The E-Invoicing Regulations in Saudi Arabia

Saudi Arabia has recently adopted e-Invoicing regulations that can be regarded as a major step towards the country’s digitalization. These regulations were launched by the Zakat, Tax and Customs Authority (ZATCA), formerly known as the General Authority of Zakat and Tax (GAZT) to simplify and enhance invoicing procedures for organizations in the Kingdom. After the launched of the phased implementation on 4th December 2021, e- invoicing is one of the crucial components of financial and business compliance to increase transparency, reduce fraud and increase efficiency. No matter if you are a businessman operating in Riyadh or any other city, it is important to familiarize with these rules to avoid any fines.

The implementation of e-invoicing in KSA is being done incrementally to give organizations an opportunity to transition into the new system. The regulations include creation and management of invoices in electronic format and formats and technical standards provided by ZATCA. The process includes B2B and B2C sales, and it forces businesses to check whether their invoicing is compliant with the requirements of the authority. These are some of the changes that businesses especially in large cities such as Riyadh should keep abreast with since failure to adhere to any of them attracts fines or legal consequences.

Since the e-Invoicing regulations continue to undergo changes in KSA, it is important for businesses to see this as a chance. Digital invoices have the potential of increasing the accuracy of the transactions and at the same time speeding them up while at the same time increasing accuracy in filing of taxes. Also, the centralized system discourages fraud and manipulation and leads to a better business climate for all participants. In addition to meeting the legal requirements, compliance with the e-invoicing legislation has multiple advantages over the long term for companies that will open the door to efficient functioning in the new context of the Saudi Arabian market.

Overview of E-Invoicing Regulations in the KSA

The e-Invoicing Regulations were issued in March 2021 by the Zakat, Tax, and Customs Authority (ZATCA), which used to be called the General Authority of Zakat and Tax (GAZT) in KSA. This was the start of a major change in the Kingdom’s invoicing process. ZATCA was also able to solicit inputs from businesses, the public and other stakholders on these draft regulations up to April 17, 2021. After considering all the comments, the two final regulations were issued on May 28, 2021. It was an attempt to align the Saudi market with international standards where invoice and tax collection is much more efficient and transparent.

In addition to the regulations, ZATCA has released the draft rules comprising of the technical standards, requirements and procedures for e-invoicing for the businesses. These rules are available on ZATCA’s official portal and include the Electronic Invoice XML Implementation Standard, the Electronic Invoice Data Dictionary, and the Electronic Invoice Security Implementation Standards. Through hosting these documents, e-Invoicing Regulations in KSA ZATCA guarantees taxpayers the availability of all the information they need in order to fulfil the technical and procedural aspects of the e-invoicing system, which forms part of the VAT Implementing Regulation.

The Fatoorah is also known as the First Phase of E-Invoicing

The e-invoicing system in Saudi Arabia has been implemented in two phases; with the first phase – Fatoorah starting on the 4th of December 2021. The first phase of implementation was focused on resident taxpayers who were required to produce, assimilate and archive e-invoices in addition to any associated CDNs. The first phase aimed at making it possible for various businesses to make the transition towards the new system without prescribing the exact format of electronic invoices and CDNs. However, it did mandate that certain information on the invoice had to be included, in order to make certain that these digital documents complied with the standard of the e-Invoicing Regulations.

During Phase 1, compliance parameters were also mandatory for businesses to check and confirm specifically for invoicing solutions for e-invoices and CDNs storage and generation. During this phase, flexibility was given to companies to move gradually and legally as per the laws and regulations of ZATCA. This first phase set the groundwork for a stronger digital invoicing that will eventually improve the efficiency of tax filing, minimize errors, and give improved control over invoice for all resident business organizations.

The Second Phase of the Ee-invoicing in saudi arabia-Invoicing in KSA

The second phase of e-invoicing that started from January 1, 2023 made it mandatory for specified resident taxpayers to meet certain requirements more stringently. In this phase, selected taxpayers were mandated to adopt the use of Fatoorah portal of ZATCA through the application programming interface (API) integration to their invoicing systems. This integration enables businesses to send their invoice data in real time to ZATCA for validation and authorisation.

Consequently, the Saudi Arabia’s e-invoicing system adopted the CTC model that requires an e-invoice to be validated by ZATCA before its validity is recognized. Fatoorah is implemented in phases and the second phase is being implemented in phases, each phase focusing on a specific group of taxpayers depending on their annual turnover.

Phase 2 of Fatoorah will be implemented group-wise, and the selected group of taxpayers will be notified six months in advance to get ready. Accordingly, ZATCA announced twelve waves till now:

• Wave 1 from 1st January 2023: Tayers whose annual turnover exceeds SAR 3 billion in 2021.

• Wave 2 from 1st July 2023: Businesses with more than SAR 500 million turnover in 2021.

• Wave 3 from 1st October 2023: Taxpayers with a turnover of more than SAR 250 million in 2021 or 2022.

• Wave 4 from 1st November 2023: Businesses having more than SAR 150 million turnover in 2021 or 2022.

• Wave 5 from 1st December 2023: Taxpayers with more than SAR 100 million turnover in 2021 or 2022.

• Wave 6 from 1st January 2024: Taxpayers with more than SAR 70 million turnover in 2021 or 2022.

• Wave 7 from 1st February 2024: Businesses with more than SAR 50 million turnover in 2021 or 2022.

• Wave 8 from 1st March 2024: Businesses having more than SAR 40 million turnover in 2021 or 2022.

• Wave 9 from 1st June 2024: Businesses with more than SAR 30 million turnover in 2021 or 2022.

• Wave 10 from 1st October 2024: Saudi taxpayers with more than SAR 25 million turnover in 2022 or 2023.

• Wave 11 from 1st November 2024: Saudi taxpayers with more than SAR 15 million turnover in 2022 or 2023.

• Wave 12 from 1st December 2024: KSA businesses with more than SAR 10 million turnover in 2022 or 2023.

Article Two: Purpose and Scope

The e-Invoicing Regulations are part of the Saudi Arabian VAT Implementing Regulation under Article 53. Its main objective is to set out the conditions under which electronic invoices will be accepted for purposes of VAT. In this way, the regulations guarantee the correct invoicing practices that help to avoid mistakes or fraud in tax collection among businesses.

Another advantage that results from the implementation of e-invoicing is to reduce the paper burden of the administration of businesses and the tax authorities, especially as regards VAT documentation. These regulations apply to all the Saudi businesses because all the resident taxpayers that are subjects to VAT have to follow those regulations. This means that all taxable transactions must be reported through electronic invoices including the business to business (B2B), business to consumer (B2C) and business to government (B2G).

Article Three: Natural Persons Affected by this Regulation

The e-Invoicing Regulations apply to all taxable individuals and companies within KSA regardless of the type of company. This is according to the VAT Implementing Regulation and any third party that makes a tax invoice on behalf of the taxable person. Every such person and an associated legal entity are to provide e-invoices for every supply that calls for a tax invoice under the regulations. Furthermore, the rules apply to the electronic credit or debit notes, wherever it is necessary under the VAT law. That said, the Saudi regulations do not apply to the businesses and individuals who are non-residents of Saudi Arabia in their extra-Saudi VAT transactions.

Article Four: Provisions Regarding to Electronic Invoices and Notes

The VAT law considers e-Invoicing Regulations of electronic invoices and related credit or debit notes as tax invoices and notes. Therefore, tax invoices, credit notes, and debit notes are also extended to the electronic form of such documents according to all the provisions of the VAT law. This is in accordance with various provisions including fines and penalties under the seventh group of Chapter 16 of the Vietnamese VAT law, contents of simplified tax invoices under Article 53 of the Vietnamese VAT Implementing Regulations, and debit and credit notes under Article 54.

Also, the e-Invoicing Regulations require the businesses to comply with the provisions of record-keeping and invoice issuance pursuant to Article 66 of the VAT Implementing Regulations. The regulations also conform with the general electronic transactions law in Saudi Arabia that pertains to electronic signature and proof of electronic transactions. These combined laws are as follows; electronic invoice has the same legal recognition as the traditional invoices to avoid fraud or change of the invoices.

Article Five: Technical requirements and rules of procedures

The e-invoicing solutions suggested under the regulations are several hardware, software, networks, and integration paths through which the businesses must issue the compliant e-invoices. The third and last of these requirements is that these solutions should be able to connect to the internet for the purpose of sharing data with ZATCA. Moreover, the systems have to be resistant to tampering, that is, modifications to the invoices have to be protected by the systems themselves e-invoicing in Saudi Arabia.

As earlier mentioned, to support ZATCA’s Fatoorah portal, e-invoicing solutions must also support connectivity to other systems via API. Furthermore, all e-invoicing systems must meet the data and information security controls that are currently in operation in Saudi Arabia. These strict technical standards are an attempt at forming a safe and optimised environment for invoicing that reduces the chances of manipulation or fraud while accommodating for the general objectives of the nation’s digitalisation. Technical rules may be issued in future to cover the requirements in these aspects by the Governor.

Article Six: General Provisions

According to the current laws, the Governor of ZATCA has the discretion of setting the time limits and target groups of e- invoicing rules. This includes releasing vital directives and rulings that are crucial in the implementation of the provisions as provided in the e-invoicing system. Notably, as to integration, the Governor may inform the businesses about the integration deadlines and other procedural measures necessary for proper compliance. These directives assist the firms in structuring themselves in a systematic way with relation to ZATCA’s regulations.

Further, the Governor can supply the rules, controls, and processes needed for the integration of systems of electronic invoices in a certain period of time. The regulations require that the integration must be done within 180 days from the date the e-Invoicing Regulations were published on 28th May 2021. This would make sure that organisations have enough time to make the necessary changes in their systems while the Governor retains the sovereign right to set the exact milestones within which full compliance shall have been achieved.

Article Seven: Enforcement and Obligation

The compliance with the rules governing e-invoicing started from the date of the publication of the relevant legal acts in the Official Gazette on May 28, 2021. The implementation of all e-invoicing provisions was granted one year from the date of the ordinance to all resident taxpayers, and thus, compliance with all the requirements was due on 28 May 2022. It was intended to afford ample time to companies to experiment with the technicalities involved in the new system and to discharge their obligations thereunder.

These provisions are intended to guarantee that every resident taxpayer in Saudi Arabia adheres to the e-invoicing system on time. These regulations are not only aimed at controlling the VAT compliance, but also at creating the improved, more secure and, at the same time, less susceptible to the tampering, process of invoicing. After the twelve months, the companies are supposed to have implemented fully into the system and failure to do this attracts penalties or even administrative actions.

Conclusion:

This paper discusses how the e-invoicing regulations in Saudi Arabia have pushed the country towards a more efficient and transparent tax system. As a result of implementing the use of e-invoicing for VAT registered businesses, the Zakat, Tax and Customs Authority (ZATCA) would like to eradicate the repetitiveness in the generation of invoices, E-invoicing in Riyadh decrease the number of errors and increase the level of compliance regarding VAT legislation.

As it is observed in the British case, these phases starting from Phase 1 in December 2021 and Phase 2 in January 2023 given enough time to the businesses to adopt these systems and the transition is as smooth as possible. Adherence to this regulation is important for any business to avoid any penalties and smooth processing of tax returns.

These e-invoicing regulations do not only help in the improvement of the efficiency of tax collection as Saudi Arabia moves towards financial liberalization, but also provides improved accuracy and accountability of all transactions involving VAT. Companies are encouraged to follow the guidelines on electronic invoicing, specifically, that e-invoices must be in Arabic and other languages may be permitted besides Arabic. When following the rules of e-invoicing, the companies are also promoting the general objectives of increasing transparency and enhancing the compliant tax regime in the Kingdom.