Final e-Invoicing Regulations in Saudi Arabia (Phase 2)

The e-invoicing system in the Kingdom of Saudi Arabia is designed to phase out paper invoices. Introduced by the Zakat, Tax, and Customs Authority (ZATCA), the initiative will help businesses and customers interact more seamlessly and securely.

The first phase of this rule took effect on December 4, 2021, with electronic invoicing becoming mandatory. Those who refuse to honor this new policy shall be subject to penalties from the ZATCA.

Phase 2 of the policy, referred to as the integration phase shall take effect on the 1st day of January 2023. As the country prepares for this phase, it’s crucial for all businesses and customers alike to understand the tax invoice system in Saudi Arabia, and how it may affect you.

The article will also answer the common questions people have concerning these regulations.

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Is e-invoicing mandatory in Saudi Arabia?

Following the regulation's publication, electronic invoicing became mandatory in Saudi Arabia on December 4, 2021. Essentially, all taxable Saudi Arabian persons, including third parties issuing tax invoices in proxy, must undergo this new e-invoicing process.

The new regulations published by the ZATCA include all technical and procedural rules guiding the e-invoicing implementation.

These new rules were created to help address digital transformation challenges and ensure data compliance across all levels.

Consequently, taxable businesses that refuse to comply with the electronic transactions law will face penalties accordingly. The introduction of the regulation has created certain implications for resident businesses.

It becomes necessary for resident businesses with VAT registration in the kingdom to implement Phase 2 of electronic invoicing once they have taxable supplies exceeding SAR3 billion for the 2021 calendar year.

The VAT legislation already spells out the penalties for non-compliant businesses.

Additionally, ZATCA shall be sending notifications concerning the implementation of Phase 2 to all taxable businesses. Accordingly, these businesses must revise their operations and information technology dynamics.

Why was e-invoicing introduced in KSA?

Electronic invoices are generated directly through the system to ensure a simplified tax process. KSA introduced this regulation for various reasons. Prime among these reasons is to ensure complete compliance from resident businesses.

Also known as Fatoorah, the electronic invoicing mechanism was introduced to:

Help ensure improved tax compliance

This works easily because of the digitized process. The invoices are generated electronically, making it difficult to sidestep tax obligations.

Achieve high accuracy and seamless transactions with customers

Authorities can conveniently avoid mistakes and inconsistencies using this new option compared to the previous paper option.

Ultimately, this new system will ensure seamless integration between the ZATCA system and your business data.

Increase transactional efficiency

The new invoicing system improves transactional efficiency for the government and businesses.

Due to data standardization and speedy processes, transactions can be completed within a shorter period. All of this combines with other benefits, such as quick payments and cost-effectiveness.

The new regulation also helps solve the problem of fake invoices or related offenses. The data synchronization and electronic angle of the process make it possible to detect these fake invoices and mitigate the effects of the shadow economy.

Consequently, this safeguards the economy and reduces adverse malpractices that could affect the country’s integrity.

Reduce paper wastage

The e-invoicing system will significantly reduce paper wastage, making it a more eco-friendly option. This is a notable improvement for KSA in an environment-conscious world.

Who governs e-invoicing in Saudi Arabia?

The Zakat, Tax and Customs Authority (ZATCA) governs e-invoicing in Saudi Arabia. This body released the e-invoicing policy and its adoption guidelines and timelines. Whether you’re issuing or storing these e-invoices, ZATCA is the body that governs all these processes.

The invoicing system is designed to enable safe and simplified tax invoices. After issuing tax invoices, they remain timestamped and can no longer be edited.

Suppose a buyer returns a good, and you need to reflect that accordingly; you’ll need to issue a credit note through the invoicing system. The credit note will be issued with reference to the original invoice.

Nevertheless, whether you’re issuing electronic invoices, credit notes, or debit notes, they must all comply with ZATCA’s regulations. This is crucial to ensure standardization of the process while safeguarding information too.

Although the new invoice system covers most business activities, some exceptions exist. You must issue electronic invoices for sales in the country, advance payments, and exports from KSA to other countries.

However, you won’t require an electronic invoice for the following:

Imports into KSA,
VAT-exempt supplies,
Supplies that could undergo reverse charge mechanism.

Understanding how e-invoices work will help you sort your business activities more quickly. By knowing the sales that require e-invoicing or otherwise, you can execute faster without unnecessary delay.

This makes it important to integrate a suitable API to simplify your complex invoicing needs.

Implementation of e-invoicing in Saudi Arabia

The new e-invoicing regulations apply to all taxable goods and services subject to VAT in KSA, irrespective of the rate. If the provisions apply to your business, you must issue and store tax invoices accordingly.

When issuing an electronic invoice in KSA, Arabic is the primary and mandatory language. You can choose to add another language, but Arabic is compulsory.

The invoicing mechanism is also compulsory for all transactions, including B2B, B2C, and B2G.

The implementation process involves two phases. Phase 1 guides the issuance and storage of electronic invoices. At this phase, you have to issue invoices using a system connected to the internet and in line with ZATCA regulations.

Examples of usable invoicing systems include e-invoicing software, an online cash register, or a cloud-based solution.

While issuing an invoice, you must fill out all mandatory boxes and include all relevant details, such as the issuer’s name, time, and VAT number.

Phase 2 regulations for e-invoicing in KSA

ZATCA will activate the second phase of the e-invoicing solution in 2023. This phase requires that affected taxpayers file the generated e-invoices with ZATCA for confirmation and validation.

Phase 2 involves integrating with the ZATCA system, so the authorities can verify transactions to assess tax obligations.

This phase will be rolled out in stages, starting January 1, 2023. Targeted groups shall receive notifications months before the policy begins to affect their businesses. At this phase, businesses will have to issue invoices in dedicated formats, including PDF/A-3, XML, etc.

Phase 2 will also attract more technical steps and requirements. Therefore, it’s crucial that you devise ZATCA-compliant standards to ensure you sync with the system seamlessly. Your system must be designed to operate with external systems effortlessly.

Key amendments to the updated e-invoicing legislation

The updated e-invoicing legislation reflects some of the key changes made. These amendments include:

Amendments concerning the verification of the XML invoices
Amendments concerning data fields - which are mandatory, optional, or conditional
Value Added Tax Identification Number (VAT ID) is no longer categorized into Group or Individual VAT number
Taxpayer’s EGS verification process has now been revised to include a secret value component
Fields are now included for Contract Identification Numbers and Purchase Order

Following the release of Phase 2’s regulations, notifications of target taxpayers shall start on January 1, 2023. This will inform the businesses about the expected date to go live with the new amendments.

ZATCA will send more notifications to the relevant tax groups as the year progresses. A business’ turnover is crucial in determining whether they receive the notification.

Takeaway: Go live with KSA’s Phase 2 using a global invoicing solution

To make your business seamless in this e-invoicing era, you must refine your system to accommodate the e-invoicing regulations in Saudi Arabia. Integrating solutions that help you easily comply with the latest e-invoicing policy will ensure your business remains secure.

Staying updated with regulations and remaining tax compliant is a great way to avoid regulatory issues concerning e-invoices. Use simplified tax invoice functionalities to fulfill your invoicing and tax obligations.

At Storecove, we can help you get your business ready for e-invoicing compliance. You only need to provide your data and get one API connection to fulfill all your invoicing needs. Schedule a memo to get started!

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