What is VAT Reporting Deviation in Saudi Arabia?

Zakat, Tax and Customs Authority (ZATCA), the tax authority, implemented e-invoicing in the Kingdom of Saudi Arabia (KSA). Through this initiative, the government intends to bring transparency to business transactions and ensure better tax compliance. Hence, once e-invoicing is implemented, it uses the same records to perform cross-checking to ensure accuracy.

Hence, enterprises that have already integrated with ZATCA and implemented e-invoicing must understand the impact of e-invoicing on Value Added Tax (VAT) reporting. This article explains all about the VAT reporting deviation in Saudi Arabia.

What is VAT reporting deviation?

VAT reporting deviation is a scenario where there is a deviation between VAT calculated from the e-invoices generated and VAT collection reported in tax returns. For these instances, ZATCA has started sending notices and warnings to enterprises.

What are the reasons for VAT reporting deviation?

Businesses are used to file VAT returns based on the reports from the source systems such as ERP/ accounting systems/ POS. However, with mandatory e-invoicing implementation, they should cross-check the source system data with e-invoices before filing the VAT returns. Hence, businesses must modify their VAT return filing process.

Further, ZATCA validates VAT from the e-invoices generated and issues notices seeking explanations for any discrepancies. In this scenario, businesses may pay fines/penalties for underreporting/misreporting.

Here are the major reasons for VAT reporting deviations:

1. Invoices are generated in the source system but not e-invoices due to technical glitches.
2. Invoices are not shared with the solution provider due to rules set at the source system. 
3. Invoices failed during transmission to the solution provider.
4. Invoices failed during transmission to ZATCA.
5. Cancelled orders are recorded in the ERP/accounting system but not reported to ZATCA.
6. Incorrect data shared with e-invoicing solution provider w.r.t date or numerical calculations.

How to avoid VAT reporting deviation?

Enterprises must perform reconciliations between source systems and e-invoice data to identify the deviations and reasons for that. They must do this activity monthly to ensure that the VAT reported in VAT returns is the same as that calculated from e-invoices reported to ZATCA.

Businesses must identify the deviations and correct them. To do so, they shall:

• Generate e-invoices for missing invoices
• Create credit notes for cancelled orders which are not registered with ZATCA or in ERP
• Correct invoices in case of data mismatches
• Record additional invoices in ERP

Manually performing these reconciliations and corrective actions would be difficult and time-consuming. Hence, businesses must modify existing processes to integrate e-invoice records with source systems and streamline the VAT return filing process.