Allowed Deductions

Question 1: Should a bad debt meet all conditions as specified in Article 9(3) of the Implementing Regulations to be an allowed deduction?

Answer: Yes. To allow a bad debt as a deduction, it should meet all conditions as specified in Article 9 (3) of the Implementing Regulations.

Question 2: Is research and development expense, with no mark up, incurred abroad by a head-office or a non-Saudi partner and allocated  to its branches worldwide including the branch in the Kingdom an allowed expense?

Answer: Under Article 9 (9) of the Implementing Regulations, research and development expense incurred in the Kingdom only is an allowed expense.

Question 3: What is the depreciation method under the new Income Tax law? Is it the accelerated method or straight-line method? Is it still allowed for excessive use of assets to have an additional 50% of depreciation amount?

Answer: Article 17 of Income Tax law stipulates the depreciation method to be the accelerated method. The said Article explains in detail how to compute the annual depreciation allowance, including additions to or reductions from the group assets. The Income Tax Law has no provisions for additional depreciation allowance for excessive use of assets ( run assets more than one shift). Unlike the old Income Tax Law, the new method deals with assets as groups and not individual items. In addition, the accelerated method for depreciation takes into account excessive use of assets ( run assets more than one shift).

Question 4: Can a taxpayer claim a depreciation difference if depreciation expense per accounts is less than depreciation amount as per the new Income Tax Law?

Answer: If the taxpayer's depreciation expense per accounts is less than amount allowed under the Income Tax Law, the taxpayer may file its tax-return in accordance with depreciation rates as stipulated in the new Income Tax Law.

Question 5: What is the depreciation method applied for assets under Build, Operate and Transfer (BOT) contracts?

Answer: Article 17 (l) of Income Tax Law stipulates that assets under Build, Operate and Transfer (BOT) or Build, Own, Operate and Transfer (BOOT) contracts may be depreciated over the contract period or over the remaining period of the contract if acquired or renewed during that period.  The straight-line method is applied on such contracts.

Question 6: As the new Income Tax Law has adopted the accelerated method for depreciation and rates different from the rates under the old Income Tax Law, how will DZIT deal with remaining balances of asset items and with depreciation differences disallowed in previous years?

Answer: Article 81(a), on transitional provisions, of Income Tax Law stipulates that in case of purchasing an asset in a taxable year prior to the effectiveness date of the Income Tax Law, the value to be added to the appropriate group shall be the cost of the asset minus any depreciation deduction previously granted to the taxpayer.

Question 7: Please explain Article 18 of Income Tax Law on maintenance and improvement expense.

Answer: Article 18 of  Income Tax Law allows all expenses incurred for the repair and improvement of the asset groups  provided that this expense amount does not exceed 4 percent of the balance of the value of the group (  after deduction of deprecation expense).  The amount exceeding the 4-percent limit shall be added to the balance of the value of the group to be depreciated in the up-coming years. 

Question 8: Is the repair and improvement expense in excess of the 4 percent of the group value to be added to the group remaining balance and depreciated in the current year?

Answer: The repair and improvement expense in excess of the 4 percent of the group value is to be added to the group balance at the end of the current year and to be depreciated the next year.

Question 9: Is hosting expenses an allowed deduction?

Answer: Like entertainment expenses, hosting expenses are not an allowed deduction.

Question 10: Are income taxes, sales taxes, value-added taxes and other taxes paid abroad by a Saudi joint company on activities exercised abroad allowed deductions for zakat and tax purposes in the Kingdom?

Answer: Except for income taxes  (Article 10 (5) of the Implementing Regulations), taxes paid abroad by a Saudi joint company such as sales tax, value-added tax and others as a result of exercising activities abroad are allowed deductions.

Question 11: May a taxpayer deduct a loan interest if it has no taxable income nor any interest income (loan proceeds) during the year?

Answer: Under Article 9 (2) of the Implementing Regulations, a taxpayer who has incurred a loan interest but has no taxable income nor income from loan proceeds during a year may not deduct the loan interest incurred during the year, so losses resulted from the loan interest shall not be carried forward.

Question 12: Is “the carried forward losses” referred to in Article 11 (3) of the Implementing Regulations the losses as per return or as per DZIT’s final assessment?

Answer: Under Article 11(3) of the Implementing Regulations, a taxpayer may carry forward losses as adjusted by DZIT, or as reported in the taxpayer’s return if DZIT has accepted such return.