Zakat computed from the balance sheet, filed on time, defended at assessment.

Zakat applies to Saudi and GCC nationals and to entities to the extent of their Saudi and GCC ownership. Income tax applies to non-Saudi and non-GCC shareholders' share of taxable income, to non-resident entities with a permanent establishment and to certain other categories. A company with both Saudi and foreign shareholders is a mixed company that computes zakat on the Saudi and GCC share of the base and income tax on the foreign share of the taxable profit. The apportionment follows the ownership percentages during the year and must be supported by the shareholder register.

The base is computed from the sources of funds subject to zakat less the uses of funds that are not. Additions typically include opening equity (capital, reserves and retained earnings), long-term liabilities and provisions that have financed zakatable assets, and the adjusted net profit for the year. Deductions typically include the net book value of property, plant and equipment, long-term investments, intangible assets and certain other non-current items to the extent the regulations permit. If the base computed this way is lower than the adjusted net profit, the adjusted net profit is used. The computation is prepared on a worksheet that references each figure to the audited financial statements.

The rate is 2.5 percent of the base for a Hijri year of 354 days. Most companies report on a Gregorian year of 365 days, and the rate is prorated accordingly, giving approximately 2.578 percent. For a short or long first period the rate is prorated for the number of days. Applying a flat 2.5 percent to a Gregorian-year base understates the charge and is a frequent cause of assessment differences.

Adjusted net profit is the accounting profit adjusted for items the regulations do not accept as deductions, including provisions and accruals not yet incurred, expenses without adequate documentation, depreciation in excess of prescribed rates, and certain related-party charges, and for items that are excluded from zakatable income. It is both a component of the base and the floor below which the base cannot fall. The reconciliation from accounting profit to adjusted net profit is the schedule ZATCA reviews most closely.

Following SOCPA's 2019 guidance, zakat is recognised as an expense in profit or loss rather than as a charge to equity, with the amount payable presented as a current liability. The financial statements disclose the computation of the charge, the movement in the provision, the status of assessments and amounts under objection or appeal. Differences between the provision and the final assessment are recognised when the assessment is finalised. In interim reporting the charge is estimated on the basis of the expected annual base.

The return is due, together with payment, within 120 days of the end of the financial year. Companies above the audit threshold attach audited financial statements. Late filing and late payment attract penalties, and ZATCA may raise an estimated assessment where no return is filed. Practically, a late return also delays the zakat certificate, which government entities and many large customers require before releasing payments, and which is needed for certain licence renewals. We plan the zakat computation into the audit timetable so the return is filed on time.

Assessments can be objected to within the statutory period from notification, and the objection must set out the grounds with supporting evidence. If the objection is not resolved, the dispute can be escalated to the tax committees, which operate as first-instance and appellate bodies. Success depends on the quality of the evidence file assembled when the return was prepared: the worksheet, the reconciliations, the fixed asset and investment schedules and the financing agreements. We prepare objections and support you through the process, working with legal counsel where litigation is involved.

We advise on the accounting and reporting positions available under the zakat regulations, for example the eligibility of long-term investments and financing for deduction, and on the effect of group structures on the base, with the analysis to support the position taken. We do not design arrangements whose purpose is to avoid zakat. Where a licensed tax practitioner or legal counsel is required, we work alongside your appointed advisors.