

DZIT circular 3227/19Tax residence certificate from the tax authority of the treaty countryCompleted refund request formLetter from the non-resident party requesting refundCopy of withholding tax formCopy of bank receipt for withholding tax settledThe DZIT will issue the bank draft/ bank transfer in favor of the withholder.

We have been informed by the DZIT officials that in order to claim the tax

treaties' benefits, the letters issued by the foreign vendor and the letters

issued by foreign tax authorities should also be attested by Saudi Embassy

in the respective countries and also by the Ministry of Foreign Affairs in

Saudi Arabia.Prepared by: Abdullah Almuhana


Issues Raised by DZIT

Tax residence certificate should be translated and notarised from Saudi Embassy in the respective treaty country and also from the Ministry of Foreign Affairs in Saudi Arabia.

Confirmation from foreign tax authority that the income is taxable in the country of residence of the services providers.

Income to be included on the certificate from the foreign tax authority Not technically required under the treaty.

Not standard on tax residence certificates.Application to be made by the payer, not payee.Refund of withholding tax paid based on the benefits available under tax

treaties.


Practical Experience

A taxpayer has been able to secure a refund of WHT after complying

with the requirement of the above circular.

The entire refund process took four months time.

In accordance with the DZIT circular, the company settled WHT

according to the Saudi Arabian tax regulation and subsequently filed a

refund application together with the required documents.


Tax TreatiesSaudi Arabia has signed tax treaties with various countries.Under Saudi tax law, in case of any conflict, the provisions of the tax treaties

will prevail over the provisions of the local tax law and its by-laws.


List of tax treaties signed but not yet in force


Treaty’s RatesThe table below shows the maximum withholding rates for dividends, interest and

royalties provided under Saudi Arabia’s double tax treaties that were available at

the date of writing.

To benefit from the advantageous rates under the double tax treaties, additional

conditions may be required (for example, the recipient is required to be the

beneficial owner of the related gain).

Readers should obtain detailed information regarding the treaties before engaging

in transactions.





Treaty

Please note that withholding tax should be settled on all payments at the

rates mentioned in slide No. 12. Subsequently the non-resident party may

benefit from the reduced rates as mentioned above based on the

procedure laid down by Circular 3328/19.

Under Saudi tax law, in case of any conflict, the provisions of the tax

treaties will prevail over the provisions of the local tax law and its by-

laws.


Cases STRUCTURE OF CONTRACTS:

Supply only contracts are not taxable

Onshore and offshore technical and consultancy services are taxable

Scope of services should be well defined in the contract

Amount to be paid for supply portion and each of other services should

preferably be stated separately in the contract.


TAXABLE WORKS ACCOMPANYING SUPPLY

Where the value of a taxable activity is not stated separately in the offshore supply and onshore services contract, the value of each in Kingdom activity associated with the supply is deemed at 10% of the total contract value

A contract entered into with a non-resident unrelated party for the following services:

Supply of materials SR 85,000,000

Engineering SR 5,000,000

Installation SR 5,000,000

Maintenance SR 5,000,000

Total contract value SR 100,000,000


Taxation of the contract if value for each service is stated separately as above:

Contract element Value per contract SR Tax base SR

Supply 85,000,000 --

Engineering 5,000,000 5,000,000

Installation 5,000,000 5,000,000

Maintenance 5,000,000 5,000,000

Total 100,000,000 15,000,000


Taxation if the contract value is shown as lump sum amount of SR 100,000,000

Contract element Value per contract SR Tax base @ 10% SR

Supply Not stated separately --

Engineering Not stated separately 10,000,000

Installation Not stated separately 10,000,000

Maintenance Not stated separately 10,000,000

Total 100,000,000 30,000,000


CasesOffshore repair services - UK tax treaty:The DZIT has confirmed through an advance ruling that UK based non

resident company, providing off-shore repair services are not subject to tax in Saudi Arabia, in accordance with the provisions of the double tax treaty.

Residency status:In case of a company incorporated in Bahrain, the PAC ruled that it

should be treated as a Saudi resident entity as the place of central control and management of the company is located in the Kingdom.

The PAC ruling is based on the facts that the company conducts its business in Saudi Arabia and the board meetings are also held in Saudi Arabia.


Cases

WHT on refurbishment, upgrading and renovation work performed

abroad:

The PAC upheld the DZIT’s treatment of applying 15% WHT on

refurbishment, upgrading and renovation work performed outside Saudi

Arabia.

Refund of excess WHT paid:

The PAC upheld the DZIT’s treatment of rejecting the request to refund

excess WHT paid by the company on the grounds that WHT is considered as

final payment under Article 68 of the tax law.


CasesWithholding tax - deemed distribution:

The DZIT assessed 5% withholding tax on the entire amount of net profit

for the year transferred to head office current account, considering it as a

“deemed distribution” of profit.

Withholding tax - special commission:

The DZIT imposed 5% withholding tax on payments on account of special

commission and interest rate swap to non-residents. The DZIT has

disregarded the Ministry of Finance Circular No. 185/5 exempting such

payments from withholding tax.

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CasesTechnical services performed outside Saudi Arabia:

The PAC ruled that advertisement and production services [i.e. film

shooting services] performed outside the Kingdom are subject to WHT.

Withholding tax obligation:

Authorized Person ( not SPIMACO ), acting as a broker for buying and

selling of securities on behalf of non-resident investors under the CMA

regulations is required to withhold tax on remittance of dividend collected

on behalf of the non-resident investors.Prepared by: Abdullah Almuhana


CasesCancellation of WHT imposed on Salaries and delay fine:

The HAC in an appeal filed by the Department upheld PAC’s decision

on the following:

Not to impose non-resident’s tax on reimbursement of salary cost of

employees based in Saudi Arabia;

Cancel the delay fine on the additional tax liability arising from the

DZIT’s treatment.


Cases

Treaty’s Exemptions:

The DZIT, in response to taxpayer query, confirmed to him that interest

paid to a French partner is not subject to withholding tax per Article 7 – 1

of the Saudi French treaty as long as the loan is not used for industrial or

commercial activities performed in-Kingdom by the recipient.

DZIT usually request tax/zakat payer to provide auditors’ certificate

confirming payments to non-residents subject to withholding tax.


CasesTAX TREATIES DEVELOPMENTS:

Withholding tax on payments of equipment rent shall not exceed 8% (5%

as per Saudi tax law).

Withholding tax on royalty payment shall not exceed 8% (15% as per

Saudi tax law).

“Fees for Technical Services” appears to be covered under income from

business profits. Based on Article 7 (Business Profit) of the treaty, no

withholding tax should be assessed on a Spanish entity if it does not have

PE in Saudi Arabia (i.e. no fixed place of business in Saudi Arabia).


Cases

Main Features of Tax Treaty with Italy:

10% in all other cases

(5% as per Saudi Tax law)

“Fees for Technical Services” appears to be covered under income from

business profits. Based on Article 7 (Business Profit) of the treaty, no

withholding tax should be assessed on an Italian entity if it does not have PE

in Saudi Arabia (i.e. less than six months stay in Saudi Arabia).

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CasesPayroll processing arrangement:

Payment of salaries to a Saudi entity’s employees by a non-resident

payroll processing agent will be considered as technical services fee and

subject to 5% withholding tax.

Withholding tax on dividend payment:

The DZIT confirmed the Zakat liability of a GCC shareholder is

deductible when calculating withholding tax on dividend payment

Payment of dividend to non-resident investor through resident broker is

subject to 5% withholding.Prepared by: Abdullah Almuhana


CasesTransport and packing materials:

Transport and packing materials services provided outside Saudi Arabia

by a non-affiliated entity are not subject to withholding tax.

Freight and insurance cost

Freight and insurance charges paid to non-resident entities for import of

hired equipment are subject to 5% withholding tax. No withholding tax

is applicable if paid for the outright purchase of imported goods.


Financial charges:

Payment of guarantee charges to non-resident banks are subject to 5%

withholding tax (instead of 15% as applied by the DZIT).

The DZIT computed withholding tax on finance charges on loans

obtained from a local bank through non-resident facility agents.

The local bank reported these charges as revenue in their final

declarations and settled tax and zakat thereon.

Cases


Remuneration to non-resident directors:

Remuneration and bonuses paid to non-resident directors of a closed joint

stock company or their relatives would be tax deductible expense. Such

payments would be considered as “other payments” subject to 15%

withholding tax.

Media cost:

5% withholding tax on the media cost charges paid to a non-resident entity.

Cases


CasesTechnical service fees treated as management fees subject to 20%

WHT:

The HAC upheld the PAC’s decision confirming the DZIT’s treatment of

imposing 20% WHT on technical services.

The HAC’s decision was based on the ground that the work performed by

the non-resident company was in the nature of management services.


CasesWHT on payment made to a local PE:

The PAC upheld the DZIT’s position of 5% WHT on payments made

for technical services made to an entity holding a commercial

registration and registered with the DZIT on the basis that the services

were provided by the ‘French’ parent.

Invoices were raised by the Saudi entity although payments were

directly made to the foreign head office.


Cases

Technical services performed:

The PAC ruled that advertisement and production services (i.e., film

shooting services) performed outside the Kingdom are subject to WHT

on the basis that creation and design of advertisements are considered as

‘Technical and Consultancy services’ and are subject to WHT

irrespective of place of performance of such services.


Cases

PAC’s decision rejecting the following treatments by DZIT:

Imposing 5% WHT on insurance and freight payments relating to import

of leased equipment.

Rejection of taxpayers’ right to contest imposition of WHT on non-

resident parties.

Imposing delay fine on WHT relating to payments for technical services to

affiliates (due to technical disagreement).


CasesMARKETING EXPENSES ABROAD:

Sales expenses incurred by a Saudi company out of Saudi Arabia for marketing

of its products are not subject to withholding tax.

Commission to promoters and sellers of goods (manufactured in Kingdom) for

services entirely performed out of Kingdom is not subject to withholding tax.

Sales expenses incurred by Saudi companies for marketing their products in

Gulf States are not subject to withholding tax.


CasesTRANSPORTATION:

Freight and Insurance charges not subject to withholding tax if

incorporated as part of cost of materials

Payments made on account of Land transport is considered as “any

other payment” and subject to 15% withholding tax.

Cost of freight from Kingdom to a destination outside of Kingdom are

subject to tax


Cases SOCIAL INSURANCE ABROAD:

The amounts paid to social insurance organizations abroad are

considered as insurance payments; and consequently, subject to

withholding tax.

Amounts paid on account of social insurance, thrift and saving funds

abroad subject to 5% withholding tax. In addition, these are considered

as disallowable expenses for tax purposes.


CasesRoyalties to a non-resident GCC:

Payments of royalties to a non-resident GCC party in return for using its

name by a Saudi Company is subject to withholding tax.

MANAGEMENT FEES:

Payments for management and control of companies' investment

portfolios outside the Kingdom are subject to withholding tax at a rate

of 20%.


CasesLEGAL EXPENSES:

Legal expenses incurred abroad are technical and consulting services

subject to a 5% withholding tax notwithstanding the place of

performance of such services.

DATE OF PAYMENT:

Withholding tax is payable on payment or deemed payment (clearance

or settlement of accounts). The date of settlement is considered to be

the date of payment unless the settlement is between related parties in

which case it is the date of book entry.


CasesTRAINING SERVICES:

Payments for training services are subject to withholding tax at a rate of 15 % of

the total value of the contract if the training or part of it takes place in the

Kingdom. However, if the training fully takes place outside the Kingdom, it will

not be subject to withholding tax.

Recruitment charges for engineers and experts on short business visas for training

programs are considered to be from an in-Kingdom source and subject to

withholding tax.


Cases

NON-RESIDENT AIRLINES / SHIPPING COMPANIES:

Saudi agents of non-resident airlines and shipping companies are

liable to settle withholding tax while making payments to such airlines

and shipping companies for air tickets and cargo / marine shipping

services.


Thank you

Documents

Tax workshop