This article has been researched and written by the Tax Consultant Team at Creation Business Consultants. AI has not been used in generating this article.
WHY YOU CAN’T AFFORD TO WING A ZATCA AUDIT:
As part of Vision 2030’s push to diversify the economy, the Zakat, Tax, and Customs Authority (ZATCA) in Saudi Arabia is stepping up its efforts to guarantee adherence to tax, zakat, and customs laws. Nearly 70% of ZATCA’s tax collection comes from VAT, and audits are become more regular and thorough as corporate tax, transfer pricing, and transparency gain more attention. Penalties of up to 25% of unpaid taxes, interest on past-due sums, or even legal action can result from a single mistake. Understanding ZATCA’s audit triggers and expectations is essential for firms, particularly those in the UAE aiming to match with similar regional standards, in order to avoid expensive penalties. This article explains the components of ZATCA audits, typical hazards, and practical measures to ensure a successful audit.
ZATCA AUDIT TRIGGERS: WHAT GETS YOU FLAGGED:
ZATCA audits are not conducted at random; rather, they are brought on by certain red flags in your operational or financial records. Typical triggers consist of:
- Inconsistent Tax Returns: If your files show disparities in claimed income, spending, or VAT, this may raise suspicions
- VAT Refund Requests: Before monies are disbursed, audits are frequently conducted in response to refund requests, particularly under programs such as the Licensed Real Estate Developer program.
- High-Value Transactions: Frequent or large transactions, especially those that are cross-border, may indicate possible problems with transfer pricing.
- Non-Compliance with E-Invoicing: An audit may be initiated if ZATCA-compliant e-invoices are not sent through the Fatoora platform or if the invoice format is improper (for example, lacking QR codes).
- Related-Party Deals: Deals involving related parties that don’t have appropriate paperwork or arm’s-length price arouse suspicions.
- Late Payments or Filings: Failure to meet corporation tax/zakat (120 days after the fiscal year) or VAT (30th of the month after the reporting period) deadlines may result in fines and audits.
WHAT ZATCA ACTUALLY LOOKS FOR DURING AN AUDIT
ZATCA audits are thorough and use certain checklists to cover a variety of topics. What auditors look at in each sub-audit is described below:
CORPORATE TAX AUDIT
ZATCA makes ensuring that corporate income tax (20% of net adjusted earnings) are computed and reported correctly.
Checklist:
- Financial accounts: Tax and zakat computations must be in line with audited financial accounts. Auditors check provisions, equity components, and closing balances.
- Deductible expenses: These must be at arm’s length and substantiated by employment contracts or GOSI documents, such as board member remuneration or partner wages.
- Reconciliation of Differences: Determinations of presumed profit assessments may result from unreported acquisitions or disparities in fixed assets.
- Filing Compliance: For businesses with tax obligations over SAR 500,000, returns must be filed within 120 days of the fiscal year’s end, together with advance tax payments equal to 25% of the previous year’s liability.
VAT AUDIT
ZATCA audits closely examine VAT collection, reporting, and refunds with a 15% VAT rate and an emphasis on compliance.
Checklist:
- Accuracy of Input/Output VAT: Using sales/purchase listings and sample invoices as proof, auditors confirm that the VAT claimed and charged to clients are correct.
- VAT Return Consistency: Financial records and quarterly or yearly VAT returns, which are due by the 30th of the subsequent month, must match.
- Refund Documentation: In order to support credits, refund claims need thorough reconciliations and supplementary documentation.
- E-Invoicing Compliance: Within 24 hours, invoices must be sent to the Fatoora platform, contain cryptographic stamps, QR codes, and UUIDs, and be in XML or PDF/A-3 format.
- Exemptions and Zero-Rating: Contracts or export documentation must be used to support claims for zero-rated supply (like exports) or exemptions (like specific financial services).
TRANSFER PRICING (TP) REVIEW:
All related-party transactions are subject to ZATCA’s Transfer Pricing Bylaws, which were expanded to include zakat payers on January 1, 2024.
Checklist:
- The Controlled Transaction Disclosure Form (CTDF) and an auditor’s affidavit attesting to arm’s-length pricing must be filed within 120 days of the fiscal year’s end.
- Master and Local Files: It is necessary to save and make available documentation attesting to arm’s-length pricing for related-party transactions (such as royalties and loans).
- International businesses (MNEs) that generate more than SAR 3.2 billion in total sales are required to submit Country-by-Country (CbC) reports within a year following the fiscal year’s conclusion.
- Related-Party Transactions: Auditors verify that arm’s-length standards are being followed in business transactions (such as sales of products and services), indirect financing (such as payments made on behalf), and direct financing (such as loans).
- When necessary, advance pricing agreements (APAs) must be recorded in order to preapprove price plans.
COMMON MISTAKES THAT TRIGGER PENALTIES
To reduce audit risks, steer clear of these common mistakes:
- Incomplete e-invoicing includes failing to send invoices to the Fatoora platform within 24 hours or without cryptographic stamps or QR codes.
- Late filings include failing to file zakat or business taxes (120 days after the fiscal year) or VAT returns by the 30th of the subsequent month.
- Inaccurate Transfer Pricing: Submitting non-arm’s-length transactions or neglecting to preserve master/local files.
- Unsubstantiated Deductions: Making claims for unsupported VAT refunds or non-deductible costs (such as exorbitant board compensation).
- UBO Non-Compliance: Ignoring important ownership information or failing to update the UBO registry.
- Inadequate Record-Keeping: If financial statements, invoices, or reconciliations are not given during audits, ZATCA may reject them.
HOW TO PREPARE (AND PASS) A ZATCA AUDIT
To pass a ZATCA audit without incurring fines, preparation is essential. Take these actions:
PERFORM A PRE-AUDIT EVALUATION:
- To find any discrepancies in corporate tax, zakat, VAT, or transfer pricing compliance, conduct a simulated audit. Hire experts to do a transfer pricing assessment or VAT Health Check.
- Make sure e-invoicing platforms include QR codes, appropriate XML formatting, and Fatoora connectivity in order to comply with ZATCA.
ENSURE TIMELY FILINGS AND PAYMENTS:
File zakat/corporate tax returns within 120 days of the fiscal year-end, and VAT returns by the 30th of the subsequent month.
MAINTAIN ROBUST DOCUMENTATION:
- Prepare the UBO registrations and transfer pricing documents (master/local files, CTDF) beforehand.
- Maintain royalty agreements, sales/purchase listings, and audited financial accounts for a minimum of five years.
CONCLUSION
Navigating complex regulations around transfer pricing, UBO, and cross-border structures requires more than in-house effort – it demands specialist insight. Partner with experienced tax advisors who understand both the regulatory landscape and the practicalities of compliance in Saudi Arabia.
To learn how Creation Business Consultants can support your audit preparedness and tax structuring in Saudi Arabia, get in touch today.
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📞 UAE: +971 4 878 6240 | Saudi Arabia: +966 54 995 267
