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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
Listen to and consider other views
Put your mobile phone / blackberry on silent
Use the opportunity for networking
Prepared by: Abdullah Almuhana 3
Agenda
Prepared by: Abdullah Almuhana 4
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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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List of tax treaties signed but not yet in force
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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.
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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.
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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.
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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
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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
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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
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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.
Prepared by: Abdullah Almuhana 35
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.
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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
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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.
Prepared by: Abdullah Almuhana 39
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.
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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).
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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).
42
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
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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.
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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
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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
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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.
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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.
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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.
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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).
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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.
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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
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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.
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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%.
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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.
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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.
Prepared by: Abdullah Almuhana 56
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.
Prepared by: Abdullah Almuhana 57
Thank you