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HMRC internal manual

Double Taxation Relief Manual

Saudi Arabia: Unilateral relief for years 2009/10 and earlier

The position prior to the new convention coming into force is shown below.

Admissible for unilateral relief

Income Tax.

Note that, in some cases, Saudi Arabian tax may be calculated not by reference to accounts but on a `deemed profits basis’ taken as

a percentage of the gross receipts. Claims to tax credit relief in respect of Saudi tax imposed on the deemed profits basis should be considered critically.

Under Saudi Law no profit is considered to arise in Saudi Arabia where a non-resident simply exports to the Kingdom either FOB (free on board - that is where a contract of sale provides that the seller makes delivery as soon as goods are placed on board ship) or CIF (cost insurance freight - that is where the seller’s responsibilities include arranging shipment and insuring the goods for the benefit of the buyer) to a Saudi port. However, if the contract provides for delivery and/or installation of materials within the Kingdom of Saudi Arabia, the supplier may be regarded as carrying on business within Saudi Arabia and the contract may be subject to Saudi taxation on the deemed profits basis.

If goods are identified in the supply contract separately from the cost of work performed in the Kingdom then taxes will be assessed on the work performed in the Kingdom on a deemed profit basis of 15 per cent of the total value of that work. If there is no division in the contract between cost of goods and other activities in the Kingdom, work performed in the Kingdom will be given an estimated value equal to 10 per cent of the total contract value and a deemed profit of 15 per cent of that estimated value will be subject to tax in Saudi Arabia.

Clearly both of these approaches (and particularly the latter) give rise to the possibility of extraterritorial taxation, that is taxation in Saudi Arabia of income which by reference to UK principles would be regarded as having its source in the United Kingdom or in a third country. Consequently in cases where significant amounts of tax are paid in Saudi Arabia it is important to ascertain what work was actually performed in Saudi Arabia and what profit, by reference to UK tax principles, was derived from that work. only that part of the income from a contract which is derived from the performance of services in Saudi Arabia will be regarded as arising from trading in Saudi Arabia, as opposed to trading with Saudi Arabia. The distinction is demonstrated for tax credit relief purposes in the case of Yates v GCA International Ltd and this case also shows the extent to which tax credit relief should be restricted where taxation is imposed extraterritorially on a gross basis even where the tax as such is in principle admissible for the purposes of unilateral relief.

Where a United Kingdom enterprise carries on a trade or business activity in Saudi Arabia, its accounts may show payments to non-Saudi Arabian residents. The Saudi Arabian taxation authorities may take the view that these payments represent income which should be taxed in Saudi Arabia and the paying enterprise will be charged to tax on such payments. The income is not income of the paying enterprise but of the recipient, so that tax credit relief for such tax is not due to the paying enterprise. If the income has its source in the United Kingdom under United Kingdom domestic law (see INTM161110 onwards), then a United Kingdom-resident recipient will not be entitled to any credit for it. If it has a Saudi Arabian source, then credit will be due to the recipient, subject to the first sub-paragraph above.

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Inadmissible for unilateral relief

Severance fee (payable under Article 50 of the Mining Investment Law of 4 October 2004)