Income Tax Law [2004] continued (1):
Chapters Six to Ten


 

The English version of this document is for guidance only.
The Arabic version is the governing text.
 


Chapter Six:

Tax Accounting Rules

Article 22 : Taxable year

(a) The taxable year is the State's fiscal year.

(b) A taxpayer may use a twelve-month period other than the one specified in paragraph (a) of this Article as a taxable year, in accordance with the restrictions specified in the Regulations.

(c) If a taxpayer changes its taxable year, the interval between the last full taxable year prior to the change and the starting date of the new taxable year shall be considered as a short independent fiscal period. The first year of a new taxpayer or the last year of a taxpayer in case of discontinuation or liquidation, may be a short independent fiscal year, unless it is stipulated to be a long fiscal year in accordance with the Companies Law.

(d) Groups of related companies, as defined in Article 64 of this Law, shall use the same taxable year.

 

Article 23 : Method of Accounting

(a) A taxpayer's method of accounting must clearly reflect the taxpayer's income.

(b) The gross income and expenses of a resident company, and any other taxpayer who keeps or is required by Law to keep commercial books according to the accounting principles generally accepted in the Kingdom, are determined according to such books after adjustments of the accounts so as to conform to the rules of this Law.

(c) For taxation purposes, a natural person may record his transactions on a cash or accrual basis. However, if his gross income from business for a taxable year exceeds the amount specified in the Regulations, he must use the accrual method in all succeeding taxable years.

(d) A company which keeps or is required by Law to keep commercial books must record income and expenses on an accrual basis. Otherwise, it may, for taxation purposes, use either the cash or accrual method.

(e) Except for a change from the cash basis to the accrual basis required in accordance with paragraph (c) or (d) of this Article, a taxpayer may change its method of accounting upon obtaining the Department's consent.

(f) If the taxpayer changes his method of accounting, it must perform adjustments to items of income and deduction, or to debt or any other items in the taxable year following the change, so that no item is omitted, or included more than once.

 

Article 24 : Cash-Basis Accounting

A taxpayer who uses the cash method in its books and records shall register the received income when received or made available, and the paid expenses when paid.

Article 25 : Accrual-Basis Accounting

(a) A taxpayer who uses the accrual method shall record income and expenses when they are due.

(b) An amount becomes payable to the taxpayer when the taxpayer is entitled to receive it, even if payment is postponed or paid in installments.

(c) An amount becomes payable by the taxpayer when all facts determining liability have occurred.

 

Article 26 : Long-Term Contracts

(a) For a taxpayer who uses the accrual method, income and expenses relating to a long-term contract shall be calculated on the basis of the percentage of the work completed during the taxable year.

(b) The percentage of work completed is determined by comparing the costs of the contract incurred during the taxable year with the total estimated cost of the contract.

(c) For the purposes of this Article, the term 'long-term contract' means a contract for manufacture, installation, or construction, or the performance of related services, and shoe execution is not completed within the year in which execution started, with the exception of the contract expected to be completed within six months of the actual starting of work cited in the contract.

 

Article 27 : Stock

(a) A taxpayer who maintains a stock shall establish and maintain inventories for such stock.

(b) The cost of goods sold during the taxable year shall be deducted.

(c) The cost of goods sold during a taxable year is determined by adding the cost of goods purchased during the year to the opening stock and subtracting the value of the closing stock.

(d) A taxpayer who used the cash method shall calculate the cost of stock by use of the prime (direct) cost method or the absorption costing method, but a taxpayer using the accrual method shall calculate the cost of stock by use of the absorption method only.

(e) The value of the closing stock is the book or market value, whichever is lower at that date. A taxpayer shall calculate the book value or the stock by use of the weighted average method. However, it may use another method, after obtaining a written permission from the Department, and it may not change the method chosen except with the consent of the Department. 

 


Chapter Seven:

Additional rules for determining tax base

Article 28 : Joint Property

Income or expenses relating to jointly-owned property are apportioned among partners in proportion to their respective shares in the property.

 

Article 29 : Valuation

(a) If calculation of the tax base or gross income involves non-cash properties, services, or other benefits, their fair market value is calculated as of the date it was recorded in the books for taxation purposes.

(b) The market value of non-cash property transferred to an employee or any other service provider is determined without regard to any restriction on transfer of ownership.

 

Article 30 : Currency Conversion

(a) Gross income and tax base are calculated in the Saudi Riyal.

(b) If calculation of income involves an amount in a currency other than the Saudi Riyal, the amount shall be calculated for taxation purposes in Saudi Riyal at the exchange rate declared by the Saudi Arabian Monetary Agency on the date of the transaction.

 

Article 31 : Indirect Payments and Benefits

The gross income of a taxpayer includes any payment from which the taxpayer benefits directly or indirectly, as well as any payment dealt with according to its instructions, if such payment is considered income of the taxpayer if paid to the taxpayer directly.

 

Article 32 : Compensation Received

Compensation amounts received shall take the character of what is compensated for.

 

Article 33 : Recoup of expenses deducted

(a) If a taxpayer recoups expenses, loss, or previously permitted bad debt, the amount recouped is included in the gross income for the year in which it is recouped and shall take the status of the income related to the expenses.

(b) For the purpose of this Article, expenditure shall be considered recouped in the absence of the basis for the expenditure.

 

Article 34 : Estimated Taxation

(a) If branches of foreign airline, sea or land freight and transportation companies operating in the Kingdom do not submit proof of their tax base in accordance with this Law, such tax base shall be determined as follows:

  1. The tax base from branches of foreign airlines operating in the Kingdom shall be considered five percent (5%) of the gross income realized in the Kingdom from tickets, cargo, mail or any other income. Such branches shall declare their gross income in the Kingdom at the times specified by Law.
  2. The tax base of foreign freight, land and sea transportation companies operating in the Kingdom shall be considered five percent (5%) of income realized in the Kingdom from charges for freight or any other income. Such branches are required to declare their income in the Kingdom at the times specified by Law.

(b) The Minister shall have the power to authorize certain other sectors to use estimated taxation to determine their tax base and rates in accordance with the Regulations.

 

Article 35 : International Agreements

In case the condition of a treaty or an international agreement to which the Kingdom is party are inconsistent with the provisions of this Law, the conditions of the treaty or international agreement shall prevail except for provisions of Article 63 of this Law, which are related to procedures against tax avoidance.


Chapter Eight

Taxation rules of partnerships

 

Article 36 : General Provisions

(a) Taxes shall be imposed on partners in partnerships and not on the company itself. However, the company is required to file a tax declaration for the purpose of information showing the amount of income, profit, loss, expenses, debts, and other items or tax-related matters of the partnership for the taxable year. The declaration shall be subject to procedural rules, including fines imposed on tax declarations in accordance with this Law.

(b) The partnership, rather than its partners, shall be responsible for choosing the taxable year, the accounting method, the inventory method, and any other accounting policies consistent with this Law. It shall also be responsible for filing notifications and statements required in relation to its types of activity.

(c) The provisions of this Law concerning capital companies shall apply to shares of limited partners in limited partnerships.

 

Article 37 : Taxation on Partners

(a) In determining the tax base of a partner, the income, expenses, losses, or credits derived or accrued against the partnership retain their status as to geographic source and type of income, gains, deductions, losses, and debt.

(b) A partner's share in a partnership's income, loss, expenses, and debt shall be taken into account for the purpose of determining the tax base of the partner's taxable year in which the partnership's taxable year ends. The partner's loss which exceeds his cost base is suspended until the partner acquires sufficient cost base to offset the loss or until the partner's share is disposed of.

(c) The loss of the related party disallowance rule stated in paragraph (d) of Article 63 of this Law shall not be applicable to the partner's share of losses and expenses in a partnership in accordance with paragraph (b) of this Article. A partnership's loss suspended in accordance with paragraph (d) of Article 63 of this Law shall not be distributed among the partners until its conditions are fulfilled. The conditions shall be considered fulfilled in case a loss is incurred in distribution upon complete disposal of the partner's share.

 

Article 38 : Cost Base of Partner's Interest

(a) The cost base of a partner's share in a partnership shall be determined by the amount the partner pays against his share plus the cost base of properties he contributed to the company.

(b) The cost base increases by the amount of a partner's share in a partnership's income (along with his exempt income) included in the partner's gross income.

(c) The cost base decreases, but not below zero, by the cost of distributions from the partnership to the partner and by the partner's share of partnership losses, and expenses as well as nondeductible expenses of the partnership, except for capital items.

(d) Debt incurred by the partnership, including the debt against its properties, increases each partner's cost base according to his share in the partnership. However, debt incurred by some partners in the partnership, in their personal status, shall increase the cost base for these partners only.

 

Article 39 : Cost Base of Partnershipo's Assets

(a) The initial cost bas of properties contributed to a partnership shall be equal to the cost base of the contributing partner.

(b) If a partner retires from a partnership and receives a distribution causing him to make profit by disposing of his share in the partnership, the cost base of the partnership's profiting assets shall be adjusted by increasing the amount of profit made, provided that the value of such assets does not exceed their market value. Cost base adjustments are distributed among assets according to the percentage difference between the cost base and the market value.

(c) If a partner retires from membership in a partnership and receives a distribution causing him to incur a loss by disposing of his share in the partnership, the cost base of the partnership's losing assets shall be adjusted by reducing the value of the loss incurred, provided that the cost base of such assets is not less than zero. Cost base adjustments are distributed among assets in accordance with the percentage difference between cost base and the market value.

(d) For purposes of paragraphs (b) and (c) of this Article, a profiting asset is the asset that has a cost base lower than the market value and a losing asset is the asset that has a cost base higher than its market value.

 

Article 40 : Transfer of Property to a Partnership

(a) No gain or loss shall be calculated for a transfer of a partner's asset to a partnership against acquiring a share in such partnership.

(b) The partner is considered an owner of a share in the partnership according to market prices and the amount paid to him. If the amount paid to him exceeds the market price, the excess amount shall be considered as distribution to the partner by the partnership.

 

Article 41 : Transfer of Asset Ownership from a Partnership to a Partner

(a) A partnership's transfer of a non-cash asset to a partner therein, including liquidation of the partner's share, is treated as a disposal of the asset by the partnership, with declaration of gain or loss on the transfer date.

(b) A partner shall take the cost base of the asset which equals the market value of the asset.

(c) A partner is deemed to have received a distribution of profit from the partnership with a value equal to the market price for the ownership of the asset transferred to him without paying its cost. The partner is treated as having disposed of part of all of his share in the partnership, if the estimated distribution exceeds the partner's cost base in the partnership. If the distribution is a complete disposal of a partner's share, and is less than the partner's cost base, the difference between the cost base and distribution may be deducted on the basis that it is a loss resulting from his disposal of his share.

Article 42: Change of partners in a partnership

(a) If a partner or partners enter into or retire from a partnership which results in its reconstitution, all its assets shall be considered transferred to the new partnership against shares in the partnership.

(b) A reconstitution of a partnership occurs when the entry or retirement of a partner or partners results in a change in the partnership's membership exceeding fifty percent (50%) of its formation in the year preceding the change.

  


Chapter Nine:

Rules of taxation on capital companies

Article 43 : General Provisions

(a) A tax shall be imposed on the shares of general partners in a partnership limited by shares, as in a partnership. Henceforth, the general partners' shares are deducted in determining the tax base of the partnership. The provisions of this Law which are applicable to partnerships shall apply to the shares of general partners in partnerships limited by shares.

(b) In case of a change of fifty percent (50%) or more in the ownership or control of a capital company, the share of a non-Saudi may not be deducted in losses incurred prior to the change in accordance with Article 21 of this Law in taxable years following the change.

 


Chapter Ten:

Natural Gas Investment Tax

 

Article 44:

A natural gas investment tax shall be imposed on every person engaged in natural gas investment, gas liquids and condensates within the Kingdom, its exclusive economic region or its continental shelf.

 

Article 45:

(a) Natural gas investment activities shall mean the exploration, production, collection, treatment, processing, fractionation of natural gas liquids, production and collection of gas condensates, as well as transportation of natural gas, its liquids and gas condensates.

(b) Transportation shall mean transporting natural gas from treatment plants to processing and fractionation plants or from any such plants to end user facilities, as well as transporting gas condensates and its liquids. That does not include local distribution networks and pipelines constructed by non-gas producers beyond the official sale points.

(c) Gas condensates shall mean condensates in their natural form, which are hydrocarbons that exist in a single gaseous phase in reservoirs with original temperatures in the range between the critical and maximum temperatures, where it is possible for the substance to have two phases side by side and which are extracted from wells completed in gas condensate reservoirs and become liquid at standard conditions of temperature and pressure.

 

Article 46:

Income from natural gas investment activities shall be the gross income derived from the sale, exchange or transfer of natural gas and its liquids, gas condensates, including sulfur and other products, as well as any other incidental or non-operational income derived from the taxpayer's primary activity, regardless of its type or source, including income derived from the utilization of excess energy in a facility subject to natural gas investment tax.

 

Article 47:

The natural gas investment tax basis shall be the gross income referred to in Article 46 of this Law, minus the expenses deductible under this Law. The amounts of royalties and surface rentals shall be considered as deductible expenses.

 

Article 48:

The natural gas investment tax rate for any taxable year shall be determined on the basis of the internal rate of return on the cumulative annual cash flows of the taxpayer derived from natural gas investment activities. The tax rate applicable to the taxpayer's natural gas investment tax basis will be in accordance with the following table: [see pdf attachment]

  1. Cumulative annual cash flows shall mean the aggregation of the annual cash flows of the taxpayer subject to the natural gas investment tax for each year starting from the first year of its tax declaration in which the taxpayer was subject to the natural gas investment tax until the year preceding the year in which the tax declaration is due for presentation.

The internal rate of return shall mean the discount rate that causes the net present value of these cumulative annual cash flows (after being discounted to the start of the first year of such cash flows) to equal zero, and then rounded to the nearest tenth of one percent (1%).

 

Article 49

The annual cash flows shall be calculated by adjusting the natural gas investment tax base as follows:

(a) Adding back any operational losses carried forward from previous years.

(b) Adding back non-cash items deducted for the purpose of determining the taxpayer's base.

(c) Adding back all financing fees and other bank service fees.

(d) Subtracting capital cash expenditures except financing fees and any other bank service fees.

(e) Subtracting the natural gas investment tax and companies income tax actually paid.

 

Article 50

(a) Income tax stipulated under paragraph (b) of Article 7 of this Law shall be applied to natural gas investment tax base of a taxpayer subject to natural gas investment tax.

(b) The income tax amount paid by a taxpayer on natural gas investment tax base in accordance with paragraph (a) of this Article shall be deducted from the natural gas investment tax to be paid by the taxpayer.

 

Article 51

(a) For the purpose of calculating the natural gas investment tax, the taxpayer's natural gas investment tax base for each gas exploration and production contract or agreement with the Government shall be deemed independent of the natural gas investment tax base or any other gas exploration and production contract or agreement. The taxpayer shall file separate tax returns and audited closing accounts for each gas exploration and production contract or agreement.

(b) A taxpayer's natural gas investment tax base shall be independent of the tax base for its other activities that are not related to its natural gas investment activity, and such taxpayer shall file a tax declaration and audited closing accounts for its natural gas investment tax activity separate from its other activities.

 

Article 52

A taxpayer is subject to income tax stipulated under paragraph (b) of Article 7 of this Law on the following:

(a) Its income from processing and fractionation of natural gas in a licensed independent plant.

(b) Its income from transporting natural gas for a third party through a licensed independent pipeline.

 

Article 53

The provisions of this Chapter shall not apply to any company engaged in the production of petroleum, or the production of both petroleum and natural gas, with respect to such company's activities within its areas of operations or concession area, as delineated upon the effectiveness of this Law.

 

Article 54

The provisions of paragraph (c) of Article 7 of this Law shall not apply to the gas investment tax base for any taxpayer subject to the natural gas investment tax.

 

Article 55

Where no stipulation is provided in this Chapter, the provisions of other Articles of this Law shall apply to the taxpayer subject to the natural gas investment tax.

 

 


 

[continued: Chapters Eleven to Sixteen]



 

Government
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