The Kingdom of Saudi Arabia is aiming to transform into a significant business hub, attracting a growing influx of foreign companies. At the LEAP Tech Conference in Riyadh on Feb. 6, the KSA announced investments of over $9 billion in future technologies and emerging companies, including $400 million from Huawei Technologies Co., $2.1 billion from Microsoft Corp., $1.5 billion from Oracle, and $1.1 billion from Zoom.
Some of the key legal and regulatory measures that the KSA is implementing to foster a robust investment landscape are considered below.
Tax Judicial System
A sound judiciary is essential for enforcing the rule of law, which is necessary for a healthy economy. The KSA has taken steps to improve its international taxation environment by strengthening the judiciary and establishing new tax committees with broad jurisdictional power.
In 2017, Saudi Arabia issued Royal Decree No. M/113, which established two types of tax committees—primary and appellate. These committees are considered complete courts and their decisions are final.
The committees have a wide range of powers, including the power to summon witnesses, order evidence and documents, issue decisions, and impose sanctions.
On Oct. 23, Royal Order No. (25711) was issued, officially endorsing the unified work rules for the Zakat, Tax and Customs Committees. The updated rules introduce several significant changes, such as the precise delineation of the committees’ jurisdictions. These changes aim to enhance the overall efficiency of the tax chambers.
To support the tax committees, the KSA established the independent General Secretariat of the Tax Committees in 2018. The General Secretariat is responsible for providing administrative and technical support to the committees and publishing their judicial decisions.
The publication of judicial decisions is a significant step forward for transparency and fairness in the Saudi tax system. It allows taxpayers to see how the tax committees are interpreting and applying the law, and it also helps deter the tax authority from overstepping its bounds.
In 2021, the primary committees rejected 11% of the Zakat, Tax and Customs Authority’s decisions, while the appellate committees overturned 36% of judicial decisions issued by the primary committees. This data shows that the new tax committees are playing an important role in protecting the rights of taxpayers.
The tax appeals committee has made significant qualitative achievements, including playing a key role in developing the legal principles of tax justice. In many of its decisions on income tax and zakat disputes related to tax assessments, the committee has affirmed that taxpayers can challenge tax assessment decisions even after the statutory objection period has passed if the decisions don’t comply with regulatory requirements, such as having clear reasoning.
This is a significant precedent, as previously the rules didn’t explicitly state this.
The new rules issued on Oct. 23 are consistent with the committee’s decisions and affirm this principle. Though Saudi tax law doesn’t explicitly provide for reasonable cause and good faith exceptions, certain appellate committees for income tax disputes have applied these principles in determining penalties for unpaid taxes. This approach offers a measure of protection for foreign investors.
In addition, digitalization poses challenges for taxation, including base erosion and profit shifting. The tax appeals chamber has played a significant role in establishing principles consistent with established international rules, such as those for determining the existence of a permanent establishment for nonresident taxpayers providing remote services in KSA.
Overall, the new Saudi tax committees are playing an important role in protecting the rights of taxpayers and improving the international taxation environment.
Transfer Pricing Developments
The KSA announced, pursuant to Board Resolution 6-1-19, dated Jan. 31, 2019, that it is adopting the OECD transfer pricing guidelines.
On April 7, Saudi Arabia introduced advance pricing agreements through Decision No. (8-2-23) of the Board of Directors of the Zakat, Tax and Customs Authority.
The Organization for Economic Cooperation and Development transfer pricing guidelines are a set of international standards for determining the transfer prices of goods and services between related parties. Advance pricing agreements are agreements between taxpayers and tax authorities that determine the transfer pricing methodology to be applied to specific transactions in advance of those transactions taking place.
Both these measures will help increase transparency and fairness in the Saudi tax system, reduce the risk of transfer pricing disputes, and increase certainty and reduce costs for taxpayers.
To Sum Up
The KSA is taking significant steps to improve its international taxation environment, including strengthening the judiciary, establishing new tax committees, adopting the OECD transfer pricing guidelines, and introducing advance pricing agreements. These steps are a positive development for the KSA and its taxpayers—and there is still room for further progress in this area.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Ahmed Altawyan is a Riyadh-based legal consultant and professor of law. He has worked as a consultant at JPMorgan Chase & Co. and served as a Fellow at NYU Law School.
We’d love to hear your smart, original take: Write for us.
Learn more about Bloomberg Tax or Log In to keep reading:
Learn About Bloomberg Tax
From research to software to news, find what you need to stay ahead.
Already a subscriber?
Log in to keep reading or access research tools.