E-invoicing Phase 2 in KSA: How ZATCA’s guidelines affect you

Uninterrupted cashflow is critical to any business, whatever the size, industry or maturity level. As a corporate taxpayer in the Kingdom of Saudi Arabia (KSA), there is a requirement to meet obligations and comply with the Zakat, Tax and Customs Authority’s (ZATCA’s) e-invoicing requirements to work seamlessly with their system. This not only improves tax transparency between you and the regulator, but also enables your department to process a high volume of transactions while remaining compliant.

The deadline for Phase 1 of the e-invoicing mandate has passed, and on the 1st of January, 2023, Phase 2 was introduced. This phase functions as an extension of the first phase and was introduced for corporate taxpayers falling under the Wave 1 criteria.

The Kingdom has been implementing Phase 2 of e-invoicing in waves, with the criteria for Wave 4 and Wave 5 having just been announced by ZATCA. In this guide we will be discussing the typical challenges of implementing e-invoicing in KSA and how you can prepare.

What are the new e-invoicing requirements? 

Phase 2 also known as the integration phase of ZATCA’s e-invoicing system, requires businesses to integrate their e-invoicing solution with ZATCA’s invoicing platform FATOORAH. Phase 1, known as the generation phase mandated all resident and non-resident taxpayers within the Kingdom to generate and store e-invoices with requisite fields through electronic solutions compliant with Phase 1 requirements.

According to Phase 1 guidelines, a compliant e-invoicing process ensures:
•    Invoices are issued in the correct format
•    Invoices contain all the necessary information
•    Invoices are archived in accordance with the regulations

Each wave integrates taxpayers with the FATOORAH platform as per the criteria declared by ZATCA, within a stipulated time frame. ZATCA is opting to provide advanced notice of each wave by six months. This has meant that organisations have sufficient time to ensure their e-invoicing capabilities are well set up to handle the change.

Wave Annual Taxable Revenue (in SAR) Integration Period
Wave 1 3 Billion or more in 2021 1 Jan – 30 Jun 2023
Wave 2 0.5 Billion or more in 2021 1 Jul – 31 Dec 2023
Wave 3 250 Million or more in 2021 or 2022 1 Oct 2023 – 31 Jan 2024
Wave 4 150 Million or more in 2021 or 2022 1 Nov 2023 – 29 Feb 2024
Wave 5 100 Million in 2021 or 2022 1 Dec 2023 – 31 Mar 2024

Preparation checklist for e-invoicing Phase 2

When it comes to preparing for the implementation of Phase 2, there are two key aspects to consider. One, you and your tax department must have a deep understanding of ZATCA’s e-invoicing rules and guidelines to ensure compliance. And two, you also need to assess and further strengthen your internal capabilities to handle e-invoicing.

Demystify ZATCA’s e-invoicing rules and guidelines

Within your tax team, you’ll need to closely monitor the latest regulatory developments and review the evolving guidelines issued by ZATCA. Being across this information will enable you to perform an impact analysis to identify any gaps impeding your ability to meet your obligations.

To illustrate what this typically involves, below highlights an indicative list of mandatory, conditional and optional fields for each electronic invoice. Your tax team needs to assess whether the conditional fields apply to your business. It is also worth noting that the optional fields must be available in the e-invoicing solution (even if you are not including these in your e-invoices).

Obligation Invoice Fields – Phase 1 Invoice Fields – Phase 2
  • Invoice reference number (IRN)
  • Invoice type description
  • Invoice issue date and time
  • Seller name, address VAT registration number
  • Buyer name and address
  • Goods or services description, unit price and quantity
  • Means of payment
  • Universally Unique Invoice Identifier in UUID format
  • Previous invoice/node hash 
  • QR code 
  • Tamper-resistant invoice counter value
  • Additional seller ID
  • Subtotal exclusive of VAT
  • VAT category code
  • Cryptographic stamp
  • Self-billing flag
  • Supply date
  • Buyer VAT registration number
  • Special tax treatment
  • Third-party billed invoice flag
  • Special transaction type flag
  • Additional buyer ID
  • Discount percentage of line item
  • Payment terms
  • Additional notes
Optional N/A
  • Purchase order number
  • Contract number

Additionally, there are many fields that must be present on the invoices you issue clients and customers (otherwise known as ‘human readable’ invoices) while other fields may be skipped. 

If you are operating in the B2C space and use simplified tax invoices, there would be some differences whether these invoice fields are mandatory, conditional or  optional in Phase 1 or Phase 2. 

For instance, in simplified tax invoices, providing a QR code is mandatory in Phase 1 itself. Also, providing buyer name and ID is conditional, that too in Phase 2, and buyer address is optional. 

What is the difference between a ‘human readable’ invoice and one that is not?

An invoice you share either in printed format or electronically as a PDF or document is human readable. By contrast, when you share a QR code or XML of a document, devices are needed to read and understood by us humans. 

You can start with this E-invoicing Implementation Resolution document to begin understanding what is required.

If we were to summarise all the information about e-invoicing Phase 2 in one sentence, it would be this: Businesses operating in KSA need strong technical infrastructure and capabilities to meet the compliance requirements set out by ZATCA.

Which brings us to the next step.

Assess internal capability to handle e-invoicing

You need to determine whether you have the necessary technical infrastructure and competent team to handle e-invoicing. You need capability to:

•    Continuously monitor rules and guidelines being issued by ZATCA
•    Analyse guidelines to understand what needs to be implemented
•    Have the necessary technical infrastructure in place to generate, store and manage e-invoicing
•    Possess a competent team of legal counsel and IT resources to manage e-invoicing

If you already have the necessary technology infrastructure and legal expertise, you are in a good place! However, if your internal assessment finds you lacking on any of these, what you need is an experienced technology partner with a global footprint.

When should you engage with a technology partner?

A suitable technical partner can be ideal for organisations without the necessary in-house infrastructure and expertise. Here are three instances where you might need one.

  1. Your in-house capabilities are under resourced. Developing additional in-house capabilities takes time and additional resources. Especially in keeping yourself updated with the ever-evolving taxation regulations and guidelines. A technology provider with a deep understanding of legal regulations can help you keep updated through their team of experts.
  2. Recruiting your IT department to build e-invoicing tech is not an option. Possessing the necessary technical infrastructure to integrate and operate the e-invoicing solution includes having the appropriate software and hardware, as well as the necessary IT resources to manage the system.  Providers that offer e-invoicing solutions are purpose-built to on board new clients and continuously improves and updates their technology, so your IT department does not have to.
  3. You have calculated that the risk of not using automation capabilities is too high. It is challenging and impractical to manually manage the huge amount of data flowing through multiple systems before it reaches the tax team.  Automation is the way to go for businesses if they strive to remain fully compliant with e-invoicing regulations. 

E-invoicing is not just about compliance

If you feel you must introduce an e-invoicing solution to your business process just to be compliant with ZATCA’s regulations, you are approaching it the wrong way. 

Governments across the world are introducing e-invoicing to eliminate tax evasion and reduce shadow transactions. A report by global analyst firm Billentis has predicted that by 2025, 80% of all companies will have to exchange invoices electronically.

Moreover, public and investors are increasingly looking at how companies manage their tax affairs as an indicator of how they manage other ESG aspects of their business and evaluate how eligible they are for investing and growth opportunities. A recent BCG survey found that companies with a strong reputation of meeting ESG challenges in emerging markets gain better access to markets, investment capital and talent pool.

And in the short term, e-invoicing solution is beneficial it also helps;

  • ensure uninterrupted cash flow by aligning e-invoicing requirements with all stakeholders
  • avoid penalties and reputational impact of non-compliance
  • expand into new markets and respond to their legislation quickly
  • increase transparency into business operations

Selecting the right e-invoicing technology partner

Any e-invoicing solution technology partner should be able to minimise non-compliance risks through deadline management, reduce costs by offering cloud or ‘on prem’ solutions, accelerate growth by providing real time visibility into the compliance landscape and automate compliance processes to save time and resources.

When choosing the right e-invoicing solution, ensure the provider has:

  • been listed in ZATCA’s solution provider directory on their website
  • a high level of compliance with data security rules
  • offers one solution for e-invoicing as well as tax reporting
  • experience in implementing e-invoicing internationally

Discover ONESOURCE E-Invoicing, a compliant, e-invoicing solution, purpose-built for VAT in the Kingdom of Saudi Arabia.

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