The Impact of Applying Reverse Charge Mechanisms and Withholding
Tax on Reducing Tax Avoidance in the Saudi Business Environment
TAHA KHAIRY TAHA IBRAHIM
College of Business,
Jouf University,
SAUDI ARABIA
Abstract: - The research aimed to measure the impact of applying the accounting mechanisms of reverse charge
and withholding tax to reduce tax avoidance in the Saudi business environment by studying and analyzing the
reverse charge and withholding tax mechanisms as well as the methods of measuring the tax base of
transactions that take place between residents and non-residents. It also studied the impacts of applying
accounting mechanisms for reverse charge and withholding tax and clarified their impact on reducing tax
avoidance.
The research found a statistically significant relationship at the level of significance (α≤0.05) between
applying reverse accounting mechanisms and withholding tax in Saudi Arabia's business environment for
taxable enterprises and reducing tax avoidance. The application of reverse charge mechanisms and withholding
tax has a positive impact on controlling the tax community, increasing tax revenues, and reducing tax
avoidance. For a tax examination, the transactions that take place between residents and non-residents are
limited by the declaration of value-added tax, the declaration of withholding tax, and access to the tax base
properly and fairly without resorting to personal estimates.
These findings benefit users of this information in the tax administration. Indeed, tax administrators are
able to determine the tax base fairly, limit transactions between residents and non-residents, and have access to
correct, accurate, and undistorted information. This will limit tax avoidance, increase tax revenue and achieve
tax justice.
Key-Words: reverse charge; withholding tax; tax avoidance.
Received: January 18, 2023. Revised: June 2, 2023. Accepted: June 11, 2023. Published: June 23, 2023.
1 Introduction
In line with the policies of developing the tax
system, eliminating the phenomenon of tax evasion
and avoidance, tightening control over commercial
transactions- especially services imported from
abroad- and reducing the transactions of the
informal economy, the Authority needed to follow
the reverse charge method and apply withholding
tax to reduce tax evasion and avoidance. This is
triggered by the evolution of economic activities
and the emergence of the digital market, which is
known as business sites where sales are carried out
remotely and through digital platforms, [1].
The reverse charge method is considered one of the
modern methods for determining the tax base of
transactions that take place between residents and
non-residents. It is considered the mechanism by
which the taxable customer (the buyer) is obligated
to pay the tax on behalf of the supplier and is
responsible for all the obligations stipulated in the
agreement and local law. This means assigning the
buyer who receives the service to declare and supply
it to the authority. He is obligated to calculate the
output tax, deduct the input tax associated with that
service, and pay the difference between them to the
authority. In addition, the withholding tax, deducted
from the amounts that a non-resident receives from
a source in the Kingdom that the resident is
compelled to pay, helps in limiting transactions
between residents and non-residents. Interest has
increased in the use of reverse charge mechanisms
globally as one of the methods of measuring the
VAT base to reach the tax base for transactions of
goods and services that are carried out correctly and
fairly with non-residents. It also helps to determine
the withholding tax base fairly. The application of
accounting mechanisms for reverse charge and
withholding tax reduces tax avoidance. It limits all
transactions that do not pass through customs ports
such as services and software. It maximizes tax
revenues and spreads tax awareness among
taxpayers.
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The problem of the research is focused on how to
measure the tax base for imported services that do
not go through customs ports, as well as the base for
transactions that take place between residents and
non-residents through customs border crossings, and
the application of withholding tax rules. Indeed, a
non-resident individual is not charged with the
General Authority for Zakat and Income, and
therefore it is difficult to collect tax from them,
hence this problem appears. Therefore, there was a
trend towards assigning the resident customer
registered in the value-added tax a reverse charge to
collect the tax for those transactions and submit it to
the authority based on their tax return. However,
another problem arises if the résident Customer is
not registered for the VAT: how to collect and pay
the tax. Therefore, the study problem is summarized
by answering the following main question:
Will the application of reverse charge and
withholding tax mechanisms have an impact on
reducing tax avoidance, achieving tax justice, and
increasing tax revenues?
The following sub-questions are derived from the
above main question:
1. Is there an effective basis for applying reverse
charge and withholding tax?
2. Is there a way to measure the tax base of taxable
transactions between residents and non-residents?
3. Does the application of withholding tax help limit
transactions between residents and non-residents?
4. Do reverse charge mechanisms and withholding
tax have an impact on reducing tax avoidance,
achieving tax justice, and increasing tax revenues?
The answer to the previous questions contributes to
providing solutions to the problem of the study and
reaching results and recommendations that enable
the provision of a scientific contribution through
which the accounting mechanisms of reverse charge
and withholding tax can be applied to reduce tax
avoidance.
Therefore, this study mainly aims to measure the
impact of applying reverse charge and withholding
tax mechanisms to reduce tax avoidance and
achieve tax justice in the Saudi business
environment.
The objectives of this study are multifaceted.
Firstly, the study aims to determine the scope of the
accounting mechanisms for the reverse charge. This
involves identifying the transactions that fall under
the scope of the reverse charge and the
corresponding tax implications. Additionally, the
study seeks to determine the methods of calculating
the tax in relation to the mechanisms of the reverse
charge. This involves identifying the appropriate tax
calculation method that aligns with the reverse
charge mechanism.
Moreover, the study aims to examine the
accounting mechanisms for applying withholding
tax. This involves identifying the types of
transactions that are subject to the withholding tax,
as well as the corresponding tax calculation
methods. Furthermore, the study seeks to evaluate
the effects of applying reverse charge and
withholding tax mechanisms on reducing tax
avoidance and the relationship between them. This
involves analyzing the impact of these mechanisms
on tax compliance and the disclosure of taxpayers'
activities.
2 Conceptual Framework
The next section deals with the accounting
mechanisms of the reverse charge and withholding
tax in the field of tax accounting in the Saudi
business environment, and the relationship between
them to clarify the relationship between the
independent variables and the dependent variables.
Then, this is followed by dealing with the previous
studies related to the current research. The research
methodology, the standards used, and the
hypotheses tests were presented. The final section
deals with the summary, results, and
recommendations, followed by a list of references.
2.1 Accounting Mechanisms for Reverse
Charge Application
In this section, the accounting mechanisms for
applying the reverse charge will be reviewed, in
accordance with the unified agreement and the tax
system and implementing regulations in the
Kingdom.
The reverse charge mechanism is defined as the
mechanism whereby the taxable customer is
obligated to pay the tax on behalf of the supplier and
is responsible for all the obligations stipulated. They
must declare the output tax on those supplies and
any deductible input tax (Article 1 of the GCC
Unified Value Added Tax Agreement Cooperation
and Article 47 of the executive regulations of the
value-added tax system).
The reverse charge method is one of the modern
accounting methods for determining the value-
added tax base for transactions of goods and
services that take place between residents and non-
residents to combat tax avoidance if the non-
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residents do not appoint an agent or a representative
responsible for calculating the tax, [2].
The charging mechanism is applied by
transferring the obligation and supplying the tax
from the supplier to the customer as the taxable
person, [3].
Many countries, including the Czech Republic,
applied the reverse charge method to transactions
between residents and non-residents while allowing
tax deduction as one of the inputs to be deducted in
the tax return for that period, [4].
It is clear from the above that non-resident
outside the borders of the region are not concerned
with registration. So, the trend was towards
assigning resident customers who are registered for
the value-added tax the reverse charge to self-collect
the tax for their transactions and submit it to the
Authority according to their tax return. Accordingly,
if a non-resident supplier provides electronic
services to a taxable customer residing in the
Kingdom of Saudi Arabia, the customer must
calculate the tax himself according to the reverse
charge mechanism. The reverse charge mechanism
is applied in the following cases:
First case: services received by a taxable customer
from a non-resident supplier:
In this case, the resident customer applies the
reverse charge method and has to include the tax
related to these goods and services with his tax
return. This principle is based on transferring the
burden of tax collection from the non-resident
service supplier to the beneficiary of this service so
that the latter undertakes to comply with the tax on
imported services and supplies them to the
Authority instead of the supplier, [5].
Article (41) of the agreement stipulated that if
the place of supply of goods or services is in a
member state in which the supplier is not a resident,
the taxable customer becomes obligated to pay the
tax according to the tax return.
As indicated in Article (42) of the agreement,
the person appointed as the importer is obligated to
pay the tax due upon import. Also, Article (44) of
the agreement indicated that the customer who is
obligated to pay the tax according to the reverse
charge mechanism has the right to deduct the related
deductible tax, provided that he declares the tax due
in his tax return.
It is clear from these articles that when applying
the reverse charge mechanism, the recipient is
considered to have supplied services for him, which
does not require a tax bill. Therefore, he is obligated
to calculate an output tax and at the same time
deduct the related input tax, provided that the
deduction conditions are met.
Second case: services received by a non-taxable
customer from a non-resident supplier:
In this case, the customer is not subject to the
tax. It is the non-resident supplier’s responsibility to
register and impose a tax on supplies (Article 5 of
the implementing regulations of the value-added tax
system). As indicated in Article (50) of the
agreement, if the supply of electronic service is
made by a non-resident supplier to a customer who
is not registered in the Kingdom, then the supplier
has to register for VAT goods. Article (77/2)
requires non-residents to appoint a tax
representative and be jointly responsible with the
taxable person for the payment of any tax. Hence,
the tax representative replaces the non-resident
person in all rights and obligations.
It is worth noting that the tax payment is linked
to the place of supply of the service: If it is
performed in the Kingdom, it becomes taxable, and
if it is performed outside the country, then it is
considered among the exported services and is
subject to a zero price.
This problem arises in imported (electronic)
services that do not go through customs ports and
are difficult to detect and identify. It is also difficult
to locate where electronic services are used and can
be evaded. One researcher indicated that such
services represent a supportive environment for tax
avoidance because it is difficult to prove
transactions and track the tax bases.
To remedy this problem, the authority
considered the Internet broker- or portal that acts as
a broker for a non-resident supplier- responsible for
paying the tax, when supplying electronic services
in the Kingdom via the Internet (Article 47/2).
According to the researcher, it is difficult in
practice to register a non-resident supplier outside
the territory of the Kingdom, as stated in the tax
system and its implementing regulations, without
any simplified procedures for the obligations of the
representative or agent of the non-resident. This
means that the system did not meet international
standards in this regard, which indicated the need to
use a simplified system for non-residents and
encourage them to adhere to tax compliance, and
that the procedures lead to a reduction in the
potential cost of compliance, [6].
This implies the need to spread tax awareness
among the taxpayers and make them aware of their
entitlement to deduct input tax on these supplies.
This also requires creating a text in the executive
regulations to allow non-taxable persons who meet
all qualification requirements to submit an
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application to the Authority to calculate the tax on
these services and allow them the right to deduct the
input tax for the transactions related to the reverse
charge. It is important to take advantage of the
experience of Germany and France, which began
applying the reverse charge mechanism on January
1, 2014, and obligated residents, whether registered
or unregistered, to supply tax on the transactions
that take place with non-residents as the beneficiary
of the service and allow them to deduct the input tax
on those services when they register for value-added
tax. One researcher pointed out that the reverse
charge tax is triggered by the receipt of the service
by the beneficiary, [7]. The majority of tax
legislation also refers to the principle of
consumption as a basis for determining the incident
that generates the tax to measure the revenue
according to which the value-added tax is
calculated, [8].
The researcher believes that the reverse charge tax
mechanism is created by the performance of the
service, which is considered an assumed supply. It is
as if the supplier sold to himself and is not required
to issue a tax bill. Yet, the supplier’s invoice should
be kept and recorded in the commercial records.
The tax base regarding the reverse charge of
goods and services is determined through the
customs release and the customs declaration based
on the invoice of the external supplier. Also, for
imported services that do not go through customs
ports, the tax base is determined upon receipt of the
service according to the value mentioned in the
invoice.
The reverse charge mechanism tax is calculated as
follows:
- For supplies and services provided to a VAT-
registered customer, the taxable customer must self-
calculate the VAT on the received supply and
approve the output tax on the supply and any
deductible input (to the extent that the customer can
benefit from VAT deduction on inputs to the tax
return (Article 47 of the Implementing
Regulations)).
- For supplies and services provided by a non-
resident company to an unregistered customer or
end consumer, the non-resident company will
therefore be required to register for VAT purposes
and calculate the tax on the value of the service
performed according to the tax bill as if it were a
resident. Sometimes a resident customer engaged in
economic activity exceeds the mandatory
registration limit for goods and services received
from a non-resident supplier and therefore must
register and self-calculate the tax in accordance with
the reverse charge mechanism.
- For transactions between a non-resident holding
company and its subsidiaries residing in the
Kingdom of Saudi Arabia, the resident subsidiaries
are responsible for supplying the tax for the total of
those transactions since they are representative of
the supplying holding company according to the
reverse charge method, and have the right to deduct
that tax on those transactions. In case the service is
resold to a subsidiary company residing in another
country, these transactions are subject to a zero
price as an exported service. In the case of reselling
the service to another company within the group, at
the group level, these transactions are excluded to
show transactions with third parties outside the
group according to International Accounting
Standard No. (10) In the Consolidated Financial
Statements, [2].
When goods are shipped to an end consumer,
the supplier must apply value-added tax in his
country, while no tax will be calculated in the
country where the goods will be received. The
authority also makes it possible for the shipping
company, in its capacity as the importer, to pay the
tax on imports that must be collected either from the
seller or the customer (the end consumer), [9].
The customer who is obligated to pay the tax
according to the reverse charge mechanism has the
right to deduct the related deductible tax, provided
that he has declared the tax due in accordance with
the second clause of Article (41) of the agreement.
To be eligible to deduct input tax on this supply, the
customer in the Kingdom must have commercial
documents available to prove the nature of the
supply and the payable amount for the supply (Tax
Bulletin No. 2106001). As for the case of paying tax
from a non-resident supplier who supplied services
to a non-resident customer, the former is not entitled
to deduct his inputs, given that the Kingdom is the
target country, but has the right to impose the tax in
his country, i.e., the source country, [10]
Undoubtedly, there is a necessary need to apply
the reverse charge mechanism, follow the principles
of the destination country, and impose a tax on those
supplies of goods and services performed within the
Kingdom of Saudi Arabia, to remove any financial
advantage for purchasing services from abroad
compared to local purchases to achieve tax justice.
2.2 Accounting Mechanisms for Applying
Withholding Tax
- Withholding tax is a direct tax deducted from the
amounts that a non-resident receives from a source
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in the Kingdom, according to specific rates and
according to the type of service (from 5% to 20%).
It has been applied in the Kingdom since 2004.
- The tax is imposed on a non-resident who does not
have a permanent company in the Kingdom when he
earns income from a source in the Kingdom.
- The Zakat, Tax, and Customs Authority is
responsible for deducting and supplying the tax
amount to the residents, whether taxpayers or not; as
well as the permanent company of a non-resident in
the Kingdom which pays an amount to a non-
resident from a source in the Kingdom, in
accordance with the provisions regulating income
tax (Article 68 of the tax system).
- As for the natural resident person, he is not
obligated to deduct tax except in cases where he
pays an amount from a source in the Kingdom to a
non-resident, and this amount is related to the
activity he practices. Companies subject to Zakat tax
in the Kingdom are also subject to tax deductions
according to amounts paid to non-residents despite
their lack of commissioning status (article 68 of the
tax system).
- The withholding tax is triggered by the actual
payment of the tax by the resident person or the
settlement of the balances.
- The scope of applying the withholding tax is on
payments subject to a source in the Kingdom paid
from residents to non-residents. Services are defined
as any work for compensation except for the
purchase and sale of goods or any other property.
The person withholding the tax must comply with
the following, [11].
- Register with the Authority, submit the monthly
statement, and pay the deducted amount within the
first ten days of the month following the month of
payment to the beneficiary.
- Provide the authority with an annual statement that
includes a summary of all monthly withholding data
at the end of the tax year.
- Provide the beneficiary with a certificate showing
the amount paid and the amount of withholding tax.
- Maintain the records required to prove the validity
of the withheld tax as specified by the regulations.
- The person responsible for withholding the tax is
obligated to pay the value of the unpaid tax and the
delay fines according to paragraph (a) of Article
(77) of the tax law.
For instance, let us give the example of an
American company providing technical services in
the Kingdom but with no permanent company there.
In this case, the resident person must deduct tax
from the amount paid to the American company and
supply it with his tax return for withholding tax.
This is confirmed by some researchers, [12].
Indeed, when a non-resident foreign company
provides services but does not have a permanent
company, it must rely on the place of the service
beneficiary as a basis for determining the country of
income source. The presence of the host server can
be considered a basis for determining the source of
income. Double taxation is reduced through bilateral
agreements or individual efforts.
A researcher pointed out that to reduce tax
avoidance, the tax must be withheld at source, [13].
It is necessary to apply an electronic database that
includes all information related to taxpayers, [14].
To ensure uniformity of application, the
authority issued Circular No. 3227/1 on 9/6/1431
A.D (Decisions and circulars related to withholding
tax). It was decided that if an amount is paid to a
non-resident party, it is subject to withholding tax
under the tax system and agreements to avoid
double taxation. The procedures are described as
follows:
- The resident party charged with withholding tax
has to pay it to the Authority in accordance with the
provisions and prices included in the tax system.
The withholding party must submit a letter to the
authority requesting a refund of the paid amount
while making sure that the tax is paid in its country.
International tax agreements generally aim to avoid
double taxation and prevent tax evasion. Indeed,
they distribute the rules of tax jurisdiction among
countries, either by granting one country, the
country of residence, the right to impose a tax, as in
the case of a permanent company. Or by granting a
specific country the right to impose the tax in
accordance with the tax legislation while retaining
the other contracting country with the right to
impose the tax, [15].
It is clear from the foregoing that the
international agreements concluded with the
Kingdom of Saudi Arabia to avoid double taxation
and to prevent tax evasion have an impact on the
subjecting of services to withholding tax, as some
services are tax-exempt according to the
international agreements.
2.3 The Impact of Applying Reverse Charge
and Withholding Tax Mechanisms on
Reducing Tax Avoidance
Tax avoidance means trying to avoid paying tax in
whole or in part by legally using legitimate means.
It is a behavior that is not criminalized by the
system.
The Organization for Economic Cooperation for
Development defined tax avoidance as arranging
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matters in such a way that enables tax to be legally
reduced. This definition has several criticisms,
namely that there are taxable persons who avoid tax
and deal in good faith, [16].
It is also defined by [17], as a feature obtained
by the financier leading to his exemption from the
tax obligation thanks to the tax advantages provided
by the tax system, or taking advantage of the gaps in
the tax system and its executive regulations without
being considered a tax evader.
The researcher believes that tax avoidance
means that the taxpayer who is subject to tax
exploits loopholes in the tax system and its
executive regulations to reduce his tax burdens and
legitimately achieve benefits. Tax avoidance also
has negative effects on reducing tax revenues, which
negatively affects revenues and leads to a deficit in
the state's general budget and weak competition in
the markets.
Reverse charge mechanisms have a significant
impact on reducing tax avoidance since the value-
added tax system approved some measures to
counter tax avoidance, the most important of which
are the following, [10].
- The joint responsibility of the representative or
agent with the taxable person to pay any financial
obligations related to value-added tax (Article 77/2
of the executive regulations).
- The taxable person is responsible for paying the
tax on supplies received from a non-resident
supplier according to the reverse charge mechanism,
and therefore he must declare the output tax and
deduct the value-added tax on the inputs in the tax
return (Article 47/1).
- Applying the reverse charge mechanism helps in
deducting the value-added tax on inputs.
- Applying the reverse charge mechanisms helps in
providing correct and undistorted information,
which contributes to the disclosure of the taxpayers’
real activity.
The application of withholding tax has many effects
on reducing tax avoidance, the most important of
which are:
- Limiting the transactions that take place between
residents and non-residents by approving the
withholding tax submitted by residents in order to
prevent tax evasion and avoidance.
- For the tax auditing for the withholding tax, the
auditor looks at the value-added tax declarations to
count the amounts paid to non-residents, who
applied the reverse charge mechanism.
- Obliging government agencies, resident
companies, and non-resident permanent companies
to register with the Authority and report monthly
withholding tax.
-The withholding tax provides correct financial
information on the taxpayers’ real activity.
3 Literature Review
3.1 Studies Dealing with the Reverse Charge
Mechanism
The study of [18], aimed to use the logistics reverse
charge in the United Kingdom and showed the role
of management accounting in building a database
for the transactions that take place between residents
and non-residents. It recommended the necessity of
applying the reverse charge to all goods and services
received from non-residents, and all taxable and
non-taxable residents who benefit from those tax
supplies.
The study of [5], aimed to assess the effects of
applying reverse charge VAT mechanisms on the
supplier and service recipient who are subject to tax.
Its effects are reflected in the transfer of the tax
burden from the supplier to the taxable customer
due to the difficulty of claiming the tax from the
supplier to reduce tax avoidance. The study
concluded that the reverse charge mechanism has a
positive effect on the collection of income tax.
The study of [19], aimed to develop a new
method to reduce tax evasion that focuses on
corporate transactions, rather than corporate profits,
specifically. The study found that the effect of taxes
decreases with increasing distance. This is
consistent with the idea that long distances between
trading partners hinder government oversight and
increase the possibility of tax evasion. The study
recommended that all transactions between resident
and non-resident companies be subject to obligating
the company receiving the service to supply the tax
if the supplying company does not have a
representative office or an agent in America. This
implies the existence of a mechanism for
international coordination and reverse charge.
The study of [20], aimed to identify the impact
of tax haven operations and reverse commissioning
on the tax burdens of companies listed on the stock
exchange and companies residing in Europe in
particular. It found that tax havens should be used as
a mechanism to avoid taxes to relieve tax burdens.
The study recommended that regulators and tax
enforcement agencies should focus on applying the
reverse charge method to non-EU suppliers, with
input deductions applied to all companies.
The study of [21], aimed to shed light on the
importance of value-added tax and to identify the
mechanisms and scope of applying the tax and its
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effects. It proved the volume of Internet transactions
between residents and non-residents through the
reverse charge mechanism to reduce tax evasion. It
recommended that all taxpayers should be obligated
to keep regular ledgers and accounts to reduce tax
evasion.
The study of [22], aimed to review the most
important problems in the value-added tax and their
proposed treatment. It concluded that it is difficult
for the auditor to access, discover, and examine
Internet services and that there are no agreed-upon
mechanisms to tax invisible digital products. It
recommended the need to tighten control over bank
transactions between residents and non-residents
and to apply reverse charge mechanisms.
The study by [2], aimed to identify the technical
organization of the reverse charge method to
measure the value-added tax base in Egypt, the
effects and financial returns resulting from its
application in Egypt, and to measure the impact on
the tax revenues. It concluded that there is a
significant effect when applying reverse
commissioning, which is reflected in combating tax
avoidance because non-residents failed to register or
appoint an agent responsible for measuring the
taxable base, calculating and supplying the tax, in
addition to its contribution to increasing tax
revenues.
However, the study of [3], aimed to determine
the relationship between the implementation of the
value-added tax neutrality principle and the reverse
charge mechanism. It concluded that to achieve the
tax neutrality principle, tax deduction must be
applied, and it is considered an integral part of the
value-added tax mechanism. It also found that
applying the reverse charge mechanism does not
affect the implementation of this principle and that
the taxable customer is entitled to deduct the tax on
his inputs from the tax on his outputs.
The study of [23], aimed to develop a general
mechanism for reverse charges in the value-added
European Union tax system to address tax
avoidance for taxpayers. It concluded that the
expansion of the reverse charge mechanism and the
collection of tax on all transactions between
companies while allowing a tax deduction on inputs
from the tax on outputs, reduces the scope of tax
evasion and tax non-compliance.
The study of [24], aimed to present a concept
for exchanging data and information on value-added
tax using modern tax techniques between the
European Union member states to reduce tax
avoidance. The study concluded that applying the
reverse charge mechanism to reduce tax avoidance
is insufficient due to the possibility of transforming
data into goods and services not covered by the
reverse charge mechanism. The study recommended
the necessity of concluding bilateral agreements
between the European Union member states for the
exchange of data and information to help reduce tax
avoidance and provide common solutions.
3.2 Studies Dealing with the Withholding
Tax Mechanisms
The aim of the study [25], was to demonstrate the
effectiveness of integration between the control
systems to achieve justice in calculating the direct
withholding tax. The study reached a set of
conclusions, the most important of which is the
weakness of coordination between the state
departments concerned with this subject (internal
control in the centrally funded departments, the
treasuries, the General Authority for Taxes, and the
Office of Financial Supervision), and the
shortcomings in the control and information
procedures among them. The study presented a set
of recommendations, including the need to adopt
clear and simple procedures for calculating the
direct withholding tax, and the need to activate a
mechanism for cooperation in the field of control
and informatics between the departments.
The study of [26], aimed to analyze the aspects
of taxes on international capital income with regard
to the imposition of withholding tax on the interest
paid to non-residents and its impact on investment
returns, exchange rates, and distortions resulting
from the differential tax treatment of local and
international investors. The study found a decrease
in the outcome of withholding tax on interest
income paid to non-residents due to tax avoidance in
the home country.
The study of [14], aimed to identify the role of
information technology in withholding tax. It
concluded that there is a need for an electronic
system that shows tax accounting procedures for
direct withholding tax while building a database for
taxpayers and preparing the necessary decision-
making reports.
The study of [10], aimed to strengthen
mechanisms to combat tax avoidance for digital
economy activities in the Egyptian and Saudi tax
systems and to evaluate the tax treatment of digital
economy activities in light of international
guidelines. It concluded that tax transactions that
take place between residents and non-residents are
subject to withholding tax based on the place of the
service and that tax avoidance of digital economy
activities leads to the erosion of tax bases. It
recommended the need to reconsider the concept of
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permanent companies for a non-resident person in
terms of withholding tax.
The study by [27], aimed to identify the
obstacles to collecting the direct withholding tax at
the tax administration, which negatively affects the
tax revenue, and to propose solutions to address
them. It reached several results, the most important
of which is an increase in the evasion of
withholding tax. The study recommended applying
an electronic database that includes all the
taxpayers’ data to reduce tax evasion and avoidance
of withholding tax.
The study of [28], aimed to evaluate the
withholding tax procedures as a tool to increase tax
revenues in Iraq. The study concluded that there is a
large discrepancy between the number of taxpayers
and the number of tax employees to audit the
withholding tax. It recommended the need to work
on simplifying procedures to ensure that tax
deductions are transferred in a timely manner.
The difference between the current study
and previous studies
- By explaining and analyzing previous studies, it
was found that the majority of studies that dealt with
the rules of reverse charge mechanisms linked them
with tax havens, tax evasion, and avoidance in the
European Union countries and Egypt; but neither
dealt with the reverse charge and withholding tax
mechanisms in the Saudi business environment,
This is what the current study will address.
- With regard to the application of the withholding
tax and linking it to the mechanisms of reverse
commissioning, there are no studies that deal with
this subject due to its novelty.
For previous studies related to withholding tax, it
was found that they dealt with its impact on the
benefits paid to non-residents and on tax planning
and its relationship with tax coordination. Also, the
studies conducted in the Iraqi business environment
focused on the sums that are deducted from the
employees’ salaries in the public and private sectors.
These previous studies did not address the link
between the variables of the present study- namely
the application of reverse charge and withholding
tax mechanisms to reduce tax avoidance- which is
what the current research applies to the Saudi
business environment. The latter is a representative
sample of the tax community and a tool for the
development and application of modern methods to
measure the tax base of imported services.
This study is one of the relatively few studies
that contribute to providing a framework for
applying the accounting mechanisms for reverse
calculation and withholding tax and linking them to
reduce tax avoidance.
4 Research Methodology
4.1 Research Community
The field research community is represented by
those interested in taxation and reverse charge. It
showed cooperation with the researcher, and a set of
vocabulary was chosen to represent the research
sample. This sample included 51 financial managers
in companies registered with value-added tax, 87
employees of the Zakat, Tax, and Customs
Authority, and 63 auditors, so the total number of
the selected sample is 201 respondents. Our research
model is presented in Figure (1).
4.2 Module and Analysis Tools
The analysis unit included employees of the Zakat,
Tax, and Customs Authority at various
administrative levels, auditors, and financial
managers in companies, and their number reached
201 individuals. They were selected as the most
appropriate to answer the questions in the study
tool. Data were processed and analyzed using
SMART PLS software, and many statistical
methods will be used in this research, such as
descriptive statistical methods. These include the
calculation of arithmetic means, the standard
deviations of the research variables, and the bilateral
linear correlation coefficients between them, to give
initial results about these variables. The Structural
Model was also used in the study, according to the
Maximum Likelihood Estimation method, using the
Analysis Moment of Structure tool to test the study
hypotheses.
4.3 Data collection Tool
The research tool was to design an electronic
questionnaire as a central tool for the research. The
first page introduced the sample members and the
study objectives:
The first part: Included statements related to the
application of reverse charge mechanisms in
companies. This part included a set of questions to
identify the reverse charge mechanisms and the
application of withholding tax, measured through
statements for each axis on a scale from 1 to 5.
Part Two: It included statements related to limiting
tax avoidance. This axis included a set of questions
to identify the extent of the impact of reverse charge
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and withholding tax on limiting tax avoidance,
measured through statements on a scale from 1 to
4.4 Study Model
Fig. 1: Research model
5 Results
5.1 Reliability
Reliability was evaluated by examining the
ramifications of the factors with their latent
structures. More than one reliability index was
calculated: Cronbach's alpha, Composite reliability,
and Average Variance Extracted.
Fig. 2: Statistical analysis performed
Figure (2) and Table (1) show the results of the
statistical analysis of the asymptotic validity test of
the research data and model using the Smart PLS
program.
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Table 1. Results of Measurements Model: Convergent Validity
Items
Constructs
Loading
Rho_A
Composite
Reliability
Average Variance
Extracted (AVE)
AWT1
Application
of
withholding
tax rules
0.703
0.801
0.852
0.536
AWT2
0.770
AWT3
0.736
AWT4
0.733
AWT5
0.717
RCM1
Reduce tax
avoidance_
0.590
0.828
0.866
0.522
RCM3
0.639
RCM5
0.679
RCM6
0.810
RCM7
0.770
RTA1
Reverse
charge
mechanisms
0.643
0.773
0.827
0.593
RTA2
0.733
RTA3
0.809
RTA4
0.767
RTA5
0.763
RTA6
0.594
Note. Source: Prepared by researchers using Smart PLS outputs.
From Table (1) and Figure (2), the research
variables achieved very high values for the
measures and variables used. Factors Loadings
ranged between 0.810 and 0.643, which are good
reliability coefficients. The values of Cronbach's
alpha coefficient (CA) and composite reliability
(CR) ranged between 0.814 and 0.872, and the mean
values of variance (AVE) ranged between 0.522 and
0.593.
It is clear from the above table that all variance
averages (AVE) are greater than 0.5, and all
composite reliability coefficients (CR) are
significant and statistically acceptable because they
are higher than 0.7. In addition, all Cronbach's alpha
coefficients (CA) are statistically acceptable,
because they are higher than 0.7 and within the
recommended rates according to (Dijkstra &
Henseler, 2015).
5.2 Discriminant Validity
Discriminant validity indicates that the constructs of
a variable are differentiated logically and are not
repeated nor overlapped with other variables. This is
confirmed by testing the discriminant validity
matrix between the variables and dimensions of the
study and comparing the pair of correlations
between the factors obtained with the estimates of
the variance extracted for the constructs. The
discriminant validity is determined when it is
confirmed by observing the diagonal elements (the
root square of the average value of the covariance
AVE for each construction) whose values must be
higher than the correlated values in rows and
columns. The two tables hereunder display the
discriminant validity indicators. The results of the
Discriminant Validity of the Measures are presented
in Table 2.
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Table 2. The results of the Discriminant Validity of the Measures
Application of
withholding tax rules
Reduce tax
avoidance_
Reverse charge
mechanisms
0.732
Application of withholding tax
rules
0.722
0.500
Reduce tax avoidance_
0.702
0.570
0.391
Reverse charge mechanisms
Note. Source: Prepared by researchers using Smart PLS outputs.
Table 3. The HTML Discriminant Validity Test
Application of
withholding tax rules
Reduce tax
avoidance_
Reverse charge
mechanisms
Application of withholding tax
rules
0.586
Reduce tax avoidance_
0.696
0.475
Reverse charge mechanisms
Note. Source: Prepared by researchers using Smart PLS outputs.
Table 4. R-Squared, F-Squared, and Q² of the Endogenous Latent Variables
Constructs
R-Squared
Q²
F-Squared
Reduce tax avoidance
0.416
0.575
/
Application of withholding tax rules
0.155
Reverse charge mechanisms
/
/
0.283
Note. Source: Prepared by researchers using SmartPLS outputs.
Table (3) shows that all the diagonal values are
higher than the associated values in the rows and
columns and range between 0.702 and 0.73. This
supports the discriminant validity of the research
tool statements.
If the HTMT is lower than 0.90, the two
reflective structures are nearly identical and have a
weak correlation (Dijkstra & Henseler, 2015). Table
(3) shows that the measures are reliable and valid
because all values are lower than 0.90. Thus, the
discriminant validity (HTMT) of the model can be
trusted, as the HTMT result achieved the lower
bound and it was confirmed that there was no
multicollinearity.
5.3 Model Fit Quality
The structural model of the research is assessed
through the use of a set of statistical standards and
methods described in the following table:
We note from Table (4) that the value of the
determination coefficient for the variable Reduce
tax avoidance towards both Applications of
withholding tax rules and Reverse charge
mechanisms in the model is (R2 = 0.416). This
indicates that 41.6% of the variance in Reduced tax
avoidance is explained by two constructs: The
application of withholding tax rules and Reverse
charge mechanisms. To determine the effect of each
of these constructs on Reducing tax avoidance, the
(F2) coefficient was calculated. The effect of the
Application of the withholding tax rules variable
was (0.155), and the effect of the Reverse charge
mechanisms was (0.283).
Also, the Blindfolding test was used to clarify
the ability of the variable of the Application of
reverse charge mechanisms in companies to predict
the changes that will occur to reduce tax avoidance.
Table (4) indicates that the (Q²) value reached
0.575, and this ability is considered good.
The researcher believes that all of the above
confirms that the two dimensions Application of
withholding tax rules and Reverse charge
mechanisms have the ability to predict and interpret
the variation in Reducing tax avoidance. Therefore,
the research hypotheses can be tested.
5.4 Testing the Research Hypotheses
Based on the foregoing, after making sure that there
is no overlap between the dimensions of the
variables, that the study data follow a normal
distribution, and to ensure the quality of the model,
it is possible to test the research hypotheses. Indeed,
the analysis of least squares (PLS) was used based
on the Bootstrapping test to analyze the direct and
indirect effect between the variables of the research.
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Table 5. Path Coefficient of the Research Hypotheses
Hypotheses
Relationship
Std. Beta
Std. Error
T-Values
P-Values
Decision
HP1
Application of
withholding tax
rules -> Reduce tax
avoidance_
0.327
0.070
4.686
0.000
Supported**
HP2
Reverse charge
mechanisms ->
Reduce tax
avoidance_
0.442
0.067
6.599
0.000
Supported**
Significant at P** =< 0.01, p*<0.05
Note. Source: Prepared by researchers using Smart PLS outputs.
Based on the foregoing, after making sure that there
is no overlap between the dimensions of the
variables and that the study data follow a normal
distribution, and to ensure the quality of the model,
it is possible to test the research hypotheses. Indeed,
the analysis of least squares (PLS) was used based
on the Bootstrapping test to analyze the direct and
indirect effect between the variables of the research.
Fig. 3: Bootstrapping Test Structural Model
According to the results presented in Table [5] and
Figure (3), there exists a direct positive effect of the
application of withholding tax rules on the reduction
of tax avoidance. This effect is statistically
significant at a significance level of α≤0.05. The
statistical significance of this effect is further
confirmed by the associated (t) value of 4.686 at a
significance level of 0.01. Therefore, the first
hypothesis is accepted. Similarly, the results
presented in Table [5] and Figure (3)) indicate a
statistically significant positive effect of reverse
charge mechanisms on the reduction of tax
avoidance. The [t] value for this effect was found to
be 6.599 at a significance level of α≤0.01. Hence,
the second hypothesis is accepted.
The results suggest that the application of
withholding tax rules and reverse charge
mechanisms has a direct positive effect on the
reduction of tax avoidance. Tax avoidance refers to
the legal use of tax regulations to reduce one's tax
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liability. However, excessive tax avoidance can be
harmful to the economy, as it can lead to reduced
tax revenues, increased income inequality, and a
perception of unfairness in the tax system.
The application of withholding tax rules and
reverse charge mechanisms can help to reduce tax
avoidance by making it more difficult for taxpayers
to manipulate tax regulations. Withholding tax rules
require that a portion of an individual's income is
withheld by the payer and remitted to the tax
authority. Reverse charge mechanisms, on the other
hand, shift the responsibility for paying taxes from
the seller to the buyer. Both of these mechanisms
make it more difficult for taxpayers to evade taxes
or manipulate tax regulations for their own benefit.
The statistically significant positive effects observed
in the study suggest that the application of these
mechanisms can be an effective way to reduce tax
avoidance. These findings are important for
policymakers and tax authorities, as they suggest
that efforts to strengthen withholding tax rules and
reverse charge mechanisms may be an effective way
to combat tax avoidance and improve tax
compliance.
6 Discussion
Based on the research findings, the following is
shown:
The present study demonstrates a positive effect
of the application of reverse charge mechanisms and
withholding tax on reducing tax avoidance, which is
consistent with previous research conducted by [18],
[24], [25], [10], [21], [26], [27]. The application of
the reverse charge mechanism to all transactions
between a resident customer and a non-resident
supplier in the Kingdom of Saudi Arabia allows the
disclosure of taxpayers' real activities and enhances
tax compliance, thereby reducing tax avoidance.
However, the researcher notes that non-resident
companies providing services to residential clients
who are not subject to tax may not be required to
register for value-added tax, given their residence
outside the country and the absence of any tax
obligations or tax returns.
To address the challenge of imported
(electronic) services that are difficult to detect and
identify, the researcher proposes holding Internet
brokers or portals that act as intermediaries for non-
resident suppliers responsible for paying taxes.
Similarly, in the case of shipping a commodity to a
final consumer, the intermediary shipping company
can be considered the importer and responsible for
paying taxes.
There is also a direct positive effect of applying the
withholding tax on reducing tax avoidance. This is
consistent with the studies of [10], [25], [26], [27].
Indeed, the withholding tax is imposed on the non-
resident person, and the Authority obliges the
resident companies, whether taxpayers or non-
residents, as well as permanent companies in the
Kingdom for non-residents that pay an amount to a
non-resident from a source in the Kingdom, to
deduct tax from the amount paid according to the
prices mentioned in the system and to declare the
withholding tax monthly. This allows the provision
of information for transactions between residents
and non-residents, to prevent the occurrence of tax
avoidance for the activities of the digital economy
resulting from transactions that take place via the
Internet.
The withholding tax is linked to the reverse
charge mechanism. This is in line with the study of
because the supplier is a non-resident and performs
a service within the Kingdom. Therefore,
transactions between residents and non-residents
can be counted through the monthly withholding tax
and value-added tax declarations for services that
are subject to the reverse charge mechanism. This
prevents tax avoidance and evasion while taking
into account services exempt from withholding tax.
The application of reverse charge and
withholding tax mechanisms enhance providing
correct and undistorted financial information, which
contributes to the disclosure of the taxpayers’ real
activity.
For withholding tax auditing, the auditor shall
review the value-added tax declarations to account
for the amounts paid to non-residents, applying the
reverse calculation mechanism. Likewise, when
auditing the tax for the reverse charge, the examiner
shall review the declarations and amounts paid for
the withholding tax, which contributes to preventing
tax avoidance.
Reverse charge mechanisms help in determining
the withholding tax base, given that the tax base is
calculated on the whole amount paid or the value of
the service provided by the resident to the non-
resident.
Finally, the discussion notes that calculating the
tax for the reverse calculation based on the transfers
received from the withholding tax can be difficult
due to differences in accounting bases. However,
limiting transactions between residents and non-
residents can guide this area. Overall, the discussion
highlights the importance of implementing reverse
charge and withholding tax mechanisms in reducing
tax avoidance and promoting tax compliance.
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7 Recommendations
- It is necessary to spread tax awareness regarding
the application of the mechanisms of reverse charge
and withholding tax to enact the taxpayers’
obligation to supply the tax on transactions with
non-residents.
- It is essential to improve the relationship between
the taxpayers and the Zakat, Tax, and Customs
Authority and to overcome the obstacles facing the
taxpayers.
- It is essential to simplify tax procedures and to
measure the tax base of the reverse charge and
withholding tax objectively.
- It is necessary to introduce a provision in the
Executive Regulations to allow non-taxable persons
who meet all qualification requirements to apply to
the Authority to calculate the tax on those services
and to allow them to deduct the input tax for reverse
charge transactions.
- It is essential to benefit from the experiences of
France and Germany, which obligated the residents,
whether registered or unregistered, to supply the tax
on transactions with non-residents as the service
beneficiary.
Acknowledgment:
The author would like to express their gratitude to
the Deanship of Scientific Research at Jouf
University for funding this work through the
General Research Project under grant number
(DSR- 2021-04-0307).
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
This work was funded by the Deanship of Scientific
Research at Jouf University under Grant Number
(DSR- 2021-04-0307).
Conflict of Interest
The author states that there is no conflict of interest.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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