Tax Scope and Application of Accounting Period Regulations

Cabinet Decision No. 39 of 2019 

Navigating the complexities of tax regulations can be challenging for businesses, especially in a dynamic economic environment. Cabinet Decision No. 39 of 2019 offers critical guidance on accounting periods for taxpayers under the Income Tax Law’s Executive Regulations. This decision clarifies the scope of tax application, addressing various scenarios that impact how businesses determine their accounting periods. Here’s a detailed overview of the key provisions outlined in Article 3 and Article 4 of Chapter III.

Article 3: Defining the Accounting Period

1. Standard Accounting Periods

• General Rule: The standard tax year typically represents a 12-month accounting period for businesses.
• Commencement of Business: For businesses starting operations after the beginning of the tax year, the first accounting period runs from the business start date to the end of that tax year, with a minimum duration of six months. If this duration is shorter, it extends into the next following tax year.
• Liquidation: Businesses undergoing liquidation have their accounting period defined from the end of the last period until the end of the liquidation, capped at 12 months. If the period exceeds this duration, a new accounting period must be established.
• Closure, Waiver, or Sale: When a business is closed, waived, or sold, the accounting period extends from the end of the previous period to the date of closure or sale, with a minimum requirement of six months. If this minimum is not met, it merges with the subsequent period.
• Temporary Business: For temporary businesses that last up to 18 months, the accounting period corresponds to the entire duration of the business.
• Tax Calculation: Taxes are assessed based on the income earned within the designated accounting period.

2. Alternative Accounting Periods

• Group or Foreign Branches: Taxpayers who are part of a company group or operate as a foreign branch can request a different accounting period that aligns with the group or head office’s accounting period.
• Business Nature: Businesses with specific operational needs may also apply for an alternative accounting period.
• Change of Period: If a business intends to change its accounting period, the interval between the old and new periods must be at least six months; otherwise, it will be added to the new period.

3. Application Process

• Requests to establish a different accounting period must be submitted to the General Tax Authority (GTA) either with the registration application or within 30 days before the current period ends. If the GTA does not respond within 60 days, the application is implicitly considered rejected.
• Withdrawal of Approval: The GTA has the authority to withdraw its approval for a different accounting period, effective from the end of the period during which the decision is made. The following period will then adhere to the new rules.

Article 4: Income Determination and Accounting Principles

1. Accrual Accounting

Taxpayers are required to adopt the accrual accounting method, recognizing income when earned and expenses when incurred, irrespective of payment dates. This method aligns with commercial accounting standards in the State.

2. Monetary Principle Option

Taxpayers with gross income not exceeding 1,000,000 riyals can opt to use the monetary principle for income determination, recognizing income when received and expenses when paid. The GTA must respond within 60 days of the application; otherwise, it is deemed rejected.

3. Long-Term Contracts

For contracts that exceed 18 months in duration, income should be determined based on the work performed, adhering to the accrual principle.

4. Capital Gains

Capital gains arising from the sale or merger of shares or equity in resident companies are included in the taxable income of the receiving or divided entity within the tax year of the transaction.

Conclusion

Cabinet Decision No. 39 of 2019 establishes a structured framework for businesses to determine their accounting periods and manage their tax obligations effectively. By comprehending these regulations, businesses can ensure compliance and optimize their tax reporting processes, aligning with the latest statutory requirements. For detailed guidance or specific cases, consulting with a tax professional or legal advisor is recommended.

summary 

The standard tax year is 12 months, but adjustments are made based on business start dates, liquidation, closure, or temporary operations. Businesses may request an alternative accounting period if it aligns with group practices or operational needs. Changes to accounting periods must be at least six months long or be added to the new period. Taxpayers typically use accrual accounting but may opt for a monetary principle if their gross income is under 1,000,000 riyals. The regulations also cover the treatment of capital gains from mergers or disposals of company shares.

Disclaimer:  The Content offer general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk.  

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