Saudi Arabia – New measures aim to curb BEPS and attract foreign investment

Saudi Arabia – New measures aim to curb BEPS

KPMG in Saudi Arabia summarizes recent measures announced in the Kingdom, some of which aim to protect its tax base and others that open the country to more foreign investment.

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These measures include:

  • a new tax treaty with Sweden
  • fees to encourage development of ‘unexploited’ land
  • opening of the Tadawul stock market to foreign investors
  • new guidelines on permanent establishments (PE)
  • a new customs compliance program
  • expansion of the program requiring employers to report employees’ wages
  • opening of the retail sector to foreign investors   

Tax treaty between Saudi Arabia and Sweden

Saudi Arabia and Sweden signed their first income and capital tax treaty on 19 October 2015. Highlights of the treaty are as follows:

  • Dividends are taxable at a maximum rate of 5 percent if the beneficial owner is a company (other than a partnership) that holds at least 10 percent of the voting power or shares of the payer company. A 10 percent rate applies in other cases. 
  • Interest is taxable only in the beneficial owner's state of residence. 
  • Royalties paid for the use of, or right to use, industrial, commercial or scientific equipment are taxable at a top rate of 5 percent. A 7 percent rate applies to royalties in other cases.
  • Saudi Arabia generally uses the credit method to eliminate double taxation, while Sweden uses a combination of the credit and exemption methods. 

The treaty will enter into force on the last day of the month following the month in which the ratification instruments are exchanged. The treaty’s provisions will apply from 1 January of the year following its entry into force. 

Fees on unexploited land in Saudi Arabia

The government of Saudi Arabia announced measures to encourage the development of ‘unexploited’ lands. These measures will take the form of a fee imposed on the landholder. Details on calculating the fee, the application date and the land to which it applies are yet published.

Tadawul opened to foreign investors

The Saudi Arabian Capital Market Authority (CMA) announced that qualifying foreign financial institutions (QFI) would be allowed to invest in shares listed on Tadawul. Shortly after, the Department of Zakat and Income Tax (DZIT) issued a memo on the withholding tax (WHT) obligations of listed Saudi Joint Stock Companies. 

QFIs will be allowed to invest in shares listed on Tadawul from the 15 June 2015. Previously, foreign investors could only buy and sell shares listed on Tadawul indirectly through swap arrangements using registered Saudi brokers. 

Potential QFIs are advised to begin planning their entry into the Saudi stock market from a tax perspective, while Saudi listed companies are advised to assess whether the change in capital markets regulations may affect their tax/zakat status. Detail on these matters will be provided once the CMA regulations are issued. 

The DZIT has issued a memo confirming that the obligation to withhold tax on dividends paid to foreign investors will be the responsibility of the joint stock companies as per the Saudi tax law. 

New permanent establishment guidelines

The DZIT has issued ‘virtual PE’ guidelines to its branches and divisions to follow when processing WHT refund claims filed by non-residents who do not have a legal registration or PE in Saudi Arabia. The guidelines contain positions that are not consistent with accepted international interpretation and application of the PE concept under tax treaties. 

The DZIT has ruled that a non-resident party providing services in Saudi Arabia under a contract that meets or exceeds the duration threshold (e.g. 183 days in any 12-month period) under the relevant tax treaty has a taxable PE in the country, regardless of whether the services are physically rendered in Saudi Arabia. 

The Preliminary Appeal Committee (PAC) has rejected this position, and the DZIT has filed an appeal with the Higher Appeal Committee against the PAC’s ruling.  Non-resident service providers should consider the virtual PE issue and its implications when claiming WHT relief under Saudi Arabia’s tax treaties. 

Saudi Arabia Customs’ Compliance Gate program

Following efforts of the World Customs Organization and its members to harmonize and facilitate trade in a safe environment across the globe, the Customs Authority of the Kingdom of Saudi Arabia (‘Customs’) has introduced the Compliance Gate program, also known as the Authorized Economic Operator (AEO) program. The program aims to increase the voluntary compliance with the customs rules and regulations to enhance the security of international supply chains. 

Based on discussions with Customs, it is expected that the program will be initially limited to importers and exporters who engage in significant international trade activities. Later, all parties in the international supply chain that interact with Customs may apply for the program. 

Customs has issued conditions and criteria that importers and exporters must meet to apply for the AEO program. Three categories of AEO benefits are provided, which include:

  • reduced inspection procedures and shorter times required to clear the goods and release shipments
  • priority in obtaining customs facilities 
  • provision of the latest customs procedures and updates 
  • assignment of a customs service liaison officer ]
  • other benefits specific to each category. 

The AEO program is expected to bring considerable benefits to importers and exporters, enhancing their supply chains’ security and facilitating their customs transactions within Saudi Arabia. As local AEO regulations and requirements are still being developed, Customs has not yet confirmed the program’s launch date.

New compliance requirements on labor

The Ministry of Labor (MoL) is extending its Wages Protection Program that requires business entities to report wages and salaries of their employees and pay them through bank transactions. When it was initially launched in 2013, the program targeted entities with 3,000 or more employees as well as private, for-profit schools.

Entities with 2,000 or more employees had to comply with the provisions of the program as of 1 December 2013, while entities with 1000 or more employees have to comply as of 1 March 2014. As of 1 July 2014 and 1 October 2014, the program will cover entities with over 500 and over 200 employees, respectively.

Entities with 100 or more employees have had to comply with the program as of 1 January 2015 while the Ministry of Labor did not specify a specific date on which entities with less than 100 employees have to comply with the program.

The MoL says the program has several benefits for both employees and employers. Among other things, the program will preserve the rights of employees by ensuring agreed upon salaries are paid on the agreed upon dates.

The Wages Protection Program’s website provides detailed guidance on what employers need to do to start complying with the program. Even if the program does not yet apply to your company, it is advisable to get acquainted with the program’s provisions and procedures and seek help if needed. Non-compliance with the program can result in penalties ranging from freezing of MoL services to inspections and legal sanctions.

Saudi Arabia to allow full foreign ownership in retail sector

Saudi Arabia has announced plans to examine all of its trade and investment regimes in a bid to facilitate foreign investment, attract high-end businesses and diversify the economy. The plan stipulates that Saudi Arabia will ease restrictions on foreign investors to let them own 100 percent of retail and wholesale businesses. The plan aims to attract foreign companies and encourage them to manufacture their products in Saudi Arabia, and then sell them directly to the consumer, who would benefit from the advantage of after-sales services. The ultimate goal is to transform the country into an international center for the distribution, sale and re-export of products.

The announcement2 from the Saudi Arabian General Investment Authority (SAGIA) came in line with orders from King Salman Bin Abdulaziz. The king told reporters that his country must allow more opportunities for the United States and Saudi Arabia to do business.

Under the new plan, SAGIA said foreign companies wishing to invest in the Saudi market must ensure their offers include specific manufacturing time programs and plans for introducing new technology, according to the Saudi Press Agency (SPA).

SAGIA also said offers by foreign companies must ensure the creation of job opportunities and provide training for Saudi citizens under the kingdom’s ongoing Saudization project. The approach aims to increase competitiveness and provide better work opportunities to Saudi youths by enabling them to be trained in centers affiliated to these companies.

The plan will include brands such as Apple and Samsung but exclude retailers such as Wal-Mart and Tesco that cooperate with more than one producer.

The advantage of this decision is that international companies will no longer need a Saudi partner who usually acquires a percentage no less than 25 percent and takes from the proceeds without giving added value.

Rashid Al-Tayeb, vice-chairman of the public sector in Booz Allen Hamilton, said the decision to allow foreign companies to acquire an ownership up to 100 percent would have a “positive” impact on the retail sector.“

We deem this approach by the kingdom as positive as it will really change the reality in terms of attracting foreign direct investment to the retail sector.” 

It is expected that a higher percentage of Saudization – or nationalization of the private sector workforce – will be imposed on these companies. Tayeb said a higher Saudization percentage was “essential”, although “it might cause a challenge in the short term.”

“The foreign investor who wants to invest in any sector in Saudi Arabia is also responsible to serve the kingdom. For instance, the investor can serve the kingdom by creating jobs in Saudi Arabia, and we see that this is something important and positive.”

 

2 Saudi Arabia General Investment Authority news release, “Saudi Arabia to Allow Full Foreign Ownership in Retail Sector”, 6 September 2015.

MENASA Tax Update - November 2015

The latest news in tax from the Middle East, North Africa and South Asia (MENASA) region.

 
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