A tax is a compulsory amount the state levies on persons or businesses under a published law, with no direct return to the payer, to fund public spending. Compulsion and the absence of a direct return are what distinguish it from a fee charged for a service.
1 Classifying taxes
| Classification | Meaning | Examples |
|---|---|---|
| Direct | Levied on income or wealth and borne by the taxpayer themselves | Income tax on profits |
| Indirect | Levied on consumption, borne by the final consumer and collected through the business | Value added tax · excise tax |
| Withheld at source | Deducted by the payer and remitted to the authority on the recipient’s behalf | Withholding tax on payments to non-residents |
Who bears it and who collects it?
In VAT the business is a collector, not a bearer: it collects the tax from the customer and remits it to the authority. The amounts collected are therefore not revenue, but a liability shown in the statement of financial position until they are paid.
2 Tax and zakat
| Zakat | Tax | |
|---|---|---|
| Basis | A religious obligation | A legal obligation |
| Base | A zakat base governed by religious and regulatory rules | A base determined under the tax law |
| Who is generally subject | Saudis and GCC nationals treated as such | Non-Saudis and non-GCC nationals on their share of profits |
| Authority | The Zakat, Tax and Customs Authority handles collection in the Kingdom | |
In mixed companies — owned by both Saudis and non-Saudis — the treatment is split according to ownership shares: zakat on the first group’s share and income tax on the second’s. Zakat is covered in detail in the Zakat Accounting subject.
3 The main taxes applied in the Kingdom
Value added tax
On supplies of goods and services
Withholding
On payments to non-residents
Income tax
On non-Saudis’ share of profits
Excise
On specified goods such as tobacco and energy drinks
Real estate transaction tax
On disposals of property
Each tax has its own law, regulations and deadlines — none is inferred from another
Rates and thresholds change
Do not rely on a rate you memorised years ago. Rates, thresholds, exemptions and filing deadlines are amended by official decisions, and the reference is always the Zakat, Tax and Customs Authority.
4 The role of the tax accountant
- Registration: making sure the business registers once the conditions are met.
- Correct treatment: classifying every transaction for tax when it happens, not at filing time.
- Documentation: keeping invoices, contracts and supporting records for the statutory periods.
- Returns: preparing, filing and paying them on time.
- Legitimate planning: arranging affairs to reduce the burden within the limits of the law.
- Handling audits: preparing what is requested and responding to findings on time.
Planning, not evasion
Tax planning is a legitimate use of the law’s provisions and options. Evasion is concealment, falsification or artifice, and it is a violation carrying penalties. The line between them: do you disclose the full truth, or hide it?
Lesson summary
- A tax is compulsory and gives no direct return, which is what separates it from a fee.
- Taxes are direct and indirect, and some are withheld at source.
- In VAT the business collects rather than bears, and the amounts are a liability, not revenue.
- Zakat is a religious obligation and tax a legal one, and mixed companies split the treatment.
- Legitimate planning is acceptable; evasion is a violation.
5 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. A business has collected VAT from its customers. How is it treated before payment?
The amount does not belong to the business; it was collected for the authority and will be paid over, so it is a liability.
2. A company is 60% owned by a Saudi and 40% by a foreign investor. The closest treatment:
In mixed companies the treatment is split by ownership shares under the rules in force.
3. What is the essential difference between tax planning and evasion?
Using the options the law provides is legitimate; hiding or falsifying facts is a violation.