As depressed oil prices and hostilities with Yemen continue to constrain Saudi Arabia’s finances, the country’s tax authority is working to boost its tax enforcement capabilities and raise more revenues. The country is a G-20 member, and the Saudi government is actively engaged in the Organization for Economic Co-operation and Development’s (OECD) work to curb international base erosion and profit shifting and taking steps to ensure the country meets its obligations under the plan.
Where taxes are concerned, these can be uncertain times for foreign investors in Saudi Arabia. Tareq Al-Sunaid, Partner – Tax & Zakat, KPMG Al Fozan & Al Sadhan, explains.
Considering the oil reserves and the strength of Saudi foreign exchange reserves, Saudi Arabia can endure lower oil prices longer than other major oil producing countries. The uncertainty in the oil prices is not a source of concern for the Kingdom as demonstrated by this year’s budget. The government has initiated major economic reforms, including various development projects, that will offset the impact of reduced oil prices in the long run. The Department of Zakat & Income Tax (DZIT) will also be affected as part of the wider reforms undertaken by the government.
One area that the DZIT have always examined closely involves payments to non-resident service providers from a withholding tax perspective. More attention is being paid where the service provider is a related entity, as the DZIT is in the process of developing formal transfer pricing regulations.
Very recently, another area that the assessing officers are looking into involves technical services provided by non-residents in Saudi Arabia. The tax authority is taking an aggressive stance on whether a provision of technical services from offshore on an ongoing basis creates a permanent establishment of the service provider in Saudi Arabia. Many non-residents relying on the protection of tax treaties are surprised by negative determinations as a result. The DZIT’s position appears to run against the principles of the OECD, so the ultimate outcome of disputes with taxpayers in this area is unknown.
This is only one example. In fact, companies doing business in the country should expect much more scrutiny of their tax affairs in all areas. The DZIT is investing heavily in sophisticated electronic systems that will vastly improve its ability to detect non-compliance. It is also investing heavily in training to develop the international tax enforcement skills of its staff. Some employees have been sent on training missions with more developed tax administrations in locations like the United Kingdom and Turkey. Foreign companies are already experiencing the impact of these systems and resource enhancements in their dealings with DZIT. Companies can expect the impact to become even more pronounced in the future as the DZIT’s capabilities continue to improve.
Saudi authorities have traditionally adopted a substance-over-form approach in dealing with tax matters. Instead of relying on legal documentation, the assessing officers focus on the substance of the transaction. Because the OECD’s action plan on BEPS aims to allocate taxable income of corporations based on activity, as opposed to legal structures, Saudi authorities can rightly claim that BEPS action plan to some extent validates the position historically taken by the DZIT.
The interaction between Saudi authorities and international tax administrations is a powerful education opportunity that is definitely making a difference in the DZIT’s approaches at home. The government is committed to implementing the results of the OECD BEPS Action Plan and recognizes it has work to do. For example, Saudi Arabia will be challenged to get systems and processes in place to enable exchange of information under the OECD’s common reporting standard.
A more positive outcome of the Saudi Arabia’s international engagement is its fresh commitment to transparency in government, whether in tax administration or other areas. While it is true that foreign companies and individuals may have some frustration in their dealings with DZIT, it is also important to note that the government is looking to make a more business-friendly and secure destination for foreign investment.
Perhaps the most important advice is to have thorough documentation on hand that details the business reasons for your transactions and supports your tax positions. Clear documentation can help you clarify your positions with the DZIT and avoid disputes. Conversely, many taxpayers have failed to win a favorable outcome with the DZIT or in the courts because adequate documentation did not exist.
Documentation will be particularly important when Saudi Arabia introduces a new transfer pricing regime, once the OECD’s BEPS proposals in this area are finalized. Currently, the DZIT has little experience applying transfer pricing rules. Clear documentation can help companies lessen the potential for disputes and help the DZIT understand the economic basis for their transfer pricing policies.
Also keep in mind Saudi tax law requires books and records to be maintained in Arabic and within the country. Many resident taxpayers overlook these requirements or keep records in other locations for security reasons and suffer reprisals as a result.
Finally, anytime you deal with the tax authorities of another country, there is no substitute for support from a local professional adviser. In Saudi Arabia, much better outcomes are usually achieved when tax disputes are settled between the taxpayer and the DZIT, without further escalation. As the DZIT’s resources and capabilities continue to progress, it will become more important to have local advisers in your corner – professionals who can help overcome language barriers and who have the degree of knowledge, experience and familiarity with the DZIT that are needed to represent you effectively.