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The first step to remaining current with the Saudi Arabian rate of rapid changes regarding the digital tax regime is knowing the E-Invoicing Exempt transactions. Since e-invoicing duty is becoming mandatory in all the businesses in the Kingdom, it pays to understand under which circumstances and where exemptions proceed to follow due tax reports. Although your company might be at an early stage with the adoption of e-invoicing in Saudi Arabia or simply adapting to the requirement of integration, by pinpointing exempted supplies early, you will give your force a chance to avoid expensive mistakes and to keep up with the rapidly developing policies of ZATCA.
The Zakat, Tax, and Customs Authority (ZATCA) pioneered digital transformation by introducing e-invoicing in stages. On December 4, 2021, the first part (phase 1), which dealt with creating organized invoices, got underway. Phase 2, which will focus on integration with government systems, began on January 1st, 2023 and will apply to enterprises in stages. As an example, the first notified were entities whose revenue is more than SAR 3 billion in 2021 in June 2022. Such companies had to be fully integrated with their accounting system by the early year 2023, underlining the level and time of urgency of e-invoicing in Riyadh and other large-scale business centers.
Even though extensive use of the e-invoicing mandate has been used, ZATCA has vividly described many instances where the transactions are listed as being an E-Invoicing exempt transaction. Such ones are (a) certain cross-border transactions, (b) certain government dealings, and (c) invoices of non-resident suppliers. The range of exempted supplies, makes it to be such that businesses are not loaded with the irrelevant digital reporting where it is not justifiable. This paper will bring clarity in determining the type of transactions that are subject to exemption, the remaining documents required in the process, and how an organization can be ready to justify its exemption position besides audits or reviews.
Some of the supplies that are exempted under the Saudi law on VAT do not involve the issuance of e-invoices as well as associated Credit or Debit Notes (CDNs). Local transactions of services such as life Insurance or residential house renting are not within the scope of e-invoicing. Such kinds of exempt E-Invoicing supplies are not included since they are already VAT-exempted by the KSA VAT Law and Implementing Regulations where the individual industry has to bear less compliance requirements.
By way of illustration, where a company under the e-invoicing arrangement in Saudi Arabia deals with the sale of a VAT exemptable service such as a life insurance policy, it does not need to present an electronic invoice. The transaction in this scenario can be deemed to be E-Invoicing Free based on the taxation rules set. The e-invoicing facilitation in Riyadh is further simplified by the fact that residential rents are exempted, and the companies and landlords can easily maintain the appropriate compliances.
The activities listed below have been exempted by ZATCA as to e-invoicing obligation in Saudi Arabia:
1. Exempted supply payments
2. Value of making exempted supplies
Where payment is made over a VAT exempted commercial business transaction, where the commercial business transaction is renting houses, or provision of certain financial services, then the resultant business is said to be an E-Invoicing Exempt transaction. As an example, the XYZ Real Estate has not received an e-invoice by Fahd, According to Saudi Arabia’s e-invoicing guidelines, residential rentals are an example of an exemption supply to which the VAT does not apply.
Under Saudi VAT regime, the person providing the services as non-resident is relieved of accountability of VAT when they provide the services to another person resident in the Kingdom of Saudi Arabia. In this instance, the Reverse Charge Mechanism (RCM) is applicable to the recipient under the Saudi VAT regulations. The supplier in this case is not certified in Saudi Arabia and hence is not mandated to supply the e-invoice or any other credit/debit notes on the service abducted to the local firm.
When this happens, self-assessment of VAT on service to the resident business is done by the resident business. Nonetheless, the resident party, even though a VAT registrant, is also not required to issue an e-invoice as prompted by the current E-Invoicing Exempt rules. Rather, they should have clear records that show the nature and origin of the service that could be used in VAT audit and reporting.
In an example where a company such as Abdullah Consulting Services of Jordan offers advisory service to a business such as Al Ahmed Group located in Saudi Arabia, none of the partners is required to issue e-invoice. Since the service falls under the Reverse Charge Mechanism, the Saudi recipient is responsible for filing VAT. Such exempt supplies should be reported in the VAT returns, as well as accompanying documentation.
The first and single VAT point is the custom clearing window when incorporating goods into Saudi Arabia as a foreign source. The payment of Import VAT is made directly to the ZATCA-linked customs system, and no domestic supply take place since the goods are not sold within the Kingdom. Consequently, such imported dealings are categorized as E-Invoicing Exempt under the existing e-invoicing requirement and neither the overseas vendor nor the Saudi buyer needs to create an electronic invoice or a branch credit/debit note.
Take the example of Al Zamil LLC, which is a steel manufacturer based in Makkah and buys raw materials regularly, to be supplied by a vendor in Germany. A commercial invoice issued by the German vendor is accepted with the local legislation of Germany, but this does not make it a Saudi e‑invoice since such an act of purchase is not translatable as an event of VAT in that country where the German supplying vendor is based. As such, the import entry by Al Zamil is automatically converted into E‑Invoicing Exempt record, which exempts both parties of generating XML files or scanning QR codes which are required when supplying goods within Kingdome.
Even though they do not need an electronic invoice, the importer should have a proper documentation in place in order to recover the input VAT. The accounting system should include archived customs declaration, payment receipt or shipping destination method so that the auditor would be able to check on the tax paid at the border. A combination of customs data and ERP ledgers will enable businesses that use e-invoicing in Saudi Arabia to improve compliance, speed up reconciliations, and guarantee that import VAT will be a correct and timely credit on their periodic returns.
In conclusion, it is necessary to note that E-Invoicing Exempt transaction comprehension is essential to any company that is a VAT regime participant in Saudi Arabia. Either we are talking about payments to the exempted supplies, the services obtained through the reverse charge or the goods imported by the foreign suppliers, it is always better to be familiar with the times when e-invoicing is not needed as in this way, organizations will escape the unwanted compliance procedures. With regards to supporting the transition to e-invoicing in Saudi Arabia, correct identification and documentation of exempt transactions will facilitate in the filing of VAT with no penalty, should the auditor or system review by the ZATCA occur in the future.
Since e-invoicing in Riyadh and other major cities in Saudi Arabia are constantly developing following the instructions of ZATCA, business organizations should actively implement the exemption regulations into their internal systems. Use of ERP system in flagging E-Invoicing Exempt categories, keeping backup documents such as customs records or service agreement, and education of finance support staff to classify transactions will enhance compliance in the long term. The awareness and control of the exempted situations with equal attention as the taxable situations is the most important aspect of getting VAT accuracy and ensuring the trust in the fully digital tax world.
