E-Invoicing KSA (Phase I)

Tax & Legal

March 15, 2022

In brief

The Kingdom has mandated new rules for business accounting to improve traceability and digitization of all transactions. The newly introduced rules mandate businesses to use electronic solutions to issue sales invoices following a particular specification and maintain a digital record of all transactions. As part of the specification each invoice must include a unique QR code with encrypted information about the transaction.

The program is being rolled out by ZATCA in two phases, Phase 1-Generation has already been initiated since December 2021 and Phase 2-Integration is scheduled for January 2023. If you are a business operating in the Kingdom and were unaware of these changes you must do the following.

  1. Adopt an E-invoicing cloud solution. Crebit is currently working to build a compliant innovative solution for invoicing.
  2. Adopt a Makeshift solution by including a manually generated QR code in your invoice. See our QR toolkit that allows you to generate a compliant QR Code for use link

In detail

Who is it for?

The requirements of e-invoicing have been mandated for Taxable persons. These include:

  1. Supplies of goods and services subject to the standard VAT rate or zero rate
  2. Export of goods from KSA
  3. Intra-GCC supplies following Agreements, VAT law, and implementing regulations
  4. Nominal supplies by the taxpayer in accordance with the agreement, VAT law, and its implementing regulation
  5. Any payments related to the supply of goods or services received by the taxpayer before actual supply.

See the detailed list in section 3.3 of guidelines issued by ZATCA. The document can be accessed through the link below:

https://zatca.gov.sa/en/E-Invoicing/Introduction/Guidelines/Documents/E-Invoicing_Detailed__Guideline.pdf

Why E-invoicing is needed?

Simply put, it’s the law and adoption is mandatory. However, electronic invoicing hosts a series of benefits for the national economy and the subject company or person. The below benefits were outlined by the Zakat, Tax and Customs Authority but are not limited to:

  1. Enhancing the overall business ecosystem with more transparency for fair competition and protection through a unified and robust invoice auditing process
  2. Reducing hidden transactions, which is a security threat and a tool for corruption.
  3. Reduction of commercial concealment
  4. Enhancement of consumer experience and digitizing the B2C relation.
  5. Increase in compliance with tax obligations through an enhanced verification process.

Furthermore, the introduction of an E-invoicing system leads to a reduction of paper wastage and archiving costs for companies who spend significant amounts on them. By mandating the digitizing requirements, businesses that had previously been missing out on the benefits of digitalization will begin to experience the new simpler ways of working. A common benefit that companies realize lies in the application of structured data, such as data analytics, which allows businesses to understand their expenses and reveal costs reduction opportunities and also improve their operations.

The benefits of digitalization are a great many and are better suited to be discussed in a separate article.

How to Comply?

Adopting E-invoicing is a much simpler process than what may be perceived and the transition to it firsts starts by identifying the existing accounting mechanism. Since a different approach may be relevant depending on the current situation. It may be fair to split current accounting approaches into three branches.

  1. Paper-based invoicing
    • Standard handwritten vouchers
    • Excel, Word-based manual printing solution
  2. Static Electronic system invoicing.
    • POS machine
    • Off the shelf ERP solution
    • Inhouse ERP Solution
  3. Cloud-based ERP invoicing
    • Non-compliant e-invoice solution

The strategy to adopt the new E-invoicing system will vary depending on how the business is currently performing its accounting functions and our proposed approach is as follows:

Solution for Manual Paper Invoices

Regardless of how the manual paper invoices are generated, if the data in the invoice is manually typed and the records of each invoice are not automatically being stored in a cloud or local database server, this system will have to be completely phased out. In such a case, the business can choose to do the following:

  1. Adopt an Off-the-shelf E-invoicing solution (inexpensive)
  2. Develop its own E-invoicing solution (expensive)

Once a suitable solution is either selected or developed, the business can start its routine operation using the solution. Training workers to use the new solution may be required and the application will need to be configured to suit the business appropriately. Common configurations include:

  1. Invoice template configuration
  2. Customer database config
  3. Currency Configuration
  4. VAT configuration
  5. Company Information and profile configuration
  6. Upload past accounting data (optional)

The final step is a highly recommended but optional step, and it entirely depends on the business requirements. Companies can digitize historical records by hiring a temporary accountant or outsource them to a company that will digitize all previous records and upload them into the system. It is common to retain at least 3 years’ worth of accounting data on a working database as it helps you track yearly changes in costs and revenues.

Solution for Static Electronic system.

A static electronic system is one that works without connecting to the internet. The code and algorithms needed to perform accounting, or any other functions are stored locally on the device. If the solution being used is from an off-the-shelf or OEM then an upgrade to an e-invoicing solution may be difficult. You can attempt to contact the equipment or device manufacturer and request an upgrade, but it is most likely that they will not be able to support you.

If the solution being used is generic software installed on a PC, there is a chance the application developer may release an update to include these new features. To figure out if a new version is available with support for E-invoice, please refer to their public website.

If you were using an in-house developed solution, then there may be a way to upgrade the system to comply with the new requirements. The possibility of an upgrade will highly depend on the compatibility of the current system to integrate the algorithms mentioned in the “Requirements” section.

All in all, it is highly recommended that a business using static solutions choose to upgrade to a cloud-based system. Static systems depreciate very quickly, and you risk losing your entire accounting database to a single point of failure.

Solution for Cloud Applications

If you already use a cloud-based system, it may be possible that the solution provider does not currently offer e-invoicing. In such a case you can choose to do the following:

  1. Contact or wait for the solution provider to release an update
  2. Migrate your accounts to a new solutions provider.

E-Invoicing Requirements

There are two types of E-invoices: Simplified E-invoice and Standard E-invoice. Each e-invoice and associated note should be presented in a readable format. The document should be generated electronically and archived. Sample e-invoices are shown below and where each type is applicable is detailed in the subsequent table.

Type of Transaction Standard E-Invoice Simplified E-Invoice
Taxable Supplies subject to the standard rate valued at SAR 1,000 or more, made to a Taxable Person or non-taxable Legal Person
Taxable Supplies of Goods or services (other than exports of goods) made to a Taxable Person or non-taxable Legal Person, valued at less than SAR 1,000
Export of goods
Taxable Supplies made to a non-taxable natural person (other than exports of goods)
Supplies that are totally exempt from VAT in the KSA
NA
NA
Zero-rated supplies valued at SAR 1,000 or more, made to a Taxable Person or non-taxable Legal Person
VAT due under Reverse Charge Mechanism
NA
NA
Intra-GCC supplies

Source: ZATCA E-Invoicing Detailed Guidelines link

The requirements for Phase 1-Generation dictate that all e-invoices include a cryptographic stamp in the form of a QR code.

What is a QR Code

The mandated QR contains basic invoice data in an encrypted format and is included within the printed and electronic invoices. QR codes are used by customers who wish to verify their invoices and ensure that they are compliant with the ZATCA requirements. QR codes are automatically generated by the E-invoice solutions or through our toolkit and should include:

  • The Seller’s name
  • Seller’s VAT Registration number
  • Timestamp of the invoice (date and time)
  • Invoice total
  • VAT total

NOTE: The e-Invoice QR code requires a specialized app to read and, unlike some QR codes, does not contain a link to any web page.

In Summary

  • [Permanent] Adopt an e-invoicing cloud solution
  • [Temporary] Use mycrebit QR toolkit to generate the QR code and add it to your document
  • [Permanent] Upgrade your inhouse solution

What to look forward to?

The current Phase I, also called the Generation phase includes simple additional requirements to existing invoicing procedures. Whereas Phase 2 (also called the Integration phase) includes a whole new range of requirements including, but not limited to, blockchain technology. Due to this reason, we advise businesses looking to adopt a new e-invoicing solution or modify their existing ones to tread carefully. Their efforts could be in vain as their newly adopted solutions could become obsolete early next year. Given the expanse of solutions in the market currently offering e-invoicing, not all will have the capacity or capability to adopt state-of-the-art blockchain technology and your business may be left in limbo.

The requirements in Phase 2 will be less flexible and migrating systems twice a year is an exhaustive and expensive procedure. Below are a very brief list of additional requirements planned for the next stage in Jan 2023:

  • UUID
  • Cryptographic Stamp
  • Cryptographic Stamp identifier
  • Previous Invoice Hash
  • Invoice counter

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