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The Kingdom of Saudi Arabia (KSA) has gone into the digital world with one of the most progressive reforms of the Zakat, Tax and Customs Authority (ZATCA) which was formerly known as the General Authority of Zakat and Tax (GAZT). This is an effort which is supposed to make the tax procedure more efficient, and also to enhance the overall transparency of the Kingdom’s economy. In the current business environment, organizations are continuously implementing electronic solutions and thus the need to understand the E-Invoicing Rollout Phases.
The first phase of e-invoicing was officially introduced on the 4th of December, 2021; this event can be considered as a breakpoint in the Kingdom’s development in improving the financial industry. This first stage applies to all VAT registered companies to adopt E-Invoicing Rollout Phases systems. Companies have to develop and store invoices in electronic media and ensure that invoices approved by ZATCA are developed. This shift does not only facilitate the manner of issuing invoices but also the manner of issuing and collecting taxes.
It does not stop here; there is Phase 2 of the rollout, which is expected to move up from Phase 1. This phase will present the ZATCA reporting requirement for reporting and compliance in real-time for the system. The Companies in e-invoicing in Riyadh and throughout KSA must understand these E-Invoicing Rollout Phases because awareness of the changes to the tax environment enables the necessary adjustments to the issuing of invoices. In the following paper, both of these two significant phases of e-invoicing in Saudi Arabia will be explained in detail.
Phase 1: Phase of generation of e-invoices (Fatoorah)
The first project of e-invoicing known as Fatoorah was launched on 04 Dec 2021 and ended on 31 Dec 2022. All the companies to which the E-Invoicing Rollout Phases regulations applied needed to issue electronic invoices, including Credit and Debit Notes (CDNs) during this period. This generation phase highlighted compliance with specific controls and technical specifications that are set by the Zakat, Tax and Customs Authority (ZATCA) in KSA. When companies implemented electronic invoicing, they assumed that accuracy in billing would increase, the time to process invoices would decrease, and general business productivity would increase.
To assist the businesses through this process, ZATCA offered more elaborate controls in the form of the Resolution on the Controls, Requirements, Technical Specifications, and Procedural Rules. This paper provides an understanding on the various processes that need to be followed in order to produce compliant e-invoices that will meet the required legal requirements. These resolutions are also subject to adjustments as the e-invoicing environment changes in the future, according to the developments in technologies or the emerging regulations in the Kingdom, ZATCA intends to enhance the resolutions to serve the optimal aim of enhancing the invoicing process in the Kingdom.
The requirements set forth for generating e-invoices and simplified e-invoices from 4th December 2021 up to 31st December 2022 are listed as follows:
When E-Invoicing Rollout Phases was rolled out in KSA starting from December 4, 2021, up to December 31, 2022, during the Phase 1 implementation, the following requirements were set for creating e-invoices and simplified e-invoices. In all cases, suppliers were required to issue and send invoices electronically. As for the B2B and B2G scenarios, suppliers had to produce e-invoices and send them to the corresponding buyers or customers as well as to manage their storage. In Business-to-Customer (B2C) transactions, suppliers were directed to send simplified e-invoices electronically where customers could easily authenticate information by using a QR code on the e-invoice.
Though the guidelines gave certain degree of freedom, there was no set format for preparing invoices and a cryptographic stamp was not mandatory. Companies had to create e-invoices containing the necessary fields concerning non-integration, while all e-invoices had to be saved in compliance with the VAT legislation to be ready for submission if necessary.
While the placement of a QR code in the standard e-invoice was not mandatory, the simplified e-invoice contained a QR code with the most basic invoice and taxpayer information. Furthermore, the security and integrity features including device registration, the Universally Unique Identifier (UUID), and Hash were not mandatory during this phase and there were no clearance and report of the e-invoices. The only requirement was that the e-invoice generating solution had to have internet connection to run the business effectively in a digital manner.
Phase 2: Phase of integration of e-invoices (Fatoorah)
Fatoorah’s Phase 2 is the implementation phase of e-invoicing in the Kingdom of Saudi Arabia starting from 1st of January, 2023. This phase also brings legal obligations for the businesses that are considered as target groups according to the e-Invoicing Regulations. The integration phase is probably the most important one since these businesses need to connect their e-invoice generating system with the system of the Zakat, Tax and Customs Authority (ZATCA). To ease this process, the business entities will be informed beforehand on the integration procedures of the changes at least six months to the required integration time.
On June 24, 2022, ZATCA declared that firms that had a turnover of more than 3 billion SAR in the financial year 2021 will be mandated to adopt the e-invoicing system from the beginning of the year 2023. The Resolution outlining this phase contains clear rules for integration which include the controls needed, the minimum requirements for businesses, technical requirements, and the procedural rules that businesses have to follow. To ensure that the current e-invoicing environment continues to be effective and efficient to support the Kingdom’s economy, ZATCA may in future amend these resolutions as per the dynamic nature of regulations and innovation in technology.
The following are the salient points on the second phase of e-invoicing or Fatoorah:
Format Requirement: Any electronic invoice must be created in a specific format and with the presence of integration fields according to the e-Invoicing Resolution.
File Formats: Invoices have to be produced in XML format or PDF/A3 with XMP type to be submitted to ZATCA for clearance and reporting.
Real-Time Clearance: All B2B and B2G e-invoices are real-time cleared through Application Programming Interfaces (APIs) before being forwarded to buyers or customers.
Credit and Debit Notes: For the e-invoices, clearance procedures also involve related Credit and Debit Notes (CDNs).
B2C Reporting: For Business-to-Customer (B2C) transaction, the simplified e-invoice must be filed to the authorities within 24 hours of generation before it is sent to the customer.
Legal Validity: The electronic invoices that are approved by ZATCA will be legally and legally valid for any business transactions.
Storage Compliance: E-invoices have to be stored in accordance with the legislation on value-added tax, so that the authorities can have access to them at any time.
QR Code Generation: The e-invoice solution will also create a QR code which will be updated during the clearance process and placed on the e-invoice.
Mandatory QR Codes for Simplified Invoices: Additional information under Phase 2 which is compulsory for simplified e-invoices are QR codes in simplified e-invoices.
Future Updates: In some cases, depending on the new technological requirements and compliance, the ZATCA might change the e-Invoicing Resolution.
Conclusion:
Lastly, overall adoption and implementation of e-invoice in KSA particularly in the Fatoorah phases, is a promising step in raising efficiency and transparency of the Saudi Arabia Financial Sector. The shift from the initial generation phase to the current integration phase has brought about key prerequisites that the businesses need to adhere to in a bid to meet the ZATCA regulations. When e-invoicing systems are implemented and real time clearance is done, the companies are able to clear their accounts with ease subject to the legal requirements. This shift also not only helps to improve the organization of data but also contributes to enhancing the economic situation and creating a healthy economy for both a business and a consumer.
In light of the ongoing advancement in the e-invoicing industry it is crucial for companies doing business in Saudi Arabia to understand the E-Invoicing Rollout Phases. Due to the constant amendments and additions by ZATCA, it is important that business must be ready to change and adjust to these new changes. In doing so they will not only achieve compliance but also leverage all the benefits of digital invoicing to achieve further operational efficiencies and customer experience advantages in the Kingdom.
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