A keyword-optimized, practical guide for corporate taxpayers in Saudi Arabia on classifying and deducting geological surveying, geophysical, and exploration & evaluation (E&E) costs. Covers capital vs. expense decisions, depreciation/depletion methods, VAT and WHT touchpoints, and ZATCA documentation that withstands audit.
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Scope & Definitions (G&G, E&E, Development)
Geological & geophysical (G&G) activities include desktop studies, seismic (2D/3D/4D), gravity, magnetic and other surveys used to identify structures and prospects. Exploration & evaluation (E&E) costs cover prospecting, exploratory drilling, sampling, appraisal, pilot tests, and technical/feasibility work required to determine commercial viability. Development costs begin once commerciality is established and include delineation drilling, well completion, surface facilities, pipelines, and processing units.
Tax Policy: Expense vs. Capitalize vs. Amortize/Deplete
- Revenue-nature G&G (pre-commercial desktop studies, reconnaissance surveys) are commonly expensed when incurred if wholly and exclusively for the Saudi business.
- Success-based exploration that leads to a commercial discovery is typically capitalized as intangible E&E or development asset and recovered via amortization or depletion (e.g., unit-of-production) once production starts.
- Unsuccessful exploration (dry hole, uneconomic prospect) is generally written off to P&L when the project is abandoned or facts indicate no future economic benefits.
- Development & production assets (facilities, wells, pipelines) are capitalized and recovered through tax depreciation/depletion using approved rates or unit-of-production methodologies.
- Mixed ownership entities must maintain clear allocation between the CIT portion (foreign ownership) and the Zakat portion (Saudi/GCC ownership) of results.
Rule of thumb: Expense routine pre-commercial surveys; capitalize appraisal/development that builds a recoverable asset; start amortization or depletion at commercial production.
Classification Matrix (Saudi Corporate Lens)
| Cost Category | Typical Tax Treatment | Notes for ZATCA Review |
|---|---|---|
| Desktop geology & prospect screening | Expense | Evidence business nexus; retain reports and approvals. |
| Seismic acquisition & processing | Expense (early-stage) or capitalize if clearly tied to a viable field | Document link to licensed block; show decision gate outcomes. |
| Exploratory drilling (wildcat) | Capitalize if success probable; expense if dry/abandoned | Well logs, test results, abandonment memos. |
| Appraisal wells & pilot tests | Capitalize (E&E asset) | Move to development at commerciality declaration. |
| Surface facilities & pipelines | Capitalize & depreciate/deplete | Asset register; commissioning certificates; useful life/production plan. |
| Environmental & site restoration (provisions) | Recognize provision; deduct when incurred/paid per rules | Provision methodology; escrow/LC evidence if any. |
Project Ring-Fencing & Commerciality Milestones
- Ring-fence by concession/block: Keep a separate GL and cost center for each license area to support deduction timing and prevent cross-subsidy.
- Commerciality date triggers reclassification from E&E to development/production asset and the start of amortization/depletion.
- Unit-of-production methods align deduction with output (barrels/BOE or tonnes); maintain reserves reports and production forecasts.
- Abandonment: When prospects are dropped, derecognize capitalized E&E with write-off support (board minutes, technical committee decisions).
VAT, Reverse Charge & Withholding Tax (Field Services & Surveys)
- VAT (15%): Local purchases of survey, drilling, logistics and lab services generally bear VAT. Ensure valid tax invoices to recover input VAT where linked to taxable activities.
- Imported services (RCM): Non-resident survey interpretation, software licenses, or specialist consulting typically trigger reverse charge VAT; claim input VAT subject to normal rules.
- Withholding tax (WHT): Payments to non-residents for services/technical work may attract WHT (category-dependent); check treaty relief and maintain residency/beneficial ownership evidence.
- Customs & excise interfaces: For imported seismic gear/chemicals, align customs declarations with VAT and asset registers.
IFRS Alignment: IFRS 6 & IAS 16/38 Touchpoints
For accounting, many Saudi corporates apply IFRS 6 to E&E assets (policy choice to expense or capitalize E&E with impairment tests), then move to IAS 16/IAS 38 for development/production. Your tax policy should be documented to explain where it follows (or diverges from) accounting and why—ZATCA expects reconciliation to the audited FS.
ZATCA Audit Pack: Evidence to Keep
- License & concession files: MISA/MoE approvals, concession maps, work programs, extensions.
- Technical evidence: G&G reports, seismic processing outputs, well logs, test results, reserves certifications.
- Gate decisions: board/technical committee minutes declaring commerciality or abandonment.
- Cost registers: E&E capitalization schedules, development asset registers, depreciation/depletion workings.
- Tax/VAT/WHT ties: supplier invoices, RCM self-assessment, WHT returns and treaty files; reconciliation to GL and returns.
- Transfer pricing (if related parties): intercompany drilling/services contracts, benchmarking of day rates/mark-ups, benefit tests.
Illustrative Examples (Training Use)
| Scenario | Treatment | Tax/VAT Notes | Documentation |
|---|---|---|---|
| Regional seismic survey over new block | Expense or capitalize (policy); if later deemed non-viable → write-off | Input VAT recoverable if for taxable activity; RCM if foreign vendor | Contracts, data license, survey reports, invoices |
| Exploration well finds hydrocarbons; appraisal confirms commerciality | Capitalize E&E → reclassify to development at FID; start depletion on production | No VAT on crude/gas output; watch WHT on foreign contractors | Well logs, appraisal studies, reserves report, FID minutes |
| Dry hole—prospect abandoned | Expense/write-off remaining E&E | Ensure VAT input claims meet business-use tests | Abandonment memo, technical conclusions, GL entry |
| Pipeline and processing facility build-out | Capitalize & depreciate; depletion if linked to reserve units | Large input VAT—ensure correct tax codes and commissioning date | Asset register, EPC contracts, CoC/commissioning certificates |
FAQ for Saudi Corporate Tax Teams
When does amortization/depletion start?
Typically from the date the asset is available for use and production begins (commerciality/FID achieved and commissioning complete).
Can we carry forward E&E write-offs?
Loss rules apply per Saudi tax provisions; keep ring-fenced schedules and ownership splits for mixed CIT/Zakat entities.
Do related-party field services need TP support?
Yes—benchmark day rates/mark-ups and retain evidence of specialized benefits delivered in KSA.
Is VAT always recoverable on exploration?
Input VAT is generally recoverable for taxable activities; blocked items (entertainment, passenger vehicles, etc.) remain non-recoverable.
