Increasing number of ZATCA Indirect Tax audits

The Zakat, Tax, and Customs Authority (ZATCA) has once again initiated a wave of tax audits on hundreds of taxpayers across the Kingdom of Saudi Arabia (KSA), with a particular focus on Value Added Tax (VAT) and Real Estate Transaction Tax (RETT). As a result, many of our clients have received notifications from ZATCA confirming they have been selected for audits covering the year 2023 and are reaching out for our support.

According to the latest statistics from the Organisation for Economic Co-operation and Development (OECD), VAT revenue makes up almost 70% of the total tax revenue collected by ZATCA. With roughly 30 times more VAT registrations in circulation than Corporate Income Tax registrations, it’s no surprise that ZATCA is intensifying its focus on VAT audits.

Larger taxpayers, including non-resident companies, can typically expect an audit once every 1 - 3 years, depending on the volume and value of transactions and/or when refund requests are submitted.

Have you been selected for an Indirect Tax Audit?

An audit can be triggered by a myriad of different factors. It often arises through ZATCA's regular examinations of taxpayers' tax returns or as a consequence of a VAT refund request. This can be due to an overall credit on a VAT return or a separate scheme, such as the Licensed Real Estate Developer scheme. It is common for ZATCA to audit a refund request before releasing it for payment.

It is notable that the Draft Zakat and Tax Procedures Law, currently progressing through the approval stages, could see the introduction of a number of penalties, including penalties that are triggered when refunds are erroneously requested, even if not ultimately paid out. 

With a comparatively punitive regime, it’s important that taxpayers get their house in order prior to lodging any substantial refund claims. Our clients often ask us to perform a ‘mock audit’ before a refund request is made, in order to better prepare for the detailed scrutiny of a ZATCA Tax audit.

Considering this recent increase in the number of ZATCA audits, below are a few other practical points that businesses should remember when dealing with these audits:

• Scope of VAT audits: In terms of the information typically requested by ZATCA during an audit, this will be confined to the review period in question, and will often include financial statements, trial balances, listings for sales and purchases, and sample invoices and credit notes, etc.

Taxpayers should ensure that their responses to ZATCA notices are complete and appropriately address the requests laid out, without submitting information that is superfluous, which can often lead to further queries being raised. 

• Draft Law and the rejection of evidence: The draft Zakat and Tax Procedures Law contains provisions that will allow ZATCA to reject any evidence offered during the objection or litigation process if that same evidence was requested during an earlier audit and not provided on time. Should the draft Law be approved in its current state, there will be even greater pressure on taxpayers to provide the information requested during an audit in full, and on time.
• Scope of RETT audits: RETT audits are becoming more common, with ZATCA taking a particular interest in how the tax base value is calculated, the retention of evidence used to support an exemption, and whether RETT was remitted on time. In all cases, it is imperative for taxpayers to compile and retain the appropriate evidence to substantiate their RETT position. 

With the uncertainty surrounding some of the more complex real estate transactions, e.g., in some Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT) arrangements, it is often advisable to seek a ruling from ZATCA based on the specific fact pattern. A written ruling will serve as robust evidence during a RETT audit.

• Proactive coordination with experts: As Tax audits in general will inevitably involve technical queries and requests from ZATCA, it is important to liaise with experts to proactively align on the understanding of the requests and practical approach, or to deal with any expected delays in responding to queries. Whether the expert is someone in-house, or an external adviser, you should ensure that they guide you through the requests and help you navigate the risks.
• Submit the requirements on time: While ZATCA audits can be stressful, especially if it is the first audit, it is important to ensure timely submissions of data in the required formats to ZATCA. Taxpayers should ensure that experienced and knowledgeable staff/advisors are available during these times to help respond to queries in a timely manner. Our clients will often ask us to support and guide their staff during the process.
• Be prepared in advance: Taxpayers selected for audits should plan and take the necessary steps to prepare the audit requirements and tax reconciliations beforehand to comply with ZATCA’s requirements. One approach that our clients request is a due diligence exercise focusing on key transactions or risk areas. Such exercises will help identify exposures before the audit is requested and help mitigate any associated risks.
• Submit responses in Arabic: It is recommended that the responses to ZATCA’s queries are in Arabic. Should matters escalate, it is possible that non-Arabic responses will not be permissible as evidence during future hearings/objections/appeals. Deloitte has a dedicated team to help with translations, if necessary.

Did you know that as a percentage of tax collections, ZATCA collects almost twice as much tax via audit assessments than the OECD average? Tax audit assessments in the KSA yield 6.5% of the total tax collected, compared to an average of 3.7% in the OECD.

This underscores the crucial role of tax audits in bolstering tax revenue in the KSA.

How can Deloitte support your business? 

With the support of our experienced Indirect tax professionals, specialized in dealing with ZATCA tax audits and with a proven track record of success, we would be happy to assist your business in these tax audits from ZATCA to ensure that risks are minimized, and information is submitted to ZATCA in a timely manner. 

Considering our long-term experience in providing Tax Audit support, we can tailor our services to meet your specific needs, whether it’s a pre-emptive mock audit, pre-audit data review, a mid-audit VAT Health Check, or just some ad-hoc support to get you through the process, we will be there to help you and your team. 

For those of you who have witnessed the escalation of the audit process, we can also assist in managing tax assessments, drafting objections, and providing representation at the General Secretariat of Zakat, Tax, and Customs Committees (GSZTCC), among other services. Our specialist litigation team is recognized as one of the most renowned and capable teams in the Kingdom.

Deloitte’s view

When the wheels have been set in motion and the tax audit process begins, Deloitte is your trusted tax partner, ready to support you in complying with audit requirements efficiently and promptly.

If you have not been selected for an audit as yet, please keep this publication somewhere safe as a useful point of reference. 

For further support, please get in touch with your usual Deloitte contact or any member of the Deloitte Middle East Tax team mentioned in the contacts section below.