Taxable Year

Article 18

1. The taxable year of a taxpayer for all activities is the state’s fiscal year. A taxpayer’s fiscal year shall start as of the date of its commercial register or license unless evidences prove otherwise.  A taxpayer may use a different fiscal year under the following conditions:

-       the taxpayer has been using a different fiscal year approved by the Department prior to enacting of the Law;

-       the taxpayer is using a Gregorian fiscal year;

-       a company is a member in a group of companies or is a subsidiary of a foreign company using a different fiscal year.

When using a different fiscal year, the following should be met:

a. The Taxpayer shall comply with effects by submitting a separate tax return for the short period separating the last tax year before the change and the beginning of the new tax year and shall pay tax according to the return within the legally prescribed time.

b. The first year of a new taxpayer or the last year in case of cessation or liquidation may be a short fiscal year unless the company's articles of association require a long fiscal year.

c. The application of above provisions is without prejudice to provisions of Article 70 of the Law in regard to advance payment of tax by a taxpayer who changes its fiscal year.

2. A taxpayer whose first year is a long fiscal year under the company's articles of association shall file a tax return for the first 12 months within 120 days of the end of the first 12 months. After the end of the long fiscal period, the taxpayer shall file one consolidated return for the long fiscal period and pay tax accordingly with a credit of the amount paid for the first period.

3. In case of a short fiscal period, shorter than 12 months, the due date for payment of tax and filing of return is within 120 days of closure of accounts. 

Accounting Method

Article 19

Subject to provisions of Article 23 of the Law in regard to accounting method, a natural person my account for tax purposes on cash or accrual basis, but if his gross income from business for a taxable year exceeds five million Saudi riyals, he must account for business income on accrual basis in all succeeding taxable years even if such income falls later below the five million Saudi riyals.

Long-Term Contracts

Article 20

1. An accrual-basis taxpayer should account for income and deductions (income to the contractor and expenses to the contracting party-the main contractor-) relating to a long-term contract on the basis of the percentage of the contract completed during the taxable year. The following formula should be applied: The portion of Costs incurred during the taxable year, which the total value of contract bears to the estimated total cost of the long-term contract.

Costs incurred during the taxable year multiplied by total value of contract

divided by estimated total cost of the long term contract

2. The term “long-term contract” means a contract for manufacture, installation, construction, turn-key contract, or performance of related services (such as a contract with an engineer for provision of engineering supervision on the project), that has commenced during the taxable year but not completed within the same year, other than a contract estimated to be completed within 6 months of the actual start date.

3. If a taxpayer fails to comply with the prescribed method in paragraph (1) of this Article to account for income from long-term contracts, the Department has the right to determine such income as it deems appropriate based on available information and evidences.

Natural Gas Investment Tax

Article 21

Any person, natural or corporate, Saudi or non-Saudi, engaged in the natural gas, natural gas liquids and gas condensates investment activity within the Kingdom of Saudi Arabia, its dedicated economic zone or continental shelf shall be subject to the Natural Gas Investment Tax (NGIT) .

Article 22

 “Natural Gas” shall have one of the following meaning as per its rank within the chain of the gas industry activities:

a.       “Natural Gas” as defined in the Upstream Rules for Non-associated Gas Activities in the Kingdom of Saudi Arabia.

b.     “Gas” as defined in the Gas Supplies and Pricing Regulations.

c.     “Dry Gas” as defined in the Gas Supplies and Pricing Regulations.

Article 23

“Exploration, Production, Gathering and Treatment Activities” means all exploration and production activities, including geological survey, engineering, prospecting, exploration, evaluation, development, drilling, production, gathering of production and treatment and initial preparation of gas.

Article 24

A party shall be considered a gas producer if it is engaged in the production, gathering, treatment and processing of natural gas and the fractionation of natural gas liquids.

Article 25

“End User Facilities” means those facilities that receive amounts of Natural Gas and/or Natural Gas Liquids for use as fuel or feedstock or for onward distribution via a local distribution system or for storage.

Article 26

The distribution of gas and its liquids through licensed local distribution systems pursuant to the Gas Supplies and Pricing Regulations shall be regarded as part of the natural gas investment activities.

Article 27

The storage of gas and its liquids, licensed as an independent activity under the Gas Supplies and Pricing Regulations, shall be regarded as part of the natural gas investment activities.

Article 28

The natural gas investment taxable income is the gross income derived from the sale, exchange or transfer of natural gas, natural gas liquids, and gas condensates, including sulfur and other products, as well as any income derived from all aspects of natural gas investment activities mentioned in Article 45 of the Law, which include revenues derived from the transportation of natural gas, natural gas liquids and gas condensates, income derived from processing and fractionation activities and other related services and any incidental or non-operational income associated with the taxpayer’s primary activity regardless of its type or source, including income derived from third-party utilization of excess capacity in any facility that is subject to the natural gas investment tax. The said income shall be determined on accrual basis.

Article 29

“Exchanges or Transfers” occur when Natural Gas, Natural Gas Liquids, Gas Condensate or other products or services move between tax-independent activities of one taxpayer or of related parties.

Article 30

“Third Party” means any corporate or natural person that deals with the taxpayer. A NGIT taxpayer under any other Gas Exploration and Production Contract or Agreement is considered a third party.

Article 31

“NGIT Taxpayer’s Primary Activity” means the activity (ies) authorized by the natural gas exploration and production agreement or contract or licensed under the Gas Supplies and Pricing Regulations in the natural gas investment activities, including permitted independent activities.

Article 32

“Gas Exploration and Production Agreement or Contract” means the legal instrument or instruments through which the Government of Saudi Arabia awards the investor rights to operate in the field of Natural Gas Investment Activities and specifies the acreage in the Kingdom for conducting these activities.

Article 33

“Facility that is Subject to the Natural Gas Investment Tax” means any facility or other property used by a NGIT taxpayer to carry out natural gas investment activities.

Article 34

Prices to be used for calculating total realized income shall be determined according to the Gas Supplies and Pricing Regulations and their Rules for Implementation, and in cases where there are no specific provisions included in these regualtions and rules, prices shall be determined on commercial bases, provided that such pricing is approved by the Ministry of Petroleum and Mineral Resources.

Article 35

Quantities associated with income recognition shall be measured according to technical standards specified by the Ministry of Petreleum and Mineral Resources.

Article 36

A natural gas investor’s capital gains resulting from partial or total transfer of his share in the company licensed to operate in the natural gas investment activities shall not be in the income subject to NGIT; it is income subject to income tax at a rate of 20 percent.

Article 37

Expenses deductible from income which is subject to NGIT are the expenses deductible under Article 12 of the Law. Royalty and surface rental amounts shall be considered as deductible expenses on accrual basis.

Article 38

Cumulative annual cash shall be calculated from the first year for which the taxpayer files a tax declaration, as of the start of his activity, which is subject to NGIT.

Article 39

For the purpose of calculating the internal rate of return (IRR), annual cash flows for each year shall be considered to have occurred at the end of the year.

Article 40

IRR calculations shall be based on actual annual cash flows, regardless of the effects of annual inflation rate or of any other factors. The taxpayer’s certified public accountant shall accordingly certify.

Article 41

NGIT annual cash flows shall be calculated as follows:

The Natural Gas Investment Tax Base, plus:

1.  Net operational losses carried forward for tax purposes which were deducted to calcualte the Natural Gas Investment Tax Base.

2. Non-cash items deducted in calculating the Natural Gas Investment Tax Base, such as

a. Depreciation and amortization of capitalized fixed assets and intangible capitalized assets.

b. Amortization of capitlized expenditures of deductible pre-operating expenses.

c. Deducitons resulting from amortization of advance payments for future services related to plants, pipelines, etc.

3. Financing costs and related banking fees.

The following shall be deducted from the gross: 

1. Capital cash expenditures regardless of their financing source, such as:

- Fixed assets additions.

- Other additions to intangible assets during the fiscal year.

- Pre-paid expenditures for future services related to plants and/or pipelines, etc.

- Deductible pre-operating capitalized costs.

 Capitalized Financing fees, any other capitlized banking services or any other capital expenditures unrelated to natural gas investment activities such as buying shares and bonds and the like, shall not be deducted.

2.  Natural gas investment tax and income tax paid to the Government of the Kingdom of Saudi Arabia during the fiscal year, excluding fines resulting therefrom and taxes and fines paid on behalf of other parties.

The resultant represents the annual cash flows.

Article 42

The cumulative annual cash flows, and consequently the internal rate of return (IRR), for a specific year, shall be the base for determining the natural gas investment tax rate to be applied to the taxpayer for the following year.

Article 43

The following table shows an example for calculating IRR and the applicable NGIT rate:

Article 44

The impact of any changes made by the Department of Zakat and Income Tax  on the internal rate of return and tax rate determined in accordance to the taxpayer’s declaration for a certain year shall be taken into consideration when calculating the internal rate of return and tax rate for each of the following years until dispute on such changes is finally resolved.

Article 45

The natural gas investment activities for one contract, as specified in Article 51 of the Law, shall be an integral unit that can not be divided for the purposes of natural gas investment tax, and shall even be considered one tax base.

The taxpayer shall not ringfence its activity in natural gas investment for a certain contract with another contract for the same activity for the purposes of the natural gas investment tax.

The taxpayer, also, may not ringfence its activity in natural gas investment with other activities that are not considered part of natural gas investment, such as water, electricity, petrochemical and other projects.

Article 46

In case the taxpayer engages in natural gas processing or fractionation activity in permitted independent plants or in transportation of natural gas for third parties through a permitted independent pipeline, the taxpayer shall keep separate audited accounts for such activities and submit an independent tax declaration. The taxpayer shall also submit to the Department a statement of its joint revenues and expenses broken down by its various activities and certified by a certified public accountant licensed to work in the Kingdom.

Article 47

Transportation of natural gas for third parties as a prerequisite to be considered subject to the income tax referred to in Article 52 (b) of the Law shall occur upon allocation of at least 30% of pipeline capacity to third party use.

Article 48

For the purposes of natural gas investment tax calculations, the taxpayer shall submit one tax return per contract, even if more than one legal entity participated in the implementation of the contract. In case any of the mentioned legal entities, including the taxpayer, engages in permitted independent activities according to Article 52 of the Law within the framework of the single contract, then these activities must be separated, and each legal entity shall submit an independent tax return in regard thereof.

Article 49

The NGIT taxpayer shall submit its tax return including a claculation of the due 30 percent income tax, in addition to a calculation of the payable NGIT based on the tax rate determined in accordance with the IRR. The taxpayer shall pay the income tax due in addition to the NGIT due after deducting the income tax paid.

Article 50

In case the NGIT taxpayer is subject to Zakat provisions administered by the Department,  the taxpayer shall submit a return of its due Zakat for each year, in addition to its tax return in accordance with the provisions of the Law, and pay the due Zakat. IF tax exceeds Zakat, the taxpayer shall pay the difference after deducting the amounts of Zakat previously paid in excess of the due tax for the previous year(s).

Article 51

Subject to rules related to the tax assessment statutory period ( the extent allowed for tax re-assessemnt), a statutory prohibition to collect the tax resulting from a correction of an error in the assessment of tax for one year or more shall not prevent recalculating the correct internal rate of return and then calculating the due tax for all the following years that may be reassessed as per the regulations.

Article 52

The NGIT taxpayer shall maintain its accounting books and records for the statutory period and for not less than the duration of the agreement or contract.

Article 53

Upon request, the taxpayer shall be given a certificate of income tax payment and another certificate of NGIT payment including a reference to the income tax paid, and the number of the certificate issued therefore.

Article 54

For issues not provided for in this Chapter, the NGIT taxpayer shall be subject to other provisions of the Law and Regulations.

Registration

Article 55

1. With exception for taxpayers subject to final withholding tax, the following are required to register with the Department for tax purposes:

a. Every person subject to tax under the Law is required to register with the Department before the end of its first fiscal year.

b. Every person or agency, required to withhold tax under Article 68 of the Law, including partnerships, must register with the Department before payment of the first payment. 

2. The Department shall register governmental and public agencies and organizations.

3. For failure to register within the legally prescribed period, the Department shall impose a penalty according to the following schedule:

Accounting Books and Records

Article 56

1.  Other than a non-resident with no permanent establishment in the Kingdom, and other than the exceptional cases under Article 19 of these Regulations, A taxpayer must keep in the Kingdom and in Arabic the commercial books and records: at minimum, the general journal, ledger, inventory book and other accounting records as it may be necessary to accurately determine tax liability. A taxpayer is also required to keep supporting documents and explanatory data and remarks. A taxpayer may employ a professional and specialized entity to comply with this requirement but the taxpayer remains directly responsible for such compliance and must as well comply with Commercial Books Regulations.

2. A taxpayer may keep books and records by computer under the following conditions:

a.      The computer has to be in the Kingdom. A taxpayer who has business in the Kingdom through a permanent establishment may have its central computer abroad with a terminal at the subsidiary in the Kingdom through which all data and entries regarding the subsidiary’s operation can be obtained.

b.     Data entered into computer regarding the required records should be in Arabic and should give a position identical to that of the required books.

c.     Original supporting documents for all entries in accounting books and records should be kept in the Kingdom.

d.     Final accounts and balance sheet shall be generated directly by computer. In case of using a traditional method (physical books and records) with computer assistance, all reconciliation entries should be attached and in Arabic.

e.      Periodical (quarterly) computer print outs inclusive of all data should be generated.

f.       The establishment shall have documentation of computer information entry and processing (accounting entries) for reference, if needed.

g.     The establishment should have adequate security measures and controls that can be reviewed and examined to prevent manipulation of data and information,.

h.     The Department has the right to review by computers the systems and programs used by a taxpayer to prepare its computerized accounts.

Returns

Article 57

1. The Department issues the necessary tax declaration (return)  forms. The Department issues explanatory schedule forms to be attached with the declaration to enable taxpayers to comply with filing obligations. The taxpayer should use the prescribed forms, and may use computer-generated forms if identical to the approved ones.

2. The taxpayer should file the return and attachments within the legally prescribed period. The taxpayer should state all income realized during the return period. The return is considered filed at the date of the official receipt by the Department or by any authorized agency.

The provision of this paragraph applies to the information return by a partnership, and to cessation of activity return by all taxpayers. If the legally prescribed period for filing ends during an official holiday, the return may be filed with payment accordingly on the first working day after the official holiday.

3. The burden of proof for correctness of a tax return, income, expenses and other data, rests with the taxpayer.  If a taxpayer fails to prove its claims, the Department may, in addition to other legal sanctions, disallow a deduction or make an estimated assessment based on its opinion, relevant circumstances and facts and available information.

4.  In case of activity cessation, the return should be filed and payment accordingly be made within 60 days of the date of cessation.

5. A partnership must file an information return within 60 days of the end of its fiscal year. A partnership with (a) limited partner (s) must file a return of tax payable by the share of limited partner (s) according to provisions applicable to capital companies.

6. A taxpayer whose income subject to tax, before deductions, exceeds one million Saudi riyals must get its return certified as correct by a Certified Public Accountant licensed to practice in the Kingdom especially in regard to the following:

a. The return information is extracted from and in conformity with the taxpayer’s books and records.

b. The return is in compliance with the provisions of the Saudi Arabian Income Tax Law.

7.  A person assigned to be responsible for liquidation of a company, of inheritance or bankruptcy must inform the Department in writing of commencement of liquidation procedures and must file tax returns within legally prescribed times through liquidation process. He must also provide the Department with a copy of final financial statements (liquidation final accounts) and pay tax payable to the Department within 60 days of liquidation process completion; failure to do so will make that person jointly liable with the taxpayer in case of proven availability of money but there was failure to make such payment.

Department’s right to information

Article 58

1.  Natural and corporate persons, including public organizations and governmental agencies are required to provide the Department with basic information as stated in Article 61 of the Law, in regard to construction, service and delivery contracts, and their amendments, that they may conclude with any person from the private sector within three months of date of contract signature and upon any amendment thereof. They are also required to inform the Department of any cessation due to any reason and of subsequent rights to both parties from each other within 30 days of cessation. The Department has the right to request a copy of the contract.

2.  A natural or corporate person who is responsible for informing the Department of the required contract information and fails to do so shall be jointly with the taxpayer liable for the tax payable on the contract and for any tax penalties that may arise.

3. Under the Council of Ministers’ resolution No. 278 for 1391H, finance managers and project managers of governmental agencies and public organization are responsible for informing the Department with information of concluded contracts within the set time.

4. Without prejudice to withholding tax provisions of Article 68 of the Law, the provisions of this Article’s paragraphs apply to all contracts with exception for a contract with a value less SRs100.000.

Examination (Audit) and Assessment Procedures

Article 59

 1. The Department has the right to perform field examination (audit) to ensure fulfillment by the taxpayer of obligations under the Income Tax Law.

2. Subject to provisions of other Laws, field-audit of a taxpayer may be carried out to gather information in regard to another taxpayer.

Field-audit shall be carried out during working hours of the person subject to field audit. A taxpayer is obliged by Law to provide information as requested by the Department. The Department has the right to field-audit all books and records of a taxpayer without prior notice.

3.  Field audit may be performed at taxpayer’s premises or the Department’s offices based on an official notice by the Department. If books, records and other documents are taken from the business premises, a receipt to that effect must be given to the taxpayer. An auditor from the Department may inspect business premises to get familiar with the nature of business.

4. Where books and records of an audited person are kept on an electronic medium, that person is required to provide the Department’s auditor(s) with a hard (paper) copy of the requested information if the auditor(s) so request(s).

5. Where the taxpayer subject to field audit does not cooperate in providing the requested information, the auditor may take measures to obtain accounts, records and other relevant documents that have such information. The auditor may temporarily seize them if he has reason to believe that they may otherwise be hidden, damaged or tempered with by the taxpayer.

6.  When audit is over, the documents must be returned to the taxpayer within 15 days of audit completion date. The Department may keep copies of documents or entries, as needed.

7. If the Department does not agree with the taxpayer’s return, it will notify the taxpayer of its changes, reasons thereof, additional liability of tax and penalties, and of the taxpayer's rights to object. The notice to the taxpayer shall be by registered mail or by other means that provide for receipt of the notice by the taxpayer.

8. Subject to Article 65(b) of the Law, the return is considered accepted by the Department after five years of filing if the taxpayer has not received any notice to the contrary from the Department.

9.  Mathematical and material errors may be corrected within ten years of the end of the filing time of the tax year the return represents. The correction could be requested by the taxpayer, or as a result of detection by the Department or audit agencies.

“A Mathematical and materiel error” means an error as a result of a mathematical transaction, such as addition, subtraction, multiplication and division, or of posting an erroneous number or similar errors. 

10. The Department may correct an error resulted from improper application of the Law or of relevant instructions within five years of the end of the filing period of the tax year the return represents. The correction could be requested by the taxpayer, or as a result of detection by the Department or audit agencies.