- Introduction
The tax amnesty in Saudi Arabia is set to expire on 30 June 2024.
The tax amnesty is a remarkable initiative from the Saudi Government, under which taxpayers can regularise their taxes with the Zakat, Tax and Customs Authority (“ZATCA”) and benefit from the cancellation of the associated tax penalties.
With only 40 days to go, in this article we answer some lesser-known points around the tax amnesty and provide useful tips, based on our experience, for those taxpayers who are considering benefitting from it.
- Content
- Do I need to submit a tax return in respect of all my outstanding taxes in respect of all years?
In principle, taxpayers are required to submit all outstanding tax returns and pay all outstanding taxes to benefit from the tax amnesty.
However, in practice the amnesty consists in ZATCA and the taxpayer settling on a given tax. Since “tax” is a broad concept, it needs to be narrowed down to a type of tax and to a tax period (e.g. income tax for the tax period 2020). In practice, we have experience on certain taxpayers applying the tax amnesty only in respect of some taxes (e.g. only income tax matters), or only in respect of some tax periods (e.g. only VAT in respect of the VAT period third quarter of 2021).
Notwithstanding, it is always prudent to seek a written confirmation from ZATCA – ideally from ZATCA’s appointed relationship manager, if there is any appointed for your company -, confirming that it is possible to apply the tax amnesty only in respect of certain tax/es and/or tax periods.
- How to apply for the tax amnesty?
For those taxpayers who have a relationship manager at ZATCA, the usual way is to communicate with such relationship manager and inform them about the taxpayer’s intention to apply the tax amnesty.
For those taxpayers who do not have a relationship manager at ZATCA, they may contact ZATCA through ZATCA’s public email or telephone number, or visit their offices in person.
In our experience, it is useful to appoint a professional services provider, such as a law firm, to liaise with ZATCA on behalf of the taxpayer. This is especially relevant for non-resident persons.
- Additional challenges regarding permanent establishments
Non-resident persons who have a permanent establishment (“PE”) in Saudi Arabia and would like to register the PE and regularise its taxes under the tax amnesty face additional challenges, when compared to taxpayers already established in the Kingdom.
Firstly, their regularisation implies more steps. The reason is that to apply the tax amnesty, first they need to request ZATCA to register them as a PE. Once ZATCA registers them as a PE, they may submit the outstanding tax returns and pay the tax. This registration step adds additional time.
Second, in terms of the calculation of the amount of taxes outstanding. The general rule is that PEs are taxed according to their net taxable income, calculated based on the revenue minus expenses attributable to them. However, in Saudi Arabia exist force of attraction rules and provisions on the calculation of taxable income based on deemed profits. These rules may or may not affect the final tax due. It is critical to analyse and anticipate all the tax scenarios in advance, before contacting ZATCA.
Thirdly, in terms of the payment of the taxes. Non-resident persons usually do not have a bank account in the Kingdom. International bank transfers in favour of ZATCA are possible, but they take longer.
In sum, if you are considering regularising a PE under the tax amnesty, it is recommended starting as soon as possible.
- Would opting for the tax amnesty end my existing tax litigation?
In previous tax amnesties in the Kingdom, if a taxpayer had ongoing tax litigation against ZATCA and wanted to apply the amnesty in respect of the same tax matter which was under dispute, the taxpayer had to choose between either of them. In other words, if it opted for the tax amnesty, it was asked to drop its existing tax dispute.
The current regulations for the tax amnesty do not explicitly deal with this point. However, ZATCA and the Tax Committee’s practice under the current amnesty has been to accept that taxpayers can opt for the tax amnesty and still pursue their existing tax litigation.
Notwithstanding, it is always prudent to seek a written confirmation from ZATCA – ideally from the appointed relationship manager, if there is any -, confirming that both actions are compatible.
- Statutes of limitation
In Saudi Arabia there is no unified tax procedures law. The tax procedural aspects are governed by the laws and regulations of each tax (e.g. income tax, VAT, Zakat, etc.). Currently there is a draft proposal for a Zakat and tax procedures law which, if approved, would be welcome and would unify all tax procedural aspects across all taxes. The lack of a unified tax procedures law presently has practical consequences, for instance because the statutes of limitation are different depending on the tax concerned.
Therefore, when considering whether to apply the tax amnesty, taxpayers should first analyse what is the tax or taxes which they want to regularise; what is the applicable statute of limitation, if any; and whether the statute of limitation affects their proposed regularisation.
- Who decides on whether to regularise
Under the Saudi Companies Law, the general assembly (“GA”) reigns supreme. However, the GA usually does not descend to the level of discussing whether the company should regularise its taxes.
Instead, it generally corresponds to the management of the company, in its power to manage it, to decide whether to pursue the tax amnesty. The management body may take the form of a board of directors; or, a much more common form in limited liability companies and branches, just consist of a general manager.
However, in practice the staff working in the tax or finance department of the company, in conjunction with the legal department and/or external support, do all the groundwork. After they have analysed all the benefits and inconveniences and performed all the calculations, they usually escalate the matter to management, for management to decide.
Needless to say, in corporate groups with more complex governance structures – e.g. if there is an audit committee, if there are different layers of executives, if there are limitations and requirements in the articles of association, if there is a joint venture partner or a previous seller who must be notified or consulted, etc. – the decision-making process may protract.
With only 40 days for the tax amnesty to expire, those companies wishing to apply it should check if there are various levels of approvals required within their organisation and start taking action.
- Claiming damages for the outstanding taxes
In our experience, companies tend to regularise their tax affairs when there has been a change in the management or in the shareholders of the company, and a due diligence exercise disclosed that the company should have paid more taxes. Sometimes the reason to regularise is not due to lack of care, but instead due to the stakeholders taking a different interpretation on a given tax matter. Taxes derive from laws, and sometimes the laws are unclear or can be interpreted in opposite directions.
From a legal perspective, a question usually arises as to whether a claim can be brought against the person responsible for the company’s underpayment of taxes. Two different scenarios can be distinguished in this regard:
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- In case of a change in the shareholders, the share sale and purchase agreement would usually govern the matter. For instance, such agreement may include an indemnity, granted by the seller to the buyer, under which the seller obliges to indemnify the buyer – or the target company itself – for any losses arising in respect of taxes which were due by the target company before the purchase.
- In case of a change in the management, the Saudi Companies Law includes some provisions regarding the liability of the managers and board members, subject to certain requirements.
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If you are working for an organisation which is thinking about regularising, you may wish to consider the above. However, it is prudent not to jump into conclusions hastily. Before taking any step, it is critical to check the viability of a potential claim with both a litigation lawyer and a tax lawyer. In our experience, too often companies only engage a general commercial litigator and they fail to consult the underlying merits of the case with a tax lawyer, which sometimes results in spending fees and efforts on litigation to no avail. As noted, sometimes what seems gross mismanagement in respect of taxes from the outside may be found to be a reasonable and technically defendable interpretation of the tax laws.
- Financial planning
If your company is considering applying for the tax amnesty, it is likely that it will be required to pay a significant amount of money to ZATCA in one go. It is possible to request ZATCA’s approval to pay the outstanding tax according to an instalment plan that goes beyond 30 June 2024, however it must be credible and realistic for ZATCA to approve it.
Therefore, it is likely that your company would face a significant expense, which may or may not be divided in instalments. It is recommended to plan financially accordingly.
- Confidentiality
Tax matters in Saudi Arabia are strictly confidential. ZATCA do not disclose the name of taxpayers who apply or benefit from the tax amnesty.
- If you belong to a listed multinational
In some cases, applying a tax amnesty may constitute a reportable event under the stock market laws where a company is listed. Generally speaking, these laws require listed companies to keep investors and the public appraised of the position of the company, and to make a public announcement if they have information which might reasonably be expected to have a material effect on market activity in, or prices of, listed securities; or if they are aware of new developments which are not public knowledge and which may lead to substantial movements in the price of its shares.
Although usually it is not the case, depending on the relative impact that the tax amnesty may have on a company, such company may be required to make a public announcement.
If your organisation is a listed company, it is always recommended to check with corporate counsel on whether any public announcements would be required because of the tax amnesty.
- How can we help?
Our tax team is experienced in tax regularisations and tax amnesties. They have worked on previous tax amnesties in Saudi Arabia and abroad, and they can analyse and advise on the benefits and inconveniences of submitting a request before ZATCA to apply the tax amnesty. They are also aware of ZATCA’s practices.
By combining previous knowledge and practical experience in the Kingdom of Saudi Arabia, we are in a unique position to anticipate the likely response from ZATCA and help your organisation apply the tax amnesty successfully.