1Deloitte & Touche Bakr Abulkhair & Co.

Saudi Arabia income tax and zakat update

2Deloitte & Touche Bakr Abulkhair & Co.

Concept of residency

• Corporation

� Registered in the Kingdom; or

� Headquartered in the Kingdom

• Headquartered (at least 2 out of 3)

� Board of Directors decision is taken in KSA

� Key management (CEO, CFO etc.) are resident in KSA

� Majority revenue derived from Kingdom

3Deloitte & Touche Bakr Abulkhair & Co.

Significant powers given to the DZIT, e.g.

• Not accept any transaction that does not have tax effect

• Readjust transactions whose substance does not reflect its real form

• Arbitrary assessment (under certain circumstances)

• Reallocation of revenue and expenses between related parties etc.

General Anti-avoidance Rule (GAAR)

4Deloitte & Touche Bakr Abulkhair & Co.

- WHT on recharges from related parties - Important

• WHT @ 5% or 15%?

- WHT on related parties transaction (Technical services) - Important

Withholding tax

5Deloitte & Touche Bakr Abulkhair & Co.

• Refund approach

• Exemption approach (July 2013)

Refund of Withholding Taxes – claiming treaty benefits

6Deloitte & Touche Bakr Abulkhair & Co.

a) Internal reorganization

DZIT view – Subject to CGT

b) Conversion of a branch: Should not be subject to CGT

c) Parent changing location of HQ: Not subject to CGT

Capital Gains Tax

7Deloitte & Touche Bakr Abulkhair & Co.

d) Change for shareholding at top level in a multi-layered structure

DZIT view – If this change does not result in change in articles of association of Saudi LLC, then no CGT is applicable

Capital Gains Tax - Continued

8Deloitte & Touche Bakr Abulkhair & Co.

a) How will the gain be calculated?

b) What is the cost base?

Capital gain tax on sale of branch:

Capital Gains Tax - Continued

9Deloitte & Touche Bakr Abulkhair & Co.

Taxation in divided ex-neutral zone - Khafji Joint Operations (KJO)

• Land

� Khafji – Kingdom of Saudi Arabia

� Wafra – Kuwait

• Marine area

� Kuwait – 50% of the Kuwait tax

� Saudi (PE / Branch) – 50% tax

� Saudi (LLC) – DZIT opinion: tax on 100% profit

Other Important Issues

10Deloitte & Touche Bakr Abulkhair & Co.

- Application of CGT and WHT on GCC nationals/ corporations

- Reimbursement of tax/zakat from shareholders

- Contract Information Form (CIF)

- Import purchases reconciliation

- Salaries reconciliation between GOSI certificates and Company books

- Wage Protection System

- Application of withholding tax on non-deductible expenses

Other Important Issues - Continued

11Deloitte & Touche Bakr Abulkhair & Co.

- Statute of limitation:

a) Corporate tax

b) Withholding tax

- Group Zakat return filing

- New electronic Zakat filing and payment system is prone to errors

- Tax residency certificate for employees

Other Important Issues (Continued)

12Deloitte & Touche Bakr Abulkhair & Co.

Transfer pricing

• The new frontier (in the region)

• Egyptian experience

• Africa: OECD based TP rules in Kenya, Tanzania, Uganda

• Documentation to substantiate positions

Treaty abuse

• Beneficial ownership

• Substance / residence

GAAR Codification

• In the making…

Audit and investigation

• Systematic, based on rule-of-law and open to fair judicial scrutiny

• Arbitrary…

Other Important Issues (Continued)

13Deloitte & Touche Bakr Abulkhair & Co.

- OECD Base Erosion and Profit Shifting (BEPS)

Other Important Issues (Continued)