In Saudi Arabia, the Zakat, Tax and Customs Authority (ZATCA) strictly prohibits the deduction of bribes, kickbacks, facilitation payments, and other unlawful expenditures when calculating the taxable base for corporate income tax purposes. This guide explains the legal basis, what constitutes an illegal payment, the compliance risks, and best practices for corporate taxpayers to avoid penalties.
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Legal Basis for Non-Deductibility
Under Saudi Income Tax Law and related implementing regulations, expenses that are contrary to public policy or Saudi law are not deductible. Bribes, illegal commissions, and facilitation payments are explicitly excluded from allowable expenses, regardless of whether they were incurred domestically or abroad.
This aligns with international anti-bribery conventions such as the OECD Anti-Bribery Convention and domestic anti-corruption frameworks under the Saudi National Anti-Corruption Commission (Nazaha).
What Qualifies as an Illegal Payment?
- Bribes: Any direct or indirect payment to a public official, private sector counterpart, or intermediary to obtain or retain business.
- Kickbacks: Payments to reward favorable treatment or to secure contracts in violation of law.
- Facilitation Payments: Payments to expedite routine governmental actions that are otherwise due without such payments.
- Illegal Commissions: Unreported or prohibited commissions disguised as consulting fees or other expenses.
- Other Unlawful Benefits: Gifts, services, travel, or entertainment given in breach of local or international anti-corruption laws.
Tax Consequences for Deducting Illegal Payments
Attempting to deduct prohibited payments can lead to:
- Denial of deduction: The expense will be added back to taxable income, increasing tax liability.
- Penalties: ZATCA can impose fines for incorrect returns and late payment of taxes resulting from disallowed deductions.
- Legal exposure: Potential referral to law enforcement agencies under anti-corruption laws.
- Reputational damage: Negative publicity and loss of stakeholder trust.
Best Practices for Compliance
- Implement robust internal controls: Establish clear procurement, vendor approval, and payment authorization procedures.
- Conduct due diligence: Screen vendors, agents, and consultants for corruption risks.
- Maintain proper documentation: Keep records justifying all payments as legitimate and compliant with law.
- Train staff regularly: Conduct anti-bribery and anti-corruption training for employees, particularly in high-risk roles.
- Adopt a zero-tolerance policy: Include strict clauses in contracts prohibiting unlawful payments.
International Considerations
Saudi companies operating abroad must comply with both Saudi law and applicable foreign anti-bribery laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. A payment that is illegal under foreign law will also be non-deductible in Saudi Arabia, even if made outside the Kingdom.
Audit and Enforcement Trends
ZATCA auditors increasingly focus on:
- Payments recorded under vague descriptions like “consulting fees” or “marketing expenses.”
- High-value cash withdrawals or transfers to offshore accounts.
- Transactions with intermediaries in high-risk jurisdictions.
Enhanced cooperation between ZATCA and Nazaha means tax audits can trigger anti-corruption investigations.
Key Takeaways for Corporate Taxpayers
- Bribes and other illegal payments are never deductible under Saudi tax law.
- Strong compliance programs reduce tax, legal, and reputational risks.
- Transparent documentation is the best defense in a ZATCA audit.
- Coordinate tax compliance with anti-corruption and internal audit functions.
