WHAT DOCUMENTATION AND PROCEDURES ARE REQUIRED TO INITIATE A WITHHOLDING TAX CLAIM

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

Withholding tax in Saudi Arabia, a tax deducted from certain payments made by a taxpayer, is a crucial mechanism in the tax collection system of many countries. The payer of the income is responsible for withholding a certain percentage of tax before making the payment and subsequently depositing it into the government treasury. This system serves multiple purposes and is considered an effective tool in the collection of taxes for several reasons:

• ADVANCE TAX COLLECTION: Withholding tax acts as a form of advance tax collection. Taxpayers can adjust these payments against their annual income tax liability, facilitating ease by allowing them to spread their tax payments across multiple transactions throughout the year rather than making a single large payment at the end.
• ENCOURAGEMENT OF VOLUNTARY COMPLIANCE: By ensuring that taxes are collected at the source, withholding tax promotes voluntary compliance among taxpayers. It simplifies the process for taxpayers, as they are not required to calculate and remit taxes independently for each payment received.
• REDUCTION IN COLLECTION COSTS: The responsibility of tax collection is partially transferred to the payers, which reduces the administrative burden and costs associated with tax collection efforts by the government.
• PREVENTION OF DELINQUENCIES AND REVENUE LOSS: By withholding taxes at the point of payment, the system mitigates the risk of tax delinquencies and revenue losses that can occur when taxpayers fail to declare income or evade taxes.
• STEADY REVENUE STREAM: Withholding tax ensures a continuous inflow of revenue into the government’s coffers throughout the taxable year. This helps in maintaining fiscal stability and prevents periods of low revenue, known as dry spells, which can affect government operations and services.

In summary, the withholding tax system is instrumental in ensuring efficient and effective tax collection, fostering compliance, reducing administrative costs, mitigating revenue loss, and maintaining a stable fiscal environment for the government.

CONSTITUENTS OF WITHHOLDING TAX REGIME:  

• WITHHOLDING AGENT – The withholding agent (payor of the payment) is any person or entity in control of the payment subject to withholding tax. This agent is required to deduct and remit the withheld taxes to the government. A withholding agent acts on behalf of the government tax authority to collect/deduct tax from payments.

• RECIPIENTS OF THE PAYMENT – The recipient is the person entitled to receive the payment for the supply of goods or services, or other types of payments which will be discussed later.
• NATURE OF PAYMENT AND TAX RATE TO BE APPLIED – The withholding agent must determine the nature of the payment to decide the appropriate withholding tax rate. The nature of the payment can range from payments for goods or services to dividends, royalties, fees for technical services, management fees, rentals, etc. The payments subject to withholding tax can vary from country to country.

PAYMENTS SUBJECT TO WITHHOLDING TAX

Withholding tax provisions of relevant income tax laws specify when a payment will be subject to withholding tax. If the nature of the income falls within the scope of withholding tax (WHT) provisions, the next consideration is the nexus to the country of source. For instance, WHT is typically applicable to technical service fees where the services are performed in-country. For other payments like interest and royalties, the income is generally regarded as sourced in a country if the payment is borne by a tax resident of that country. Payments to non-residents that are not attributable to a permanent establishment of the non-resident (typically called a branch of the non-resident) are subject to withholding taxes. In this case, the role of the tax treaty is also important.

CONSIDERATION OF TAX TREATY:

Before making payments to non-residents deriving income from sources within the country of the withholding agent, it is pertinent to consider the tax treaty between both countries (i.e., the country of the recipient and the country of the payer). If the tax treaty provides a lower rate of tax, then withholding should be made at the lower rate rather than the standard rate provided by local law.

Example: If a non-resident from a country outside KSA is providing management services to a company based in KSA, Article 63 of the executive regulation of income tax law of KSA provides that withholding should be made at the rate of 20%. However, if KSA has a tax treaty with the relevant country of the non-resident which provides a withholding tax rate of 15%, then the rate specified by the tax treaty shall prevail, and 15% shall be applied.

• PAYMENTS TO RESIDENT PERSONS MAY ALSO BE SUBJECT TO WITHHOLDING:

In some countries, payments to resident persons may also be subject to tax withholding tax. However, corporate tax law of UAE does not impose withholding tax on domestic payments. 

• TAX DEDUCTION: 

Article Sixty-Three states that the non-residents shall be subject to tax for any amount obtained from any source in the Kingdom, and the tax shall be deducted from the amount according to the following rates:

The time for payment of withholding tax is 10 days in KSA. It differs from country to country. 

• WITHHOLDING TAX RATE UNDER CORPORATE TAX LAW OF UNITED ARAB EMIRATES

In UAE, payments to resident persons are not subject to any withholding tax. Whereas payments to non-residents person without any permanent establishment are subject to withholding tax however at the rate of 0%.  

• CLAIM OF WITHHOLDING/ TAX CREDIT FOR WITHHOLDING TAX PAID

Where the corporate tax law makes it obligatory for payment of withholding tax, I also allow claim of withholding tax paid by either resident person or non-resident person against his annual income tax liability calculated on annual taxable income. 

To explain how to claim credit of withholding tax, lets consider the mechanism applicable in KSA:

• • Withholding tax deducted by KSA resident company from payments to non-resident is deposited in KSA government treasury and tax treaty between both countries allow the taxpayer to claim tax paid in KSA In his own country as “foreign tax credit”.  
  • Similar, if a KSA resident person or a UAE based resident person earn any foreign source income from some other country and pay any withholding tax in that host country, KSA corporate income tax law and UAE corporate income tax law allow claim of credit such foreign income tax. 

Thus, it’s a reciprocal arrangement between countries of the world to allow claim of tax credit for tax paid in that other country. 

PROCEDURE FOR CLAIM OF WITHHOLDING INCOME-KSA

Article 68 of the implementing regulation requires the withholding agent to deposit the tax in the government treasury within 10 days of deduction, declaring full particulars of the taxpayer along with particulars of the payment. Having done so, the withholding agent shall provide a certificate to the non-resident person, evidencing the payment of withholding tax to the government treasury. The non-resident person can then claim a tax credit in their host country and produce such a tax certificate to the relevant authority in the host country.

Furthermore, in case the non-resident person intends to invoke a tax treaty that provides a reduced rate of withholding tax, KSA law offers two choices to non-residents. The necessary details are as follows:

ZATCA offers the option of automatic application of the relevant tax treaty without going through the refund procedure. This choice is given to Saudi Arabia residents or PEs of non-residents that make payments subject to WHT in Saudi Arabia. They can apply reduced rates or full relief upon making the payment. The following conditions are imposed on taxpayers that choose to apply DTT automatically:

• Report, via monthly WHT returns, the full details of each payment made to non-resident parties (beneficiaries).
• Still file a request form for application of DTT together with the tax residence certificate of the beneficiary.
• Undertake full responsibility for any understatement of tax, including penalties.

As mentioned above, ZATCA provides a choice; taxpayers can still withhold tax and comply with the refund procedure or can directly opt for withholding tax at a reduced rate. Both approaches are explained below.

METHOD OF THE APPLICATION OF WITHHOLDING BENEFITS

When the taxing rights of KSA are limited by the application of a relevant Double Taxation Agreement (DTA), taxpayers may follow one of two approaches to claim the benefits of the respective DTA provision:

• Apply the benefit at source (“benefit at source procedure”).
• Request a refund of withholding tax (WHT) (“refund procedure”).

BENEFITS AT SOURCE APPROACH

Under this approach, the “withholding person” responsible for withholding the tax can apply for a reduced WHT rate or exemption on payments to non-residents directly under the DTA through the ZATCA portal. When filing the request, it is required to upload the following documents:

1. TAX RESIDENCY CERTIFICATE (TRC) from the foreign tax authority.
2. APPLICATION FORM (FORM Q/7B): The appendix provides a template of this form. Form Q/7B includes two sections:
   • First section: To be completed by the beneficiary (the non-resident), including:
     1. Information on the beneficiary (name, full address, etc.)
     2. Type of payments made (income from debt claims, royalties, dividends, etc.)
     3. Attestation that all the information provided is correct.
   • Second section: To be completed by the Tax Authority of the State of the non-resident once the information provided is verified.
3. UNDERTAKING: Provided by the resident taxpayer to settle any tax amounts or penalties due to false or wrong information, arithmetic error, or misinterpretation of the DTA (Form Q/7C). The format of Form Q/7C can be viewed in the withholding tax guide by ZATCA. Access link is provided here.

Once the application is lodged in the ZATCA portal, an acknowledgement receipt is sent to the applicant. ZATCA reviews the application and provides its approval once it verifies the claimed benefits under the DTA apply. The statute of limitations to lodge an application or to be audited by ZATCA is five years. A taxpayer can no longer claim the DTA benefits once the statute of limitation period has expired. 

Creation Business Consultants have tax experts who can assist you throughout this process, ensuring that all documentation is accurately prepared and submitted, and helping to understand the complexities of the application and refund procedures. Their expertise can provide peace of mind and maximize the chances of a successful claim under the DTA benefits.

CONCLUSION

Developed economies like KSA and UAE provide an easy mechanism to claim withholding tax credit. They also have robust systems for determining appropriate tax rates and the tax position of each taxpayer under tax treaties. KSA has signed tax treaties with more than 60 countries, and most of these treaties are fully functional, providing reduced withholding tax rates with the common agenda of avoiding double taxation and base erosion. This agenda helps countries avoid imposing tax twice on a single source of income and includes procedures to prevent base erosion and fiscal evasion. 

UAE treaties also include favored nation clauses, which state that if a particular jurisdiction has ever signed the lowest rate of tax with any other country, then such lowest rates would automatically apply to UAE payments. Taxpayers primarily need to capture all documentation and proof of tax withheld to gain tax credit and avoid double taxation. In the end, it is advisable to consult with tax experts to maximize the benefits of the withholding tax regime. Creation Business Consultants have tax experts who can assist you throughout this process, ensuring that all documentation is accurately prepared and submitted, and helping to navigate the complexities of the application and refund procedures. Their expertise can provide peace of mind and maximize the chances of a successful claim under the DTA benefits.

For more information regarding how Creation can assist with Withholding Tax services in Saudi Arabia, contact us for expert tax advisory today!

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