An accounts taxpayer's Zakat base in Saudi Arabia is computed by adding the addition elements set out in the Zakat Collection Executive Regulations, then deducting the deduction elements specified in the same Regulations, based on the values shown in the taxpayer's statement of financial position at the end of the Zakat year.
The General Rule for Computing the Base
An accounts taxpayer computes the Zakat base by adding the addition elements, less the deduction elements, in accordance with the Zakat Collection Executive Regulations, relying on the values shown in the statement of financial position at the end of the Zakat year, not on the financial statements generally.
Addition Elements to the Zakat Base
The addition elements to an accounts taxpayer's Zakat base include, among others:
- Equity and its equivalents.
- Non-current liabilities and provisions treated as such, to the extent of the non-deducted assets.
- The difference between the adjusted net profit or loss and the book net profit or loss after Zakat and tax, whether the result is positive or negative.
Deduction Elements from the Zakat Base
Conversely, an accounts taxpayer deducts several elements from the Zakat base, most notably:
- Investment in an establishment inside the Kingdom.
- Investment in an establishment outside the Kingdom.
- Net fixed assets and their equivalents.
- Intangible assets, investment in investment funds, and other elements specified in the Regulations.
Zakat collection rules therefore tend to treat the Zakat base as closer to the activity's financing sources, that is, equity and long-term liabilities, after excluding what has been invested in fixed assets or deductible investments, rather than net profit alone.
The Basis of Financial Reporting and the Maximum Zakat Base
For Zakat collection purposes, the accounting standards approved by the Saudi Organization for Chartered and Professional Accountants apply to the terms, accounting treatments, and financial reports submitted to the Authority, unless the Regulations or other relevant laws provide otherwise. The Regulations also set a maximum for the Zakat base: it does not exceed equity and its equivalents, as shown in the statement of financial position at the end of the Zakat year, plus the difference between the adjusted net profit or loss and the book net profit or loss.
Transactions with Related Parties
When computing the Zakat base, the same transfer pricing instructions applied for income tax purposes apply to transactions between the taxpayer and parties related to it, ensuring that the pricing of such transactions is reflected in the Zakat base as it would be had the transaction taken place between independent parties.
Why Accuracy in Computing the Zakat Base Matters
The precise classification of items in the statement of financial position between addition and deduction elements directly affects the amount of Zakat due; classifying a liability as current or non-current, or treating an asset as a deductible fixed asset rather than a current asset, can materially change the Zakat base. Businesses therefore generally take care to review the classification of their financial statements in line with the approved accounting standards before preparing the Zakat return.
Legal References
- Zakat Collection Executive Regulations 1445H (Ministerial Resolution No. 1007 dated 19/8/1445H) with Published Amendments, Article Twenty-One, Article Twenty-Three, Article Twenty-Six, Article Nine, Article Twenty-Eight, and Article Twenty-Two.
For questions about your specific situation, you can ask the Saudi Arabia Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.