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The integration of e-invoicing is Saudi Arabia is a commendable move towards the improvement of the country’s tax system as well as efficiency of the financial transactions. As a part of this continuous change process, the Zakat, Tax and Customs Authority (ZATCA) has planned to implement phase II of e-invoicing from 01st January 2023. This phase is the development of the Phase I and is associated with new features that help simplifying the process of generation of invoices for Kingdom businesses. It is essential for the companies to understand the E-Invoices in Phase II process flow for the generation of e-invoices to follow the new regulations.
A particularly significant element in e-Invoices in Phase II is the systematic approach that ZATCA is applying to the introduction of changes. According to the authority, these improvements are going to be implemented gradually in the following manner: the taxpayers are going to be divided into particular categories. This is a strategic way through which businesses are given enough time to prepare for the transition.
Every implementation wave will be announced at least six months before the implementation start date so that all stakeholders can prepare to address the new requirements. This phased approach does not only help to smooth the change but also to establish a cooperative culture for compliance that can help businesses better respond to changes in the invoicing environment.
In this blog, we will explore more of the Phase II e-invoicing compliance needs, particularly the generation process of e-invoices. It is crucial for the companies, especially those in Riyadh and across the Kingdom of Saudi Arabia to be familiar with these steps in view of the complexities of this new scheme. Through e-invoicing in Riyadh and the broader Kingdom, firms can speed up processing time and increase accuracy and efficiency as well as improve their records based on ZATCA’s regulations. The following are the key processes that define the creation of e-invoices in Phase II and check if your business is prepared for this new innovation in the Kingdom of Saudi Arabia’s financial sector.
Accordingly, ZATCA announced the following waves under Phase 2 of E-Invoicing in Saudi Arabia
Wave 1: Businesses that are registered for VAT and have a turnover of more than SAR 3 billion in 2021 are required to apply Phase II from January 1, 2023.
Wave 2: The entities that had a turnover of more than SAR 500 million and up to SAR 3 billion in 2021 must follow Phase II starting from 1 July 2023.
Wave 3: The businesses whose annual turnover is over SAR 250 million and less than SAR 500 million in 2021 or 2022 should adopt Phase II from October 1, 2023.
Wave 4: Companies with a turnover between SAR 150,000,001 and 250,000,000 in the financial year 2021 or 2022 should adopt Phase II from November 1, 2023.
Wave 5: Retail businesses and importers with a turnover between SAR 100 million and SAR 150 million in 2021 or 2022 are required to apply Phase II starting from December 1, 2023.
Wave 6: Companies having a turnover more than SAR 70 million but less than SAR 100 million in the financial years 2021 or 2022 have to adopt phase II from 1 st of January 2024.
Wave 7: A VAT registered business with a turnover exceeding SAR 50 million and not exceeding SAR 70 million in either 2021 or 2022 is required to adopt Phase II from 1 February 2024.
Wave 8: Companies with a turnover between 40 and 50 million SAR in the year 2021 or 2022 should apply phase II from the first of March in the year 2024.
Wave 9: Business entities with a turnover of more than SAR 30 million and less than SAR 40 million in 2021 or 2022 must adopt Phase II from June 1, 2024.
Wave 10: Any entity with a turnover greater than SAR 25 million but less than SAR 30 million in 2022 or 203 will need to adopt Phase II starting from October 1, 2024.
Wave 11: The businesses with turnover more than SAR 15 million and less than SAR 25 million in 2022 or 2023 are required to implement Phase II from November 1, 2024.
Wave 12: Companies with turnover between SAR 10 and 15 million in 2022 or 203 will need to adopt Phase II from December 1, 2024.
Wave 13: Businesses with a turnover between more than SAR 7 million and less than SAR 10 million in 2022 or 2023 are required to apply Phase II from January 1, 2025.
Wave 14: Companies with turnover in 2022 or 2023 that is over SAR 5 million but not exceeding SAR 7 million must apply Phase II from February 1, 2025.
The process flow for e-invoicing in the KSA during phase II of the implementation of the project is intended to increase the rate of accurate invoicing in the Kingdom. It begins with the preparation of an e-invoice by the seller who prepares an invoice that has to meet the specifications of the Zakat, Tax, and Customs Authority (ZATCA).
The e-invoice is created by the seller inputting data which is enabled by the software and this should include; seller and buyer details, tax identification numbers, the date of the invoice and details of the product or service sold and the amount to be paid. Once generated, the e-invoice is electronically transmitted and communicated to the recipient, which is the buyer, concurrently, to the ZATCA for validation.
Upon the issuance of the e-invoice the ZATCA is in a position to verify the e-invoice against the laid down regulation. The fully compliant e-invoice is assigned a unique QR code as a mark of authenticity of the document in compliance with all the laid down characteristics. He/she can also assure that the invoice has been received. This phase also makes it mandatory for the sellers and buyers to archive the e-invoices in their account books for record and reference. The goal of e-Invoices in Phase II is to lower the rate of error even more, decrease the cases of fraud and increase the effectiveness of the entire invoicing process and therefore progress the Kingdom’s vision of a digitalized economy.
Standard Tax Invoice Generation Flow in the Phase II
Step 1: Generate Invoices Using the ERP
The first step in the process involves creating the invoice through your Enterprise Resource Planning (ERP) system. This system is crucial for businesses as it consolidates various functions like finance, sales, and inventory into a single framework. By integrating your invoicing function into the ERP, businesses can ensure that all invoice data is accurate and consistent across departments.
Step 2: Generate UUID, PIH, and ICV with ZATCA-Compliant XML
After generating the invoice, the e-Invoicing Generation Solution (EGS) unit takes over. This step involves creating a unique set of identifiers essential for the e-invoicing process. The Universally Unique Identifier (UUID) ensures that each invoice can be distinctly recognized, while the Previous Invoice Hash (PIH) provides a reference to the last generated invoice, establishing a secure connection between sequential invoices.
Step 3: Send Data Files to the Fatoora Portal
Once the XML file is prepared, the next step is to transmit the data files to the Fatoora portal, which is the platform set up by ZATCA for the e-invoicing system. This step is critical because it involves the actual submission of the invoice data for validation. The EGS unit must ensure that the data is sent in the correct format and complies with ZATCA’s requirements to avoid rejection.
Step 4: Validation and Clearance by ZATCA
Upon receiving the invoice data, ZATCA performs a validation check to ensure that the invoice format adheres to the regulations and is compliant with the established rules. If the invoice data meets all criteria, ZATCA clears the invoice and issues a cryptographic stamp, which serves as an authentication mark confirming that the invoice is valid and has been accepted into the system.
Step 5: Receipt of ZATCA Cleared XML and QR Code
After successful validation, the EGS unit receives the ZATCA-cleared XML file along with a unique QR code. This QR code contains essential information about the invoice and can be scanned for easy access and verification. It serves as a digital fingerprint of the invoice, linking back to the original data submitted to ZATCA.
Step 6: Generate PDF A-3 Invoice
With the ZATCA-cleared XML and QR code in hand, the next step involves generating the final invoice in PDF A-3 format. This PDF will embed the XML data, making it easy for customers to access all relevant invoice details within a single document. The EGS unit converts the XML data into the PDF format while ensuring that all information is accurately represented.
Step 7: Store and Archive Invoices
Once the PDF invoice is generated, businesses must store and archive the invoices according to the XML format specified by ZATCA. Proper storage is critical for compliance and auditing purposes. Businesses need to maintain an organized system for both the XML and PDF invoices, ensuring that they can be easily retrieved if needed for inspections or audits.
Step 8: Share Invoices with Customers
After storing the invoices, the next step is sharing the PDF A-3 (XML embedded) or the XML e-invoice with customers. Businesses must ensure that they provide customers with a copy of the invoice in a format that suits their needs. When sharing a printed copy of the standard tax e-invoice, it is also necessary to send the XML file via email to the buyer for their records.
Step 9: Customer Validation Using ZATCA’s App
Finally, customers can validate the standard tax e-invoice using ZATCA’s special app. This app provides a user-friendly interface for verifying the authenticity of the invoices they receive. By scanning the QR code or entering relevant details, customers can confirm that the invoice is legitimate and compliant with the regulations.
Simplified tax invoice generation flow in the phase 2
Here is a Step By Step Process Flow of Simplified Tax Invoices in Phase II:
Step 1: Generate Invoices Using ERP
The first process of producing a simple tax e-invoice is by generating the invoice through an Enterprise Resource Planning (ERP) system. This includes entering all necessary transaction details, including the goods and services sold, the quantities, the prices, and the customers’ details. Precision is critical during this stage because it establishes the framework for other processes upon adherence to ZATCA’s regulations.
Step 2: Generate UUID, PIH, ICV, and QR Code
After the EGS unit has received the invoice data it then creates the UUID, PIH and ICV The UUID is a unique identification number assigned to each invoice and the PIH and ICV are used in the hash calculation. Besides, there is also a generation of a QR code that contains some information such as the cryptographic stamp and the public key. This step also ensures that every invoice is easily recognizable and protected from the time it is generated right until it is paid.
Step 3: Share the Simplified Tax e-Invoice
When you have created the simplified tax e-invoice, you may forward it to your customer. This document can be sent in an email or through an invoicing portal or a separate invoicing application. This is important in order to maintain good business relations with your customers as well as ensuring that they process their payments within the shortest time possible while at the same time following the new e-invoicing regulations as set by ZATCA.
Step 4: Customer Validation Using ZATCA’s App
Customers can also verify the simplified tax e-invoice using the special application made by ZATCA. Customers are in a position to verify the validity and correctness of the invoice through this app hence they are charged for genuine transactions. It also improves the level of transparency which is very vital for building trust between the businesses and their clients in relation to the invoices issued.
Step 5: Report to Fatoora Portal
It is important to report the generated ST-e-Invoices to the Fatoora portal within one day or 24 hours. This real-time reporting is one of the necessities set by ZATCA e-invoicing framework and assists with keeping records consistent in the tax system.
Step 6: Acknowledgment from ZATCA
In case of a successful report, ZATCA will then check the invoice data for credibility and adherence to the set laws. If all is well, a notification will be provided, affirming the simplified e-invoice.
Step 7: Store and Archive Invoices
Last but not least, generated invoices have to be stored and archived by businesses in the specified XML format by ZATCA. Archiving is very important for future purposes, audit and other related legal issues. They may also help in improving the handling of invoices that are required to be stored electronically by the legal framework of e-invoicing for your business.
Conclusion:
In conclusion, the Phase II of e-invoicing in Saudi Arabia is a great leap forward for the country’s digitalization and tax administration. With the requirements for connecting EGS to ZATCA’s system, companies are not only simplifying their invoicing procedures but also increasing the level of openness and protection. The process of how it generates the invoices and the way in which customers validate them provides a clear structure to maintain accountability for all tax invoices that are issued.
While operating under the new requirements, it is essential to know the steps that are important for meeting e-invoicing regulation in KSA. As for e-invoices in Phase II, the use of unique identifiers and cryptographic measures will help to prevent frauds and at the same time, companies can have more efficient communication with customers and tax authorities. These adjustments will in the long run help in forming a more effective and stable economic system in Saudi Arabia thereby supporting the use of e-invoicing in today’s business world.
