Zakat Applications in the Kingdom of Saudi Arabia Presenter: Mr. Saleh Al Awaji- DZIT s Deputy Director General 1
Zakat Legal Base Index Department of Zakat and Income Tax Zakat Main Features Filing Zakat Base Items, Deductible and non-deductible Expenses Determination of Zakat Base Books and Records Example Presumptive Assessment Objections and Appeals 2
Zakat Legal Base Royal Decree no. 17/2/28/8634, dated 29/6/1370H as amended by the royal Decree no. 17/2/28/577, dated 14/2/1367 has stipulated collection of zakat based on Islamic Jurisprudence from Saudi individuals and companies at a rate of 2.5%. The Royal Decree no. 5/506, dated 19/3/1405 H has stipulated zakat treatment of individuals and companies from member states of the Cooperation Council for the Arab States of the Gulf (GCC) like Saudis. 3
Department of Zakat and Income Tax (DZIT) 4
Establishment The Department of Zakat and Income Tax (DZIT) was first established in 1355 H. (1936) as an office within the Ministry of Finance to collect the prescribed revenues. Based on power delegated to him, the Minister of Finance resolved in resolution no. 394, dated 7/8/1370 to establish DZIT as a department reporting directly to the Minister of Finance. 5
DZIT Mission Administer the taxation and zakat system through the correct assessment and collection of zakat and tax as efficiently and effectively as possible, to improve the voluntary compliance of taxpayers by providing equitable treatment, outstanding performance and the continued improvement of services to them. 6
DZIT Responsibilities 1. Examine, assess and collect zakat from Saudis and resident citizens from member states of GCC. 2. Examine, assess and collect tax from persons subject to taxation: 3. Follow-up on delinquent taxpayers to ensure collection of due zakat, taxes and fines. 4. Develop work procedures by undertaking research and studies to find solutions to problems that may arise in application. 5. Issue statistical reports on DZIT operations: taxpayer's numbers, categories, locations, and activities. Submit annual report on DZIT's accomplishments, revenues and expenditures to concerned authorities. 7
DZIT Organization Features The structure is based principally on functional criterion. There is a dedicated organisational unit for managing tax affairs of large taxpayers. There are dedicated organizational units responsible for audit, taxpayers services, collection and taxpayers' appeals/disputes. There is a separate substantial in-house IT functions. 8
DZIT Staff and office network DZIT staff is over 1600. DZIT has one headquarters and 16 local offices. 9
DZIT Revenue collections revenues collected by DZIT have in the late years increased at an approximate annual rate of 20%. DZIT automatically remits its zakat revenue to a zakat account at the Saudi Arabian Monetary Agency earmarked to social insurance entitlements being met by the Social Insurance Agency of the Ministry of Social Affairs. Tax revenues are deposited at a special tax account as part of the state's resources. DZIT Total amount of net collection for the fiscal year 2013 is over SR 25 billion: SR 12 billion tax revenue and SR 13 billion zakat revenue. 10
Registered taxpayers Total number of taxpayers and zakat payers is (280,455) broken down as follows: The number of registered taxpayers (Individuals): (4,342 ) The number of registered taxpayers (Companies): (6,864 ) The number of registered zakat payers (Individuals): (248,679) The number of registered zakat payers (Companies): (19,990 ) 11
Use of electronic services in DZIT DZIT is currently implementing a plan for improving over the coming years the range and quality of electronic services provided to taxpayers. DZIT has already enhanced online electronic tax return filing services: 77% of return filing done electronically as well as has enhanced online electronic payment services: all payments are done through banks by accessing an electronic payment system available at all banks; the payment system is called SADDAD. DZIT has also increased information provision on DZIT s website and enhanced data capture from third parties. 12
Automating Services DZIT Portal General e-services Zakat/Taxpayer e-services Zakat/Taxpayer Registration Zakat/Taxpayer Returns 13
DZIT Portal DZIT Portal (www.dzit.gov.sa) caters to a wide range of audiences, including, but not limited to: Zakat/Taxpayers Auditors Government Agencies Citizens through multiple services. 14
DZIT Portal Transparency Efficient and on-time services. Reduce Time consuming Processes DZIT Mission, Goals, & objectives definition Key Objectives Improved Collection 15
General e-services Correspondence Tracking System An online service to verify the search for correspondence details General e-services Zakat Certificate An online service to verify the Zakat Certificate Salary Certification An online service to verify the employee salary certification www.dzit.gov.sa 16
Zakat/Taxpayer Returns Zakat/Taxpayer Returns is an interactive service, that enables all Zakat/Taxpayers to submit/view their Returns and be notified of their Zakat/Tax overdue through the following process. Filing Obligation Notification Email SMS Returns Submission Simulation Attachments Returns Follow up Pending Returns Successful Submission Zakat/Tax Amount overdue Invoice Number Zakat/Taxpayer Notification Email SMS www.dzit.gov.sa 17
SADAD Services SADAD services are summarized as an integration between the Invoice number generated from the returns submission and Payment Services using SADAD Services. Zakat/Tax Invoice Number Amount overdue Payment through SADAD Services Using Invoice No. Amount Paid www.dzit.gov.sa 18
DZIT Organizational Structures 19
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Zakat Main Features Zakat is applied at a flat rate of 2.5 percent on the net worth (not net income) of Saudi natural persons, wholly Saudi owned companies, and Saudi partners in joint ventures (except for rain-fed agricultural products and irrigated agricultural products for which the rate is 10 percent and 5 percent respectively). The Zakat base, i.e. the assessable amount is not income or profit of zakat payer. It is much larger: it includes capital, retained earnings, reserves and net profits, but excluding fixed assets, investments in other companies, losses carried over from previous years, and losses for the fiscal year. There is no exemption from Zakat. zakat is payable even for no-profit periods. zakat is payable even if the company ceases activities. Company liquidation only stops Zakat liability. 21
Filing Returns TWO RETURNS ARE USED: Return no. 2 is for zaka tpayers with books and records Zakatpayers must file it and pay accordingly within one month after the end of the financial year. Return no. 5 is for zakat payers with no books and records. Zakat payers must file it and pay accordingly within one month after the end of the year they adopted. 22
Basic Information Form number 2 Return for zakatpayers of individuals and companies with books and records Financial Number Branch: Company Name: Legal Status: Main Activity: Main Activity Description Address: P.O. Box Zip Code Electronic Mail Tel. Fax What is the basis used? Accrual Cash Does the company use the weighted average method for inventory? Yes No Is the cost or fair market value method, whichever is less, is used in valuation of ending inventory? Financial Year From: To: For DZIT use only Code: Document Location No.: If no, specify the used method. If no, specify the used method. Yes No Does the company keep statutory books in Arabic? Yes No Declaration by the taxpayer: I declare that this return and its attachments have been prepared according to books and records kept for the period this return represents, I bear full liability for any information proven to be incorrect. Stamp Name: Signature: Position: 23
Continue Instructions 1. This return is to be used by resident Saudi individuals, 100 percent Saudi companies and those from GCC who are treated as such who keep books and records. 2. This return and its attachments should be filed and payable amount be paid within 120 days of the end the taxpayer s tax year the return represents. 3. Documents proving payments and audited final accounts should be attached with this return. 4. To be complete, this return should have all fields completed, required schedules and attachments attached. 5. The taxpayer is fully responsible for the correctness of the data derived from its legal books and records. 6. Agriculture companies of multiple activities, one being subject to zakat provisions on grains and others subject to zakat provisions on business are required to file separate accounts for the activity(s) subject to zakat provisions on business. 7. This return should be filled out in clear Arabic. No erasure, deletion or alteration to data of the return is allowed. 8. 9. The owner of the entity or an authorized person should approve the return. Additional clarifications should be attached with the return. 24
Schedule no. (1): Income 25
Serial Description Riyal Riyal No. Income 20101 Income from main activity..( attach schedule 1 ), plus 20102 Other Income (attach schedule ) 20103 Ending Inventory 20100 Total Income ( Addition up of 20101 thru 20103 ), minus Expenses 20201 Beginning Inventory 20202 Purchases from abroad 20203 Purchases from inside the Kingdom 20204 Direct Expenses (attach schedule ) 20205 Wages and salaries 20206 Sub-contractors (attach schedule 3 ) 20207 Depreciation ( attach schedule 4) 20208 Consulting and Professional Fees ( attach schedule 6) 20209 Reserves and provisions ( attach schedule 8) 20299 Others ( attach schedule ) 20200 Total expenses (Addition up of 20201 thru 20299 ) 20300 20300 Net book profit (loss) (20100 20200 ), plus or minus Adjustments to net result 20401 Depreciation differences ( to be added back to net fixed assets) 20402 Provisions charged to the period accounts 20499 Others ( attach schedule ) 20400 Total adjustments to net result ( Addition up of 20401 thru 20499 ) 20500 20500 Net result as adjusted ( 20300 + 20400) profit (loss) Additions 20601 Capital, plus 20602 Carried forward profits 20603 Provisions 20604 Reserves 20605 Loans and other finances 20606 Partners credit current account 20699 Others ( attach schedule ) 20600 Gross base ( Addition up of 20601 thru 20699 ) + 20500 20701 Fixed assets and items treated as such (attach schedule ) Deductions 20702 Investments (attach schedule ) 20703 Carried over losses as adjusted 20704 Setting-up expenses and items treated as such ( attach schedule ) 20799 Others (attach schedule ) 20700 Total deductions ( Addition up of 20701 thru 20799) 20800 20800 Net Zakat base ( 20600 20700) 20900 20900 Zakat payable ( 208000 * 2.5%), minus: Payments 21001 Overpayments from previous years, payments on account ( attach schedule ) 21002 Per receipt number, dated / / 21000 Total payments (21001 + 21002) 21100 Payable differences or overpayments ( 20900 21000) 26
Basic Information Presumptive Return for zakatpayers Financial Number Branch: Company Name: Legal Status: Main Activity: Main Activity Description Financial Year From: To: Full Name of the Owner Location Address: Building P.O. Box Tel. Street Zip Code Fax District Electronic Mail City For DZIT use only Code: Document Location No.: Number of Branches: Number of staff and labors: Declaration by the zakatpayer Annual Rent Amount: Total annual amount for wages: I declare that this return includes all income from main activity and other income derived during the period this return represents, I bear full liability for any information proven to be incorrect. Name: Signature: Position: Stamp: Form number 5 Instructions 1. This return is to be used by Saudi resident zakatpayers and by those from GCC who are treated as such with no books and records. 2. This return and its attachments should be filed and payable amount be paid within 120 days of the end the taxpayer s tax year the return represents. 3. Documents proving payments should be attached with this return. 4. To be complete, this return should have all fields completed. 5. The taxpayer is fully responsible for the correctness of the return data. 6. This return should be filled out in clear Arabic. No erasure, deletion or alteration to data of the return is allowed. 7. The owner of the entity or an authorized person should approve the return. Additional clarifications should be attached with the return 27
Continue Serial No. Description Total Profit Rate 50101 Value of Imports from outside and Income purchases from inside( attach schedule ), 50102 Income from contracts (attach schedule 1 ) 50103 Annual receipts ( sales) from main activity 50199 Other income ( attach schedule ) 50100 Total Income ( Addition up of 50101 thru 50199 ), minus 50200 Share in profit (loss) of a partnership ( TIN: ), plus: 50300 Capital 50400 Zakat base (50100 + 50200 + 50300 ) 50500 Zakat payable ( 50400 * 2.5%) 50601 Per receipt number, dated / / Payments 50602 Per receipt number, dated / / 50603 Per receipt number, dated / / 50600 Total payments (addition up of 50601 thru 50603) 50700 Balance payable ( 50500 50600), plus: 50800 Zakat payable on previous years 50900 Total payable ( 50700 + 50800) ---- Agree with the taxpayer s return. For Official Use --- Agree with adjustments made on the taxpayer s return for the following reasons: Profit amount For Official Use Examiner Manager, Examination and Assessment Admin. Audit Admin. 28
Determination of Zakat Base For zakatpayers with books and records, Zakat Base is determined as follows: 29
a. Adjustments to book result: Net profit (loss) per books 00000 Additions to book result: Reserves formed during the year of audit 000 Social Insurance paid abroad 000 Fixed assets depreciation differences 000 Expenses not related to the activity 000 Zakat or tax paid and charged to accounts 000 0000 Net profit as adjusted for zakat purposes 000000 b. The following items are added to net profit (loss) as adjusted for zakat purposes: Paid-up capital 0000 Additions to paid-up capital: Balances of all provisions and reserves that 0000 completed one year, with exception to depreciation provision (not added). Prior years profits carried forward (if any) 0000 Loans used to acquire/finance fixed assets or 0000 investments The owner s/partner s credit current account 0000 Retained profits for distribution (If any) 0000 The year s adjusted net profit 0000 0000 Total items included in zakat base 00000 Deductions: Fixed assets net value 0000 Carried over loss as adjusted by DZIT 0000 The year s loss as adjusted 0000 Pre-setting up expenses balance 0000 Entity s construction in progress 0000 Investments in other entities that were subject 0000 to zakat at these entities Investments in the Kingdom s government bills 0000 0000 (average of 12 months) Zakat base 0000 Payable zakat is 2.5 percent of zakat base 0000 30
Example : Corporate Income Tax and Zakat Calculation Profit/loss-sharing ratio: Non-Saudi shareholder s (partner s) share : 50 % Saudi shareholder s (partner s) share : 50% Corporate Capital : SR 15.000.000 Result of financial year = (SR 20.797.567) Corporate Tax & Zakat Calculation for both Non-Saudi & Saudi Shareholders SR SR Corporate Loss 20.797.567 50% share of profit/loss 10.398.784 Payable tax by non-saudi Partner Nothing Zakat on the Saudi share 50% share of capital 7.500.000 Legal reserves 3.750.000 Retained profits 8.485.211 Total 19.735.211 Less Net fixed assets 1.813.597 Year Loss 10.398.783 12.212.380 Zakat Base 7.522.831 Payable Zakat at 2.5 188.071 31
Presumptive Cases Zakat base of some zakatpayers may be determined under a presumptive method in any of the following: 1. The zakatpayer has no reliable accounts to determine the zakat base. 2. The Department has not accepted the zakatpayer s books due to essential shortfalls in them. 3. The zakatpayer has not filed return and accounts during the legally prescribed dates. Zakat base is determined as follows: 1. Operating Capital The operating capital may be determined using any method possible: DZIT may refer to relevant documents to determine the operating capital, such as the entity s commercial register, the articles of association, or any other documents, or it may resort to any means possible. If it becomes evident that the operating capital is different from the declared/determined capital, DZIT may change it to agree with the volume of activity, number of capital cycles per year based on common practice of each type of activity. 2. Net profits Net profit will be determined to be not less than 15 percent of the zakatpayer s annual gross receipts. Annual gross receipts will be based on documents submitted by the zakatpayer, on the basis of number of annual capital cycles, or based on other indicators or information available at DZIT and derived from different activities. 32
Objections and Appeals by zakatpayers Zakat payers may object according to the following rules: 1. The zakatpayer must submit an objection letter to DZIT showing reasons for objection within 60 days of date of notice of assessment to the zakatpayer by DZIT. 2. DZIT records the objection in a special register and reviews it. It will submit it to the 1 st Instance Committee along with statement of its position. 3. The 1 st Instance Committee will consider cases and issue its resolution based on available documents and after hearing the two parties. 4. Either party, DZIT or the taxpayer, may appeal the 1 st Instance Committee s resolution within 30 days of receipt of resolution. 5. To accept the appeal, the zakatpayer should first pay or submit a bank guarantee based on the 1 st Instance Committee s resolution. 6. The Higher Appeal Committee issues its resolution based on available documents and after hearing the two parties and it becomes final once the Minister of Finance and National Economy signs it. 33
ZAKAT APPLICATIONS IN THE REGION 34
Legal Binding to Pay Zakat to the State and Vice Versa Organizations Collecting Zakat by Force of Law Libya, Saudi Arabia, Pakistan, Malaysia, the Sudan and Yemen Arab Republic Organizations Collecting Zakat voluntarily Iran, Bangladesh, Kuwait, Bahrain, Egypt and Iraq 35
Combining Zakat Collection and Disbursement Under One Organization Organizations Collecting Zakat by Force of Law The Sudan, Pakistan, Yemen and Malaysia unify the collection and disbursement under the same organization In Saudi Arabia, all Zakat receipts are forwarded to the Saudi Monetary Agency and credited to the account of the Social Insurance Department In Libya the Zakat Organization disburses zakat proceeds to the officials of zakat management only. The rest of zakat receipts are disbursed by the General Organization for Social Insurance and the Islamic Dawa Society, in accordance with zakat nisabs. Organizations Collecting Zakat Voluntarily In all these organizations, collection and disbursement of zakat are undertaken by the same organization. 36
Questions & Answers Thank You for Your Time! 37