Challenges in Applying Saudi Arabian Tax Treaties : Digitalization, Withholding Tax, and Permanent Establishment of Non-Residents

As part of Vision 2030, the Kingdom of Saudi Arabia (KSA) has begun implementing broad economic and legal reforms to improve its tax environment and create an amicable setting for international investors. However, there are challenges to this endeavour such as digitalization in income taxation at the global level that are not limited to Saudi rules. This study investigates the challenges in taxation arising from digitalization that can potentially affect base erosion and profit shifting (BEPS) mechanisms both internationally and in Saudi Arabia. One major problem in the Saudi tax judiciary is the interpretation of international tax treaties for determining the existence of a permanent establishment (PE) for the purpose of Saudi income tax for a non-resident providing remote services within Saudi territory. By examining contradictory decisions related to two typical digital services, specifically online travel companies (OTCs) and international telecommunication, this study highlights the complexity involved in digitalization, withholding tax, and PEs. It also accentuates the need to clearly define the meaning of a ‘permanent digital establishment’ by analysing Saudi practices against the context of international rules. Finally, it emphasizes the necessity of establishing a permanent higher chamber in the tax judiciary that will make decisions on stable judicial tax principles. This will improve the Saudi legal tax environment and ensure its consistency with international practices