OVERVIEW OF TAX IN KSA
Anas Salhieh
Senior Tax Executive
OVERVIEW OF TAX IN KSA
• KSA tax system is based on the source of income.
• Tax rate in KSA is 20%.
• Non-Saudi/GCC persons are subject to tax on their sources of income.
• Direct taxes in KSA includes:
• Corporate Income tax
• Withholding tax (“WHT”)
• Capital Gains Tax
• Indirect Taxes are:
• VAT
• Excise Tax
• Customs
OVERVIEW OF TAX IN KSA
• KSA has more than 44 Conventions for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income (“DTT”).
• KSA and Korea DTT was effective in January 1, 2009.
PERMANENT
ESTABLISHMENT
Hyungmin Song Senior Associate
PERMANENT ESTABLISHMENT (“PE”) –
SAUDI INCOME TAX LAW ARTICLE 4
Construction sites, assembly facilities, and the exercise of supervisory activities connected therewith.
Installations, sites used for surveying natural resources, drilling equipment, ships used for surveying for natural resources as well as the exercise of supervisory activities connected
therewith.
A fixed base where a nonresident natural person carries out business.
A branch of a nonresident company licensed to carry out business in the Kingdom
Permanent Establishment:
The permanent establishment of a nonresident in the Kingdom,
consists of the permanent place of the nonresident’s activity through which it carries out business, in full or in part, including business carried out through its agent.
PHYSICAL PRESENCE PE
• DTT Art 5(4)
• PE shall be deemed not to include, for example, the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise.
• DTT Art 5(3)(a)
• a building site, construction, assembly or installation project, or
supervisory activities, in connection therewith, but only where such site, project or activities continue for a period of more than six months.
AGENCY PE
• DTT Art 5(5)
• An agent referred to above is a dependent agent who has any of the following authorities:
• negotiate on behalf of a non-resident,
• conclude contracts on behalf of a non-resident,
• has a stock of goods, owned by a non-resident, on hand in the
Kingdom to supply the clients’ demands on behalf of the non-resident.
SERVICE PE
• DTT Art 5(3)(b)
• “the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any 12-month period”.
• The Saudi tax authorities interprets that a service PE does not require physical presence.
TAX CONSEQUENCES
• Income tax on income attributable to PE:
• Determination of income attributable to PE
• VAT on supply of goods or services:
• What if a Korean company doesn’t have a PE?
INCOME ATTRIBUTABLE TO PE - SAUDI INCOME TAX
LAW
ARTICLE 5(a)(10)
(a) Income is considered accrued in the Kingdom in any of the following cases:
(10) If the income is attributable to a permanent establishment of a nonresident located in the Kingdom, including income from
sales in the Kingdom of goods of the same or similar kind as those sold through such a permanent establishment, and income from rendering services or carrying out another activity in the
Kingdom of the same or similar nature as an activity performed by a non-resident through a permanent establishment.
INCOME ATTRIBUTABLE TO PE - DOUBLE TAXATION
TREATY
ARTICLE 7(2)
• The principle of separate and independent enterprise
• “the profits which it might be expected to make if it
were a distinct and separate enterprise engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the
enterprise of which it is a permanent establishment”
PROTOCOL ARTICLE 4
• More detailed provision for determination of the profits of PE.
• Article 4(c) – export contracts
• “any portion of these activities executed outside the other Contracting State shall not be taken into consideration in determining the profits of the permanent establishment.”
PROTOCOL ARTICLE 4
• Article 4(d) - contracts for survey, building, construction, installations or assembly
• “the profits of a permanent establishment shall not be determined on the total amount of the contract, but shall be determined only on the basis of that part of the contract, which is effectively carried out by the permanent establishment in the state where the permanent
establishment is situated and any portion of the contract executed outside the other Contracting State shall not be taken into
consideration in determining the profits of the permanent establishment”.
.
COMPARISON WITH OTHER DTTS
• https://www.nts.go.kr/eng/resources/resour_02.asp?minfoKey=
MINF7620080220173406#none
PRIORITY BETWEEN INCOME TAX LAW AND TAX TREATY
• Saudi Income Tax Law Article 35 provides that a treaty will prevail except for the anti tax-avoidance provision.
• “In case the conditions of a treaty or an international agreement to which the Kingdom is party are inconsistent with articles and provisions of this Law, the conditions of the treaty or international agreement shall prevail except for provisions of Article Sixty
Three of this Law which are related to procedures of anti tax- avoidance”.
PRIORITY BETWEEN INCOME TAX LAW AND TAX TREATY
• Saudi Income Tax Law Article 63 provides that:
“(a) For the purpose of tax determination, the Department may:
(1) disregard any transaction with no tax effect.
(2) re-classify transactions whose form does not reflect their substance and put them in their real form”.
MULTILATERAL CONVENTION TO PREVENT BEPS
• KSA singed the multilateral convention to prevent Base Erosion and Profit Sharing (“BEPS”).
• For example, if a 10-month construction contract is divided into two 5-month contracts to be performed by different affiliates, the Korean construction company has a PE (Art 14 – Splitting-up of Contracts).
CASE STUDY
CASE STUDY 1
Background:
• Company A (“A Co.”) is resident in Korea.
• A Co. Signed a contract with B Co. To provide construction supervisory
services.
• A Co. sent their employees under the sponsorship of B Co. to conclude the services in KSA.
• A Co. employees will stay in KSA for 100 days.
• B Co. Pays A Co. against these services and deduct WHT.
A Co.
B Co.
employees
ServicesContract Payment
CASE STUDY 1 (CONT’D)
Case issues:
• GAZT consider employees staying for more than 90 days will
constitute a PE for A Co.
• A Co. Shall pay income tax
instead of WHT from the sources of income generated in KSA.
• A Co. will obtain tax credit for WHT withheld by B Co.
• Profits of A Co. will be subject to deemed dividends WHT.
A Co.
B Co.
employees
ServicesContract Payment
CASE STUDY 1 (CONT’D)
Treaty relief:
• Treaty prevails domestic law and practices.
• Treaty specifies that a PE will be triggered after 183 days.
• No WHT shall be accounted for since the taxing rights are with Korea.
• The Contract will be subject to Tax in Korea and not in KSA as per the tax treaty.
A Co.
B Co.
employees
ServicesContract Payment
CASE STUDY 2
Case issues
• A Co. established an LLC in KSA “A Co. Sub” (100% owned).
• A Co. Sub is totally independent company from A Co., it had its own management, it signs contract in its own capacity, and conclude
negotiation by itself.
• A Co Sub signed an EPC contract with B Co.
• A Co Sub subcontracts the
Engineering and the procurement portion to A Co.
A Co.
B Co.
A Co Subsidiary
E.P.C Contract Payment Subcontract
Engineering &
Procurement
CASE STUDY 2 (CONT’D)
Case issues
• As per Domestic law the Engineering will be subject to related party services WHT i.e.
15%. However, treaty shall provide relief.
• Procurement shall not be subject to WHT since there is no source of income (selling goods by a non resident is not a source of income).
• GAZT may argue that A Co Sub is an agent for A Co. therefore constitute a PE of A Co.
• IF proved, A Co. will be required to pay income tax in KSA.
A Co.
B Co.
A Co Subsidiary
E.P.C Contract Payment Subcontract
Engineering &
Procurement
CONCLUSION
UNDERSTANDING OF DTT PROVISIONS
• PE related issues shall be interpreted by interaction between Saudi ITL and DTT
• Saudi tax authority tends to impose taxes without reviewing DTT
• Needs to refer a PE related tax dispute to a panel which has deep understanding about DTT provisions
• Utilization of MAP (Mutual Agreement Procedure)
RECENT
DEVELOPMENTS
AND HOT TOPICS
RECENT DEVELOPMENTS
• Issuance of Several VAT guidelines.
• Amendments on Income tax law and by law
• Signing the BEPS Multilateral Instrument (“MLI”).
• Establishing Alternative dispute resolution committee (Settlement Committee).
• Special Integrated Economic zones regulations.
• Signing a Double Tax treaty with UAE.
HOT TOPICS
• Applying treaties and obtaining WHT refunds.
• Assessment on EPC contracts.
• Transfer pricing regulations being prepared.
• Communication between Saudi Bar Association and GAZT regarding the appeal before the new committees.
• Procedures for new appellate committees.
• BOG claims its not the competent authority for tax disputes.
• GAZT transformation.
• GAZT being open for settlements.
