Learn everything about ZATCA compliance in Saudi Arabia, including VAT rules, e-invoicing phases, penalties, and audit preparation. BMS Auditing offers expert guidance to help your business stay compliant.
Do you know that companies are charged with penalties ranging from SAR 1,000 to SAR 50,000 due to ZATCA non-compliance? ZATCA plays a crucial role in ensuring that businesses in KSA operate under fair regulations. To avoid penalizations, it is important to understand the ZATCA Compliance in KSA.
This blog will shed light on the significance of ZATCA compliance and steps to ensure that your company operates under fair regulations. Let’s dive into the details!
Understanding ZATCA Compliance in Saudi Arabia
The Zakat, Tax, Customs Authority (ZATCA) is the governing body in Saudi Arabia that is responsible for overseeing customs duties, tax administration, and zakat. Under Vision 2030, ZATCA’s main objective is to maximize compliance, enhance customer experience, transparency, and accountability, and build an effective organization. Here are some of the key roles of ZATCA:
- Zakat Collection: Oversees the assessment and collection of Zakat from eligible entities.
- Customs Management: Regulates exports and imports, collects customs duties at borders, and inspects goods.
- Administering Tax Laws: Implements and enforces income tax, excise tax, VAT, and other taxes in KSA.
- Audits and Inspection: Conducts audits and field inspections to ensure compliance with zakat and tax obligations.
- E-Invoicing Implementation: Enforcement of e-invoicing (FATOORA) across businesses.
- Policy Development: Collaborates with government entities to draft and update tax-related policies in line with Vision 2030.
- Digital Transformation: Promotes digital transformation for enhanced operational efficiency and transparency.
Key Areas of ZATCA Compliance
ZATCA compliance incorporates several domains including VAT registration and reporting, Zakat Assessment, e-invoicing, and customs declarations. Each of these areas requires its own set of rules and regulations, documentation, deadlines, and requirements standardized by ZATCA in KSA.
One of the vital aspects is the seamless integration of digital structures to meet ZATCA’s auditing and reporting standards. Businesses must adapt quickly to stay in line with regulations from maintaining digital records to issuing compliant e-invoices.
E-Invoicing Regulations and Phases
As per ZATCA’s guidance, Saudi Arabia has introduced e-invoicing (also known as FATOORA) mandatory. E-invoicing is characterized by two distinct phases:
Generation Phase – Phase 1
The first phase, which is known as the ‘Generation Phase’ was effective from December 4, 2021. In this phase, taxpayers are obliged to generate and store the invoices and associated notes (credit/debit) electronically. The basic objective of this phase was to transform the traditional way of storing and generating invoices from manually to electronically.
Integration Phase – Phase 2
The second phase known as the ‘Integration Phase’ was introduced on January 1. 2023. This phase required the taxpayers to integrate their e-invoicing solutions with ZATCA’s FATOROA portal for validation and real-time transmission. This phase aimed at enabling seamless communication between ZATCA and the taxpayer’s system to ensure compliance and transparency.
This transformation to a digital invoicing system aims to reduce fraud, enhance transparency, and streamline tax collection. It is mandatory for businesses that their invoicing system can generate XML-format invoices, and QR codes and integrate them into ZATCA’s portal. Non-compliance with ZATCA’s e-invoicing regulations can lead to fines and business disruption.
VAT Compliance and Reporting Standard
Any organization whose taxable supplies surpass SAR 375,000 per year is required to register for VAT. Saudi Arabia’s standard VAT rate is currently 15%. ZATCA mandates timely submission of VAT returns, detailed documentation of input and output of VAT, and accurate tax calculations. If your company fails to comply with ZATCA’s rules, it may lead to severe penalties including blacklisting and account freezing.
You must be wondering how to comply with ZATCA’s VAT standards. Proper VAT compliance means:
- Maintaining comprehensive records
- Performing periodic reconciliations
- Utilizing tax-compliant accounting software
Penalties for ZATCA Non-Compliance in Saudi Arabia
ZATCA issued a reclassification decision modifying the penalties for particular offenses under VAT and e-invoicing effective from January 30, 2022. The purpose of the reclassification of penalties was to enhance awareness among businesses about law compliance law and give taxpayers a chance to adhere to the rules and regulations.
When a ZATCA official finds any violation during audits or inspections, they will issue a notice to the taxpayer and warn them not to repeat the offense. Once the notice is issued, taxpayers are given three months to correct the violations. If the taxpayer repeats the violation, penalties will apply.
Penalties for VAT Violations in KSA?
As per the reclassification decision, if ZATCA officials found any taxpayer violating the laws, they would be given three months to correct it. If they fail to comply with the following rules and regulations, they will be penalized accordingly.
|
VAT-Related Violations |
Penalties |
|
Failure to include all contents of the tax invoice or including credit/debit notes. |
First Time Violation: Notice |
|
Failure to issue tax invoices |
|
|
Failure to issue credit/debit notes or not providing them to customers. |
Second Time Violation: SAR 1,000 |
|
Failure to keep records, invoices, and other documents for a certain duration. |
Third Time Violation: SAR 5,000 |
|
Preventing or not allowing Authority employees to perform audits or inspections. |
Fourth Time Violation: SAR 10,000 |
|
Violation of any VAT law provision or regulations. |
After Fourth Violation: SAR 40,000 |
|
Wrong calculation of due tax |
Penalties for E-Invoicing Violations in KSA?
The following are the violations and penalties according to ZATCA’s law:
|
E-Invoicing-Related Violations |
Penalties |
|
Failure to include QR codes in the e-invoices. |
First Time Violation: Notice |
|
Non-compliance with keeping e-invoices and notes according to the required format. |
Second Time Violation: SAR 1,000 |
|
Failing to inform the Authority about malfunctioning that hinders invoice and e-notes issuing process. |
Third Time Violation: SAR 5,000 |
|
Deletion of e-invoices or e-notes after issuance. |
Fourth Time Violation: SAR 10,000 |
|
Violation of any other provision of e-invoicing law. |
After Fourth Violation: SAR 40,000 |
How to Prepare for ZATCA Audits in Saudi Arabia?
The ZATCA audit includes reviewing a business’s tax returns, invoice practices, and financial statements. Here are some of the ways to prepare for ZATCA audits in KSA:
Maintain Organized Reports
It is crucial to maintain your reports, documents, or financial records well-maintained, organized, clean, and easily accessible for at least six years.
Ensure Data Format Compliance
Align all the records as per the ZATCA’s guidelines relating to digital formats including XML-based e-invoices. Failure to comply with this ruling can result in penalties.
Conduct Internal Audits
You must perform regular audits to identify the shortcomings or any non-compliant practices early. This can save you from any penalization.
Hire a Tax Consultant
It is worth noting that you must hire a tax consultant who can guide you through all the ZATCA’s rules and regulations. This will not only prevent businesses from getting penalties but also help in enhancing the overall performance.
Stay Proactive
A key tip to avoid fines and non-compliance is to stay proactive. Identify the issues and address them before the ZATCA official’s audit.
Steps to Ensure Business Compliance with ZATCA in KSA
Here is a step-by-step guide to ensure business compliance with ZATCA in Saudi Arabia:
Step1: Conduct a Compliance Gap Assessment
The first and crucial step is to determine the gaps in compliance. For this, you have to review your current business operations, tax processes, and invoicing methods to investigate areas that fail to comply with ZATCA regulations.
Step 2: Upgrade Internal Systems and Tools
Make sure to upgrade your accounting software and invoicing system to meet the requirements of ZATCA’s e-invoicing. Moreover, ensure VAT requirements including XML formatting, API integration, and QR code generation.
Step 3: Standardize Processes Across Departments
The alignment of the company’s workflows across operations, sales, and finance is significant. You must ensure consistency in recordkeeping, invoice generation, and tax filings.
Step 4: Train Your Employee
Conduct training sessions or workshops to educate and train your company’s staff on ZATCA tax obligations, rules, and the importance of compliance on a daily basis. This will eliminate the risk of mistakes or carelessness of staff members and motivate them to work hard to comply with rules and regulations.
Step 5: Consult with a Licensed Tax Advisor
Working with local legal experts or ZATCA consultants can help you in getting good advice and they can help you with system implementation and ensure regulatory compliance.
Step 6: Monitor Regulatory Updates
You must stay informed or updated about changes or modifications in ZATCA regulations through the official website and news. It will help you eliminate the non-compliance risks.
Step 7: Keep Detailed Documentation
You must ensure that all financial documents, tax, and e-invoicing records are securely saved for at least six years in an orderly manner.
Step 8: Perform Internal Audits
To verify compliance, you must perform internal audits to check whether all the ZATCA requirements are fulfilled or not. This can help you prepare for audits by ZATCA officials.
ZATCA Compliance – Mistakes to Avoid
Here are some of the common mistakes that businesses make with ZATCA compliance:
- Submitting incorrect or incomplete VAT returns
- Delaying VAT return submissions
- Relying on outdated manual systems for invoicing and tax filing
- Misunderstanding tax obligations
- Issuing invoices that are not ZATCA-compliant
- Lacking SOPs for tax-related tasks and compliance procedures
- Missing regulatory updates
- Poor data management or organization
- Lack of documentation for audits
Stay ZATCA Compliant with BMS Auditing's Expert Support
To stay compliant with ZATCA regulations in Saudi Arabia, it's essential to have the right legal guidance. If you're running a business and need to ensure full ZATCA compliance, partnering with a trusted advisor is crucial.
At BMS Auditing, our team of experienced and knowledgeable professionals is ready to assist you with every step of the compliance process. Reach out to us for expert support—we're here to help.
