TAX NEWS - 2010

Saudi Arabia Tax: New procedure announced to claim tax treaty benefits

Saudi Arabia's Department of Zakat and Income Tax (DZIT) issued a circular on 23 May 2010 that sets out the procedures to claim tax treaty benefits on payments made to nonresidents (Circular No 3228/19).

The new procedures apply to corporations and establishments resident in Saudi Arabia that make payments to nonresidents that are subject to withholding tax under Saudi tax law, even if the country where the nonresident is resident has concluded a tax treaty with Saudi Arabia. The circular also sets out the procedure to obtain a refund of overpaid tax in cases where the rate under an applicable tax treaty is lower than the rate under Saudi tax law.

According to Circular No 3228/19, a Saudi resident making a payment to a nonresident must withhold tax at the rate specified in the tax law and remit that amount to the DZIT. If a tax treaty provides for an exemption or a lower rate of withholding tax, the payer must submit a letter to the DZIT requesting a refund of the overpaid amount and must include the following documents with the letter:

- A letter from the nonresident recipient requesting a refund of the overpaid amount;
- A certificate issued by the tax authorities in the country where the recipient is resident, verifying that the beneficiary is a resident of that country in accordance with article 4 of the treaty and that the amount paid is subject to tax in that country; and
- A copy of the withholding tax form used to pay the tax, together with the receipt of payment to the Department of Zakat and Income Tax (DZIT) by the withholding party.

We believe that the there may be some practical difficulties with the new procedures and that the circular leaves some issues unanswered. For example:

- What is the effective date of the circular (e.g. the issuance date or another date)?
- Will a government entity that contracts with a nonresident file a refund application on behalf of the nonresident?
- How will contracts that were signed on the basis of the direct application of a tax treaty be dealt with?
- Does the Saudi payer have to submit an application to DZIT in respect of each payment to a nonresident, or will one application suffice?
- If a refund is due, what is the time frame for the refund by the Department of Zakat and Income Tax (DZIT)?
- Will compensation (e.g. interest) be paid on late refunds?

We have requested clarification from the Department of Zakat and Income Tax (DZIT) on these issues.