KSA Newsalert: Strict enforcement of Qawaem Tax Insights from KSA Tax Services

Tax Insights
from KSA Tax Services
KSA Newsalert: Strict enforcement
of Qawaem
October 2015
In brief
The Qawaem program is a tool provided by the Ministry of Commerce and Industry (“MCI”) of Saudi
Arabia to assist enterprises and audit firms to electronically submit financial statements to the MCI.
Historically the MCI has not strictly enforced compliance with use of Qawaem. This position appears
to have now changed with the MCI on 11 October 2015 issuing a statement in the media that
companies failing to comply with the Qawaem program will face severe consequences which includes
cancellation of registration, up to one year imprisonment and fines of up to SAR 20,000.
In detail
company and branch of a foreign
entity.
What is the Qawaem
program?
The Qawaem contains three
major segments that include all
sectors in which the
presentation and disclosure
requirements may vary in
accordance with the related
accounting standards. These
segments are insurance sector,
banking sector, and ‘other
sector’ (that includes all the rest
of the sectors).
Consequence of noncompliance
Under Article 230 of the
Company law, the penalty for
non-submission of required
documents is in the range of
SAR 1,000 to 5,000. In case of
repetition of an offense, the
prescribed penalty shall be
doubled.
When was it introduced?
Under Article 175 of the
Company law, every company is
required to submit its financial
statement along with the
Director’s and Auditor’s report
within six months from the close
of its financial year. As an egovernance ambition of KSA,
MCI launched Electronic
Platform "Qawaem" on 1 Jan
2015 (Thursday, 10/03/1435
AH).
Which type of entities
are effected?
At present, the Qawaem
program is applicable to all the
entities in KSA which operate as
a joint stock company (listed or
unlisted), limited liability
Having said the above, we
believe that the law has not been
strictly enforced on the
companies by MCI.
What has changed
On 11 Oct 2015, the MCI has
issued a strict warning to
companies which are not
compliant with the Qawaem
program. The MCI have stated
they propose to undertake the
following measures to enforce
full compliance of the initiative:

Companies which fail to
submit the financial
statement documents by
end of October 2015 (i.e.
financial statement for the
year ending 2014, shall face
severe consequence which
include cancellation of their
registration; and

The penalty may include
maximum one year
imprisonment and a fine not
exceeding SAR 20,000.
There shall be no
negotiation with any
defaulters on such penalties
Does this program
impact tax filings?
The Qawaem program was an
initiative implemented in
cooperation with the Saudi
Organization for Certified
Public Accountants (“SOCPA”)
and the Department of Zakat
and Income tax (“DZIT”) to
convert financial statement
documents to electronic soft
copy and to be submitted
online.
The accounting headings
mentioned in the DZIT tax
forms do not completely
synchronise with the
accounting headings provided
in the financial statements.
However, we believe that there
has been some ongoing
initiative to identify accounting
headings which can be directly
linked to electronic form of
financial statements.
Currently, 100% foreign owned
companies (incl. foreign
www.pwc.com/me
branches) are not required to
file audited financial accounts
along with the tax return.
However, the DZIT usually
requires the company to
submit audited financial
statements during the tax audit
process. Some companies file
tax returns based on draft
financial statements which
may undergo change post the
audit. Such amendments in the
financial statements require
companies to file a revised tax
return (or at least a
rectification letter) for the year
in which the amendment has
been made. However,
experience shows that often
companies either do not revise
their return or amend the
subsequent tax return to reflect
the prior year change.
Therefore, in light of MCI’s
initiative, tax paying entities
should consider the following:


Even though the filing
requirement under
Qawaem program is before
the end of six months from
the close the financial year,
as against the tax filing
deadline which is 120 days
(i.e. approx. 4 months)
from the close of the
financial year, the
companies should at least
aim to finalise the
numbers in the financial
statements by tax filing
deadline,
As far as possible, the
accounting headings in
DZIT tax forms should
map with the accounting
headings in the financial
statements for consistency.
At present (i.e. from 2014
onwards) companies which are
100% GCC owned (i.e. zakat
payers) are required to file
zakat returns online. We
understand that DZIT is in the
process of preparing a
platform for e-filing for 100%
tax payer companies and
“mixed” entities (i.e. which pay
zakat as well as tax).
PwC
We believe that the
involvement of DZIT in MCI’s
initiative clearly indicates that
going forward, DZIT may
compare the electronic tax
filing with the data points
provided by Qawaem. This
should highlight the
differences between the
accounts and tax return which
the DZIT may primarily
review.
Aims of the program
One of the aims of the Qawaem
program is to ensure
credibility and transparency of
the financial statements to the
beneficiaries. It will also form
an economic data base,
supporting the National
Database and Information. The
program will also link the
financial statements of
companies and institutions
with International Standard
Industrial Classifications,
adopted by the United Nations,
which will enable a financial
analysis of economic sectors
and activities of various
sectors.
Other foreseeable
implication of the
program from tax
perspective
Saudi tax law contains certain
provisions in respect of
measures against the tax
avoidance. In case of related
party transactions, DZIT is
empowered to allocate income
or expenses as necessary to
reflect the income that would
have resulted from a
transaction between
independent parties. Currently
there are no specific transfer
pricing (“TP”) regulations
governing transactions with
related parties. However, in
accordance with the
Ministerial (of Finance)
Resolution # 1776 of 19 March
2014, DZIT has been task
forced to develop guidelines on
the application of TP rules
already contained in the law.
Under one of the TP methods,
the arm’s length nature of the
transaction can be determined
by comparing the operating
margin of comparable
uncontrolled companies
engaged in similar business
activities/ sector.
We believe that access to
electronic database of financial
statements which may be
filtered as per the requirement,
may assist DZIT to compare
the margins earned by various
companies vis-à-vis the tax
payer’s margin earned from
related party transaction.
It will be important to
understand what granular level
of information the program
will provide to MCI and DZIT.
The takeaway
Companies which are required
to comply with the program
should expedite the process
and endeavour to meet the
deadline of end Oct 2015. To
reiterate, the penalties are now
very harsh including
cancellation of registration and
imprisonment.
Going forward, companies
should consider finalising their
financial statements at the
same time as finalising the tax
/zakat form. And in doing so
map the accounting headings
with the DZIT tax/ zakat
return form for consistency.
Companies engaged in related
party transactions should
remain alert for anticipated TP
regulations and how this
electronic database may be
potentially used by DZIT in TP
audits.
Page 2
Tax Insights
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Jeddah
Riyadh
Khobar
Mohammed Yaghmour,
Soudki Zawaydeh,
Ebrahim B Karolia,
[email protected]
[email protected]
[email protected]
Mohammed Hussein Amawi,
Mohammed Al-Obaidi,
[email protected]
[email protected]
Mugahid Hussein,
[email protected]
Yaseen AbuAlkheer,
Abdulkhamid Muminov,
[email protected]
[email protected]
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