CIRCULAR NO. 3256/9 DATED 28/06/1426H
(03/08/2005)

Circular No. 3256/9 dated 28/06/1426H (03/08/2005) that refers to Article 68(a) of the Income Tax Law and which states in subparagraph (a)(5) that the withholding tax rate for payments made against international telecommunication services is 5%, and that also refers to Article 63(5) of the implementing regulations to the income tax law.

An inquiry was received about whether tax should be withheld from the following payments made by residents to international [nonresident] telecommunications companies and payments to other nonresidents:

1. Payments made in respect of international phone services, telex, and intermediary services. Such services arise from a local telecommunication company's use of an international telecommunication company's network to connect, transmit or deliver calls made by a KSA resident subscriber when placing a requesting to make an international call.

2. Payments made to international organizations that own satellites against the use of satellite bandwidth or international circuits in such satellites for the purpose of providing the local telecommunication company subscribers with international telecommunication services.

3. Payments made to nonresident companies in respect of leasing capacities in international ca-bles and internet for the purpose of using such capacities in various communication services.

4. Payments made to international telecommunication companies against international roaming services - a service arising from the use of a foreign phone network when a subscriber of a Saudi telecom service provider uses a Saudi-issued mobile sim when abroad for the duration of their stay outside of the Kingdom.

Studies were conducted to examine such types of services in light of the income tax legislation and the relevant practices of other countries and presented to the Minister of Finance, his excellency the Minister of Finance determined (via letter no. 1/4260 dated 22/04/1426H (30/05/2005G)) that the relevant provisions of the income tax legislation clearly indicate that payments for the services stated in paragraphs 1, 2 & 3 above are subject to withholding tax at a rate of 5%. However, payments made in respect of the services stated in paragraph 4 above - related to the international roaming services - are not subject to withholding tax. This is because the activities carried out in rendering such service is wholly carried out outside the Kingdom; this the payment received by the nonresident in respect of that service cannot be considered to be derived from a source in the Kingdom. Further, in the case of roaming services the role of local telecommunication companies is limited to that of an intermediary that invoices subscribers and collects payment for and on behalf of the nonresident foreign telecommunication company. The Minister directed the tax authority to apply the treatments highlighted in the aforementioned letter to all similar cases.