Zakat is a levy on the zakat base, not on profit, and the base is built from the balance sheet. The most common errors come from treating it as a tax on earnings.
Key takeaways
- The zakat base for a Saudi or GCC-owned entity is built from equity and long-term funding less non-zakatable assets, with adjusted net profit as a floor.
- The rate is 2.5 percent for a Hijri year and is prorated for a Gregorian year of 365 days.
- Provision accounting, filing within 120 days and the certificate needed for payments and contracts all depend on the computation being done properly.
Zakat applies to Saudi and GCC nationals' shareholdings in entities resident in the Kingdom, while corporate income tax applies to non-Saudi shareholdings. Mixed companies apportion between the two. Because zakat is levied on a base derived from the balance sheet rather than on profit, finance teams that approach it as a tax computation make predictable errors. This article sets out the mechanics as they apply to a typical Saudi company and the points where care is needed. It does not replace the advice of a licensed zakat practitioner; ZATCA's regulations and their interpretation change, and each entity's facts differ.
The zakat base
The base is computed from sources of funds that are subject to zakat, less uses of funds that are not. Broadly, the additions are opening equity, including share capital, reserves and retained earnings, plus long-term liabilities and provisions that financed zakatable assets, plus adjusted net profit for the year. The deductions are the net book value of non-current assets that are not held for trading, such as property, plant and equipment, long-term investments and intangible assets, together with certain other items the regulations allow. The result is the zakat base. Where the base computed on this method is lower than the adjusted net profit for the year, the adjusted net profit is used, so the adjusted net profit acts as a floor.
Adjusted net profit is the accounting profit adjusted for items that ZATCA does not accept as deductions, such as provisions not yet incurred, certain expenses without adequate support, and depreciation in excess of the prescribed rates, and for items it does not consider zakatable income.
The rate
The rate is 2.5 percent of the base for a Hijri (lunar) year of 354 days. For an entity reporting on a Gregorian year of 365 days the rate is prorated, giving approximately 2.578 percent. Financial statements that apply 2.5 percent to a Gregorian-year base understate the charge.
Accounting and disclosure
Since SOCPA's 2019 guidance, zakat is recognised as an expense in profit or loss rather than a charge to equity, with the amount payable presented as a current liability. The financial statements should disclose the computation of the charge, the movement in the provision, the status of assessments and any amounts under objection or appeal. Differences between the provision and the final assessment are recognised when the assessment is finalised.
Filing and certificates
The zakat return is due within 120 days of the end of the financial year, together with payment. Entities with revenue above the audit threshold must file audited financial statements. On filing and payment, ZATCA issues a zakat certificate, which is required to receive payments from government entities, to release final payments under many contracts and to renew certain registrations. A late or incomplete return therefore has commercial consequences beyond penalties.
Where finance teams go wrong
- Applying 2.5 percent to a Gregorian-year base.
- Deducting the full carrying amount of investments or fixed assets without checking eligibility, or failing to deduct assets that are eligible.
- Treating long-term loans used to fund fixed assets inconsistently between additions and deductions.
- Booking a provision for zakat that bears no relation to the base computation because it was estimated as a percentage of profit.
- Missing the 120-day deadline because the audit was late, and then losing the certificate needed to collect receivables.
The remedy in every case is the same: compute the base from the audited balance sheet using a documented worksheet, reconcile it to the return, and keep the evidence for the assessment.