Business Zakat Accounting & Taxation in Saudi Arabia

Saudi Arabia is one of the few countries in the world to have fully integrated zakat with income tax. It established the Department of Zakat and Income Tax (DZIT) under the Ministry of Finance by the Ministerial Resolution no. 394, dated 7/8/1370 H. (14/06/1951). While its headquarter in Riyadh deals with large zakat and tax payers, the other sixteen field offices reach out to the smaller ones across the country. It has been continuously and intensively working on improving workflows and procedures incorporating state of the art technologies and on simplifying and standardizing procedures and forms. It has completely automated the collection of zakat/ tax and maintains a comprehensive portal at www.dzit.gov.sa to serve as a gateway for registration and provision of various e-services to zakat/tax payers. This has led to better transparency and compliance, efficient and timely services, reduction in processing time and as a result, a steady improvement in collection of zakat. Saudi Arabia’s zakat revenues during 2014 is expected to be around USD4 billion (perhaps the highest in the world; as compared to USD0.69 billion in Malaysia during 2013). Zakat and tax revenues in the kingdom have been increasing at a rate of 20 percent per year through the last five years.

Estimation of Zakat Payable:
According to Saudi law, all business entities must register with DZIT and thus, are subjected to zakat. Broadly speaking, two methods for computing zakat are permitted: (i) financial statements method and (ii) presumptive method. Zakat payers are allowed to donate the due zakat amount to authorized charity bodies, but must provide supporting documents to be considered as an eligible expense. Zakat payable is estimated based on the following general rule:

• Applied on assets that reach a threshold (Nisab)
• Applied on assets that Continuously owned over one lunar year (Hawl)
• Computed on the net worth of natural or legal entities.
• Computed as 2.5 percent of zakat base (capital, retained earnings, certain reserves and net
  profits but excluding fixed assets).

Zakat payable = 2.5% of zakat base; Zakat base = A + B – C; where
A. Net profit as adjusted for zakat purposes =
Net profit (loss) per books plus adjustments [sum of 1-5; where
1. Reserves formed during the year of audit
2. Social insurance paid abroad
3. Fixed assets depreciation difference
4. Expenses not related to the activity
5. Zakat or tax paid and charged to accounts]
B. Paid-up capital plus additions to paid-up capital [sum of 1-5; where
1. Balances of all provisions and reserves that completed one year, with exception to depreciation
provision
2. Prior year’s profits carried forward (if any)
3. Loans used to acquire or finance fixed assets or investments
4. The owner’s/ partner’s credit current account
5. Retained profits for distribution (if any)]
C. Deductions [sum of 1-7;]
1. Fixed assets net value
2. Carried over loss as adjusted by DZIT
3. The year’s loss as adjusted
4. Pre-setting up expenses balance
5. Entity’s construction in progress
6. Investments in other entities that were subject to zakat at these entities
7. Investments in the Kingdom’s government bills (average of 12 months)

All Collected zakat are routed to the Deputyship of Social Security that provides social security to beneficiaries in the form of pensions (men, widows, divorced women, orphans) and subsidies (temporary handicapped, prisoners’ families, families whose supporters are absent or deserted them) and many social security programs for beneficiaries such as, providing public housing, furnishing houses for poor people and rehabilitation to some of the beneficiaries.

Accounting Standards for Zakat

Saudi Arabia is also the first country to have formulated an Accounting Standard for Zakat (AS- 013), issued by the Saudi Organization of Certified Public Accountants (SOCPA) in 1999. This is in contrast to the TR i-1 released by the Malaysian Accounting Standards Board much later in 2006. Further the latter is called a Technical Release rather than an Accounting Standard. The Standard provides guidance on the recognition, measurement and presentation and disclosure of zakat by entities that pay zakat. Some salient components of As-013 are as follows:

Scope of the Standard:
This standard specifies requirements for measuring and displaying zakat and disclosure in the financial statements for-profit enterprises, regardless of size or shape. It does not include the standard method of calculating and determination of zakat, which is done in the light of provisions and rules of zakat and regulations governing them.
Objective of the Standard:
To determine the requirements of measurement, presentation and disclosure of dedicated zakat in the financial statements so that they report the financial position of the entity and the results of their operations in a fair manner.
Measurement:
Zakat provision must be measured consistently for each financial period separately and in accordance with the provisions and rules of zakat in the Kingdom.
Zakat should be displayed as a separate item in the income statement after items “gains or losses” and before “exceptional net income”.
Disclosure:
The financial statements must disclose at least the following:
1. accounting policy used in the treatment of zakat.
2. summary of the elements and the amounts of zakat for the current period and the previous period
3. balance of zakat in the first period, additions and exclusions that has occurred during the last period and the balance of the period.
4. the amount of the final assessment is adopted for each period and the amounts of the differences between the same and the zakat provision for that period, and a summary of their nature.
5. years, which involved dispute regarding zakat, the reasons for it and the amount in dispute.

References:
1. Saleh Al Awaji, The Department of Zakat and Income Tax’s Role in Curbing Poverty and Encouraging Investments in Light of Sharia and Social Responsibility: Saudi Arabia as a Case Study, Presentation at Seminar on Taxation and Islamic Finance jointly organized by IRTI and OECD held at IDB Headquarters, Jeddah, Saudi Arabia on December 11, 2013
2. Accounting Standard for Zakat, accessed on October 01, 2014 from http://www.socpa.org.sa/Home/Accounting-Standards/AS-013

Mohammed Obaidullah | October 02, 2014