Understanding Withholding Tax on International Telecommunication Services A Breakdown of Circular No. 32569

The telecommunication sector, a vital component of global connectivity, is often at the forefront of tax regulations, especially when cross-border services are involved. The Kingdom of Saudi Arabia (KSA) introduced important tax guidelines on telecommunication services with Circular No. 3256/9, dated 28/06/1426H (03/08/2005G), clarifying the withholding tax obligations for specific international telecommunication services. These guidelines, rooted in the KSA Income Tax Law, address payments made by local telecommunication companies to international service providers.

Let’s explore the essential points covered by this Circular and its implications for Saudi businesses engaged in international telecommunications.

Key Provisions of the Circular

This Circular revolves around Article 68(a) of the KSA Income Tax Law, which stipulates that a 5% withholding tax must be applied to certain payments made to non-resident entities. Specifically, the following types of payments are subject to withholding tax:

1. International Phone Services, Telex, and Intermediary Services Payments made by a local telecommunication company to an international provider for the use of their network to deliver international calls placed by a resident of the KSA are subject to a 5% withholding tax. Essentially, this covers the technical connections and transmission services required to facilitate outbound international communication.
2. Satellite Bandwidth and Circuits Payments to international satellite operators for using bandwidth or circuits to provide subscribers in the KSA with international telecommunication services are also taxed at 5%. This typically applies to satellite communication services that enable global telecommunication access for local subscribers.
3. Leasing Capacities in International Cables and Internet When a local telecom company leases capacity in international cables or internet services for communication purposes, the payments made to the non-resident service providers are subject to the same 5% withholding tax. This category covers leased data transmission channels that support internet and telecommunications infrastructure.

However, the fourth category of services, international roaming, is exempt from withholding tax due to the nature of the service being rendered.

Exemption: International Roaming Services

One significant clarification in the Circular is the treatment of international roaming services. This service involves a KSA resident using a Saudi-issued SIM card abroad, while the local telecom company acts as an intermediary between the subscriber and the foreign telecommunication network. Since the entire activity is performed outside of Saudi Arabia, the payments made for roaming services are not subject to withholding tax. The rationale is that the income received by the foreign telecom company is not considered to have originated from a source within the KSA.

Ministerial Determination and Broader Implications

The guidance provided in Letter No. 1/4260 dated 22/04/1426H (30/05/2005G), from the Minister of Finance, plays a crucial role in shaping the tax treatment for these services. After studying the practices of other countries and aligning with Saudi tax legislation, the Ministry concluded that withholding tax should apply only to the services rendered within or deriving from Saudi Arabia.

For businesses in the telecommunication industry, this Circular has significant implications for how they manage their tax obligations and structure contracts with international service providers. By understanding which payments are subject to withholding tax and which are exempt, companies can optimize their tax compliance processes and avoid potential penalties.

Conclusion

Circular No. 3256/9 provides clear guidance on the taxation of payments made for certain telecommunication services, with a 5% withholding tax applied to international phone services, satellite bandwidth usage, and leased international cable capacities. Importantly, it distinguishes international roaming services as tax-exempt, reflecting the extraterritorial nature of the services provided. Telecommunication companies operating in the Kingdom must take note of these regulations to ensure compliance with the KSA Income Tax Law and related implementing regulations.

summary

Circular No. 3256/9, dated 28/06/1426H (03/08/2005G), clarifies the application of a 5% withholding tax on certain payments made by Saudi Arabian telecommunication companies to non-resident international service providers. The tax applies to payments for international phone services, satellite bandwidth, and leased international cable capacities. However, payments for international roaming services are exempt, as the service is performed outside Saudi Arabia. The Circular provides clear guidance for telecom companies to ensure compliance with the KSA Income Tax Law and related regulations.  

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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