Tax evasion and avoidance are a couple of vital threats to the global economy. Compliance and collection are two constant challenges for the tax system. Saudi Arabia is no exception. The Kingdom introduced its first-ever value-added tax (VAT) in January 2018. After having completed 4 years of application, the Saudi tax administration is looking for ways to enhance compliance without paying an additional cost.
“E-invoicing” is the newest tool of the Zakat, Tax and Customs Authority (ZATCA) to fight tax evasion and avoidance. E-invoices are generated by specific solutions to be used in B2B and B2C transactions and then submitted to ZATCA for the VAT cross-checking and collection electronically. The next stage of tax invoicing is the comprehensive linking of taxpayers with ZATCA in 2023. The VAT in Saudi Arabia is 15%.
The Saudi tax administration is undertaking digital transformation seriously to increase efficiency, compliance, and collection. How is this going ahead? Let’s see!
LESS ONGROUND AND PAPERWORK
With the introduction of e-invoicing, on-ground tax observers will have less burden in checking and cross-checking invoices, which used to be generated on paper. According to the ZATCA website, e-invoices will lead to the absence of prohibited functionalities, which include uncontrolled access, software time change, tampering, and multiple invoice sequence. Those functionalities can be used by merchants to manipulate invoices and statements.
Tracking illegal transactions and operation is a real headache for VAT administrations. It needs a level of expertise in IT, accounting, and taxing. E-invoices come with a mandatory QR code that shows the invoice and tax details for simplified tax invoices. Nobody can manipulate e-invoices. This is not the case with paper or printed invoices.
E-invoicing is a reformative step in taxation, opening a new horizon of digitalization, raising the standards of sustainable collection, and reducing compliance problems.
BIG DATA AND DIGITAL INFRASTRUCTURE
The rise of “Big Data” is defined as a collection of data that is huge in volume, yet growing exponentially with time. Good examples are transaction processing systems, customer databases, medical records, smart apps, and social media.
This is a huge amount of data being pumped into cloud storage systems every single second or even a fraction of a second. Big data will not be possible without a digital infrastructure that has been built since the introduction of the Internet in the Kingdom in the 1990s. According to the World Bank, the Internet penetration rate in Saudi Arabia is 97.86%. This high percentage is an indicator of the advancement of the National Strategy of Digital Transformation, which has been translated into action since 2006. It is going to end in 2024.
According to a variety of sources (reports and sales managers and accountants), cash transactions are at an all-time low in the Kingdom. Some stores reported that only 10% of customers pay in cash! The Covid-19 lockdown of 2020 has driven customers to contactless payment methods. Electronic payments are easier to track and tax.
How is this related to improving taxation?
COMPREHENSIVE DIGITAL LINK
The Saudi tax administrators are paving the way for the comprehensive link of taxpayers (merchants) with ZATCA so that data is transformed directly, meaning that the tax administrator can know the exact taxable sales or services in a real-time manner, second by second.
The new project is scheduled to start in 2023. Businesses need to level up to the new linking requirements with more transparency in all transactions. The human error margin gets lesser.
Traditional sales estimations by tax administrators will be from the past. Real-time taxable sales reports are stored in clouds, making the cross-checking of statements, payments, and personal data easier than ever. More transparency helps in proper taxation, and, most importantly, reduces evasion and avoidance.
Compliance with new regulations means more taxpayers are transferring the proper amounts of taxes, ensuring the values of taxation justice are respected.
TAX LEAKAGE
ZATCA imposes hefty fines for the violation of VAT regulations. Some financial penalties reach up to USD 26,000.
The digital transformation of tax collection will ensure better law enforcement since mistakes or discrepancies, or miscalculations are tracked properly. Digital records enable easy access for both taxpayers and administrators to check the accounts and documents.
Tax administrators always have fears of tax leakage. Loss of revenues is a constant challenge. More compliance means more revenues and less leakage. Zero leakage is yet a goal to be set in the near future!
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