Tax Withholding
Tax Withholding is a mechanism where the buyer deducts a percentage of the payment as tax and remits it to the tax authority on behalf of the supplier. In Saudi Arabia, withholding tax applies to certain payments made to non-resident parties.
Setting Up Withholding Tax
- Go to Accounting > Tax Withholding Category and click New.
- Enter a Category Name.
- Add withholding tax rates in the Rates table:
- Fiscal Year: The applicable year
- Tax Withholding Rate: The percentage to withhold (e.g., 5% for some services)
- From Amount and To Amount: The amount range this rate applies to
- Account: The withholding tax account
- Click Save.
Applying Withholding Tax
Assign the Tax Withholding Category to suppliers (in the Supplier master) who are subject to withholding tax.
When you create a Purchase Invoice for that supplier:
- The full invoice amount is recorded
- A withholding tax deduction is calculated
- Upon payment, the withheld amount is deducted and posted to the withholding tax liability account
Accounting Entries
For a SAR 10,000 invoice with 5% withholding:
On Purchase Invoice:
- Debit: Expense Account SAR 10,000
- Credit: Accounts Payable SAR 10,000
On Payment:
- Debit: Accounts Payable SAR 10,000
- Credit: Bank Account SAR 9,500
- Credit: Withholding Tax Payable SAR 500