The Old Income Tax : Income Tax By-Law

Chapter 1
Basic Provisions

1. The Provisions of Royal Decree no. 17/2/28/3321, dated 21/1/1370 H. (2/11/1950) will be effective as of 1/1/1370 H. (2/11/1950) and the tax becomes payable by non-Saudi persons and companies. Saudis are subject to “zakat” in accordance with the Islamic Jurisprudence. Companies and Banks with Saudi and non-Saudi partners are subject to tax under the provisions of the said Decree.

2. For the purpose of this Law, the term “income” means any profit, gain or income realized by a person, resident of the Kingdom or not, by performance of a job, or by any other permitted work or service performed personally by the person or through capital investment in all commercial, industrial and agricultural operations and in other crafts, and any other earnings from a private “waqf”(endowments), inside the Kingdom of Saudi Arabia or within Saudi rights in the two neutral zones between itself and either Iraq and Kuwait.

3. For the purpose of this Law, the term “Personal income” means all wages, salaries, rewards and remunerations, received by a non-Saudi person, whether civil servant or otherwise. It also includes income derived by the person for personal services, or for being agent of any form or purpose, or for any work conducted at governmental agency or at any other agency with independent budget, such as Awqaf (Endowments) and Municipalities or similar agencies, or at any public or private organizations, such as companies, or commercial, industrial, agricultural outfits, banks, individuals or others. Income includes amounts received as salaries, wages, and compensations for or in lieu of salaries. In short, income includes every thing received by the person from any sources mentioned. Income includes cash or in kind payments (reasonably estimated), and deductions from wages or salaries to pay back employers.

4. Taxable gross receipts are all receipts, profits and gains realized by registered or no registered companies regardless of the place of head-office, and gross receipts could be from commercial, industrial, agricultural or banking enterprises of any type and in any form of payment. Gross receipts could result from any kind of commercial activity, industry, agriculture, from sale or purchase, or commercial or financial transactions, from mines, quarries, oil resources and products, other minerals, and properties movable or immovable. Gross receipts also include all receipts from commissions, dividends, securities and guarantees, or any other profit or gain from commercial deals that aim at profit and gains from any source of wealth to include private “Waqf”. Gross receipts of companies incorporated outside Saudi Arabia that exercise business inside and outside the Kingdom at the same time are all receipts from all local sources in addition to the portion of other receipts attributable to local sources. For the purpose of this law, Kingdom of Saudi Arabia includes Saudi rights in the two neutral zones between the Kingdom and either Iraq or Kuwait. For the purpose of this law, the term “company’ means any company, partnership or association of two or more persons that exercises any type of or combination of businesses mentioned in this article, and whether it is a commercial or non commercial company provided it is a profit outfit, and it also includes stores owned by two or more persons.

5. Taxable net profit from capital investment is all income, gross receipts and profits. Gross receipts are cash amounts received, and properties and chattels obtained with no capital, during the year. The deductions are cost of goods sold, ordinary and necessary expenses for the outfit, and reasonable depreciation amount (receipts from sales are included in gross receipts subject to tax).

6. Profits referred to above of persons with no reliable books and records are estimated based on estimated values of goods, machinery and tools received or posted to accounts based on import documents and other appropriate means to estimate profits. Estimated profit will not be less than 15 percent of gross receipts.

7. Gross receipts means whatever an owner of a trade, industry or agriculture obtains from sale of or dealing with goods, machinery, and tools.

Chapter 2
Tax Rates

8. Employment tax on salaries and allowances, set forth in paragraph 3 hereof , and on professionals (such as doctors, lawyers and the like) in regard to salaries and allowances shall be set at …percent of annual income in excess of exempted amount .

9.Professionals, set forth in paragraph 8 hereof, who in addition to their full time jobs do other part time work shall be taxed at … percent of their income from employment and other part-time jobs in excess of the annual exempted amount.

10. Merchants, owners of plants and factories, business men who use their capital to purchase and sell goods of various types and descriptions, or to rent, lease and handle movable and immovable properties, or to import and export, including trade in animals, transport vehicles (inclusive of rent cars, boats, machines and equipment), brokers, auctioneers and commission agents shall be taxed at a rate of ….net profit which should be at least 15 percent of the annual gross receipts in excess of the annual exempted amount. The word “merchant” shall mean any person with commercial activities who makes a career of such activities in accordance with Commercial Law issued in Royal Decree no. 32, dated 15/1/1350 H. It also means commission agents, auctioneers, land, marine and air transportation agents, banks, any person with one or more commercial activities or other activities being subject to tax rate of … shall be taxed in regard to that (those) activity (ies) even though trade or commerce is not a career. This also includes brokerage commission for incidental work.

11. Contractors’ profits in excess of the exempted amount will be subject to tax at a rate of …. , from contracts with government agencies or private sector. Profits will be deemed 15 percent of gross income (contract value). Gross income of persons who rent and lease properties shall be the difference between receipts and payments.

Taxpayers will be entitled to the full annual exemption only if they are resident or deemed to be resident in the Kingdom for one full year. In case of shorter residence periods, the exemption amount will be in proportion to such periods.

12. Corporate income tax on companies registered or should be registered under Royal Order no. 144, and on banks shall be … percent of profits before distribution or remittance to other parties .

Chapter 3
Deductions from Profits

13. The following deductions are allowed for taxpayer categories referred to in articles 10, 11 and 12 of this by-law.
a. Ordinary and necessary expenses, such as space rental, wages for employees and other expenses related to the outfit.
b. Travel expenses related to the outfit.
c. A reasonable amount for depreciation of business assets.
d. A Verified loss incurred by the outfit during the tax year and not reimbursed in any other way.
e. Proceeds to government from concession or monopoly companies, and the government share in their profits.

It is clear that personal expense of whatever type and form is not an allowed deduction. Debts payable by the taxpayer are not allowed either, unless it is a cost of goods, business rent or an employee wage. Debts payable to the taxpayer not received during the year are included in the taxable amount provided there is no double taxation.

Chapter 4
Exemptions

14. The following are tax-exempted:

a. …
b. ….
c. …..
d. Salaries and allowances of foreign ambassadors …
e. Saudis who are subject to zakat.
f. Employees travel expenses..
g. Allowance…
h. Contributions, and subsidies paid directly to philanthropic and social organizations recognized by Saudi Government, and contributions and subsidies by the government.
i. Non-profit organizations recognized by Saudi governmental and whose main purpose is not profit generation, and philanthropic Endowments.
j. Real Estate subject to real estate tax after verification of tax payment. This does not include persons who are in the business of renting and re-renting real estate covered in article 10 of this law.
k. Dividends from profits of companies that have already been subject to tax.
l. Provisions and proceeds allocated by the government to tribes and nomadic areas.

Chapter 5
Assessment and collection of tax

15. Tax on wages and salaries (cancelled)

a. Tax on wages and salaries will be withheld from wages and salaries of employees referred to in Article 3 hereof and whose net salaries, wages and other allowances exceed a threshold of ____ , so the monthly exempted amount will be the annual threshold divided by twelve, that is _____. The tax will be calculated on the remaining amount. Withheld amounts will be recorded as revenue in the account of income tax in the year’s budget.

Directors or managers of financially autonomous agencies, of companies, banks, and other commercial, industrial or agricultural outfits shall ensure the withholding of payable tax and shall account for the amount withheld under a holding account. The withheld amount will be remitted to the Treasury based on an itemized list to be attached with the remitted amount and will be recorded at Treasury in the above-mentioned account. The managers of concerned outfits are fully liable for any shortfall or negligence in withholding or remittance of tax to Treasury. (The account of an employee whose service is terminated or who passes away before the completion of the year will be closed down by returning any amounts withheld to the employee or heirs on the grounds that tax is payable on the whole year.).

b. Professionals referred to in Article 9 hereof are required to make payment of tax due on previous month and are liable to the provision of penalty stipulated in the last paragraph of Article 15 of the Royal Decree on Income Tax Law. The tax account will be reconciled after the end of each year, and overpayments (if any) will be refunded.

16. Banks, companies and tradesmen referred to in article 12 are required to pay due tax on or before the 15th day of the third month following the end of their fiscal year in accordance with provisions of last paragraph of article 16 of this decree.

17. Tradesmen, owners of factories, and business men referred to in article 10, and professionals referred to in article 9 of this by-law are required to pay tax due on or before the 15th day of the month following the time when tax becomes payable. They are also required to file the official relevant form at time of payment.

In regard to contractors referred to in article 11 of this by-law, the tax payable by them will be deducted from amounts payable to them proportionate with the amount of payment. This method applies to contractors with governmental, semi governmental agencies or to contracts between individuals. Reconciliation must be made upon completion of a contract. All contracting entities are required to withhold and pay tax to the treasury in accordance with article 15 of this by-law.

18. To facilitate implementation of this by-law, a department will be set-up at the Directorate of General Revenues to assess and collect tax according to this by-law . This department is responsible for determination of profits, based on taxpayers’ statements or through audit and investigation, and amount of tax payable. Financial offices will assess and collect these taxes as directed.

19. In addition to duties above, the Department shall audit books and records of companies, tradesmen and other taxpayers, inform them of notices, and keep the books referred to in article 39. In short, this Department will do whatever necessary to arrive at the taxpayer’s correct position: it may check imports documents and others or may look at 3rd party records ( individuals, banks, companies and official or private entities) with which the taxpayer has had dealings. This Department is fully responsible for any shortfall in this respect or failure in timely collection.

Chapter 6
Penalties

20. Fiscal Penalties

a. The employer shall withhold the tax payable by the employees. The employer will be subject to a penalty of 10 percent of tax payable if it fails to withhold and pay tax at the legally prescribed time. Any further delay will cause the employer to be subject to a delay penalty of 25 percent . A taxpayer is subject to these penalties: 10 and 25 percent, on income from capital investment in accordance with the last paragraph of article 9 of the said Royal Decree. Companies are as well subject to these penalties in accordance with article 15 of the Royal Decree in case of non-or delinquent filing of the mentioned declaration.

b. If a deliberate error is found in the data provided to the Ministry of Finance, 1st Instance Committee, or Higher Appeal Committee by taxpayers, directors of governmental agencies, other agencies or business owners in relation to assessment, audit or collection of tax, an additional amount of 25 percent of tax payable will be added to tax amount, and a penalty of 25 percent of tax payable will be imposed on the party that committed the error unless it is the taxpayer.

21. Other Penalties:
In addition to the tax payable and cash penalties, a taxpayer, such as merchant, business man, professional, company, who refrains from paying due tax on time or who deliberately provides incorrect data to evade tax or to help evade tax may be banned temporarily or permanently from conducting business in the Kingdom, leaving the country, or transferring money abroad.

An official employee who helps evade tax, or any employee who, by virtue of position, specialty, or work has a role in assessment and collection of tax, discloses information that has come to his knowledge while carrying out his duties will be terminated from his job in addition to being subject to other legal penalties.

Chapter 7
Objections and Appeals

22. A taxpayer, such as a company, merchant, businessman, professional, will be notified in a written notice of tax payable according to the audit conducted by the Ministry of Finance.

23. A taxpayer may object to the tax assessed within 30 days of date of receipt of the notice in a written memorandum ( original and one copy ) stating reasons for the objection and addressed to the department that notified him of the assessment. The department keeps the original memorandum and returns the copy to the taxpayer stamped of receipt and date. The objection memorandum may be sent to the above-mentioned department via registered mail.

24.
a. The taxpayer’s objection will be presented to a 1st Instance Committee within 60 days of date of receipt.

b. One or more 1st Instance Committee will be formed at DZIT to consider objections filed by taxpayers. A 1st Instance Committee(s) will consist of three members from DZIT or other agencies, and be formed per an order by the Minister of Finance and National Economy. The grades of the committee’s members will be no less than 10, and be chaired by the most senior member, and have a secretary assigned from DZIT’ employees. The 1st Instance Committee has the authority to solve all issues presented to it.

c. The Committee’s Chairman will inform DZIT, the assessing agency, and the taxpayer of the date of the Committee’s session at least 15 days before that date.

d. In the first session, the objecting taxpayer must present documents and memorandum of defense to the Committee; the Committee will provide a copy of that memorandum to the assessing department to respond to in the next session. The session for resolution of dispute should not be postponed unless for compelling circumstances the Committee accepts .

25. The 1st Instance Committee issues its resolution by majority after hearing the two parties. The tax payable based on the resolution should neither be less than what the taxpayer/representative declared nor more than the tax assessed by DZIT. The Committee will inform the two parties of its resolution and the grounds thereof within 15 days of date of issuance of resolution. The resolution should be implemented even if appealed.

26. DZIT and the taxpayer may appeal the 1st Instance Committee resolution within 30 days of date of receipt of the resolution provided that if the taxpayer is appealing he ought to pay any amount still due based on the resolution or submit a bank guarantee that provides the following:

1. The amount of guarantee should be no less than the total amount still payable by the taxpayer, i.e. tax, and delay penalty and concealment penalty based on the Committee’s resolution.
2. The valid period of the guarantee should be no less than one year.
3. The guarantee should be renewable.
4. The guarantee can be cashed at the exclusive discretion of DZIT.
5. The guarantee should be in a format compatible with the format approved by the Saudi Arabian Monetary Agency.

27. Either party in a memorandum stating the grounds for objection, original and one copy, addressed to the Higher Appeal Committee, may appeal the 1st Instance Committee resolution. The copy shall be returned to the objecting party, stamped as received with the date of receipt. The appeal memorandum may be sent to the Higher Appeal Committee via registered mail.

28. The Higher Appeal Committee is formed to consider appeals by either DZIT or the taxpayer and it consists of three experienced members assigned by the Minister of Finance and National Economy who names one member as a chairman. This Committee meets at the head-office of DZIT.

29. The Higher Appeal Committee issues its resolution soon after considering the documents it deems necessary and after hearing the two parties and conducting any investigation it deems necessary. It may seek the assistance of experts as it deems necessary. The appeal must not cause any damage to the appellant, and majority issues the resolution.

30. The Higher Appeal Committee’s resolution becomes final once the Minister of Finance and national Economy signs it. DZIT is to be informed of the resolution within 30 days of the Minister’s signature. DZIT must inform the taxpayer of the contents of the resolution and adjust the assessment accordingly. DZIT may provide the taxpayer with a copy of the signed resolution if he so requested .

31. The Provisions of Revenue Collection Law shall apply in regard to collection of tax and any penalty resulted from the tax.. The Ministry of Finance debt has the first claim over all properties of persons and companies who are debited with tax or obligated to pay. The government debt comes over any debt, and no taxpayer shall be allowed to leave the country unless payment of tax is confirmed.

Chapter 8
General Provisions

32. A taxpayer, whether an individual or a company, who ceases to operate in total or partially during the year must inform the Ministry of Finance of cessation within 60 days of actual date of cessation. The taxpayer must file required data to clear its tax account, otherwise the taxpayer will be required to pay tax for the whole year. Transferring the title of a commercial store or other properties in total or partially is for tax purposes like cessation of activity. Failure to inform the Ministry of Finance of the transfer in a timely manner will make the transferee and the transferor jointly liable for paying the tax.

33. Companies incorporated in countries other than Saudi Arabia that operate inside and outside the Kingdom are subject to tax in the Kingdom and to other regulations that apply to all other companies and are required to file data with the Ministry of Finance.

34. If any employee gets an increase in salary or allowance during the year, the increment should be taxed from the effective date of the increase, provided that the increment in addition to the salary and allowance have exceeded the exempted threshold or the increment has resulted in increase of tax liability on salary and allowances. The employer is required to provide the Ministry of Finance with all information stated in this paragraph in writing.

35. Merchants, owners of factories and business men referred to herein are required to keep organized books and accounts to show income and expenses in relation to business. The books and records will be used to determine values of goods, machinery and tools acquired or sold in order to facilitate determination the amount of taxable profit. These books have to be certified by the Commercial Court or by the public notary if there is no commercial court. Taxpayers are required to keep supporting documents, invoices, customs receipts and other documents that show imports and profits.

36. Companies and Banks, registered or required to register, and merchants whose accounts are based on Gregorian fiscal year are required to file a statement showing their profits realized between 1/1/1370 H. and the end of 1950, and to account for this profit of the specified period as part of the tax year.

37. The Finance Office is required to keep three books in accordance with the attached form: one is to register the category of taxpayers subject to the 5 percent tax, the second is to register the category of taxpayers subject to the 10 percent tax, and the third is to register the category of taxpayers subject to the 20 percent tax referred herein ; it is also required to maintain a log of 1st Instance objections and appeals. The Finance Office is responsible for informing taxpayers of notices, obtaining data from companies and the like in regard to profits, imports, names of employees, their salaries and any other information relating to tax assessment as set forth herein, and shall also receive applications for objections and appeals.

38. The Finance Office shall, as soon as it receives these instructions, start to identify taxpayers sorted per category and collect payable tax from them.

39. In the case of lack of clarity that may surface during implementation of articles of these instructions, the Minister of Finance is the reference authority for clarification and interpretation.

40. The Director General of Finance shall supervise printing of the required books, forms of notices and statements and shall distribute them to Financial Offices as soon as possible.

41. These instructions will be printed in sufficient number, published in local newspapers, and circulated to all Financial Offices.

Minister of Finance