Question

Q. The paragraph (e) in the article 17 of the Saudi income tax explained how depreciation expense is calculated for any group of assets. (2.0 Marks).

Required:

1. Discuss In Detail This Article
2. Give a numerical example explaining the applicability of the paragraph (e) in the article 17 of the Saudi income tax.

Article 17: Depreciation
(a) Except for land, a depreciation may be deducted for a taxpayer's
depreciable tangible or intangible assets which lose value
because of wear and tear or obsolescence and which are wholly
or partly used in the generation of taxable income, and remain to
have a value after the end of the taxable year.
(b) Depreciable assets are classified into groups and depreciation
rates as follows:
(1) Stationary buildings: five percent (5%).
(2) Movable industrial and agricultural buildings: ten
percent (10%).
(3) Factories, machines, engines, hardware and software
(computer software) and equipment, including passenger
and cargo vehicles: twenty five percent (25%).
(4) Expenses for geological surveying, drilling, exploration,
and other preliminary work to exploit natural resources
and develop their fields: twenty percent (20%).
(5) All other tangible and intangible depreciable assets not
included in pervious categories, such as furniture, planes,
ships, trains and goodwill: ten percent (10%).
(c) The depreciation deduction for each group is determined in
accordance to paragraphs (d) to (l) of this Article.
(d) The depreciation deduction for each group is calculated by
applying its depreciation rate determined in accordance with
paragraph (b) of this Article against the balance of the value of
such group at the end of the taxable year.
(e) The balance of the value of each group at the end of the taxable
year is the total of the balance of the value of the group at the
end of the previous taxable year after the depreciation deduction
in accordance with this Article for the previous taxable year, and
fifty percent (50%) of the cost base of assets in use added to the
group in the current and previous taxable years after the
deduction of fifty percent (50%) of the compensation received
from the assets disposed of during the current and previous
11
taxable years, provided that the balance does not become in the
negative.
(f) If the taxpayer converts its assets to personal use or if the asset
ceases to be used in the generation of taxable income, this action
by the taxpayer is deemed to be a disposal of the asset for its
market value.
(g) When fifty percent (50%) of the compensation of the assets
disposed of during the current and previous taxable years
exceeds the balance of the value of the group at the end of the
taxable year, regardless of the amount of such compensation, the
value of the group shall be reduced to zero and the excess is
included in the taxpayer's taxable income.
(h) If the balance of the value of the group at the end of the year,
after allowing for the deduction in accordance with paragraph
(d), is less than one thousand (1,000) riyals, the amount of the
balance may be deducted.
(i) Where all the assets in a group are disposed of, the balance of the
group may be deducted at the end of the year.
(j) Where a land is bought or sold with constructions thereon, the
value shall be reasonably apportioned to arrive at a separate
value of the construction.
(k) In case a part of the assets is used for the generation of taxable
income, a depreciation deduction is allowed for a part of the
asset value against the part of the asset used in the generation of
the taxable income.
(l) As an exception to the provisions of the previous paragraphs,
assets under Build, Operate and Transfer (BOT) or Build, Own,
Operate and Transfer (BOOT) contracts may be depreciated over
the contract period or over the remaining period of the contract,
if acquired or renewed during that period.

Answer:

(Answer in your own words DO NOT copy from the Law).

Answer 1

Answer (a)

The Article 17 of Saudi Income Tax provides the provisions regarding the calculation of depreciation expense for the assets in the business. The Article 17 is divided into paragraphs which can be summarized as below:

· Para (a) states that depreciation is charged due to normal wear and tear, or obsolescence which is caused due to use of different class of assets for the generation of taxable income, except Land. Land is a non-depreciable asset.

· Para (b) provides the depreciation rates for different class of assets. The rates are as follows:

§ Stationary buildings – 5%

§ Movable industrial and agricultural buildings – 10%

§ Factories, machines, engines, hardware and software(computer software) and equipment, including passenger and cargo vehicles – 25%

§ Expenses for geological surveying, drilling, exploration, and other preliminary work to exploit natural resources and develop their fields – 20%

§ All other tangible and intangible depreciable assets not included in previous categories, such as furniture, planes, ships, trains and goodwill – 10%

· Para (c)&(d) states that the depreciation is calculated by applying the rate given in the para(b) on the value of group of assets at the end of taxable year.

· Para (e) states the rule for calculation of the value of asset for depreciation. The value of asset ion the end of taxable year is calculated as follows

§ Value of the group of asset in the end of previous taxable year

§ Add: 50% of the value of asset purchased during the current taxable year

§ Add: 50% of the value of asset purchased during the previous taxable year

§ Less: 50% of compensation received for asset disposed off in the current taxable year

§ Less: 50% of compensation received for asset disposed off in the previous taxable year

· Para (f) states that if the asset is converted to personal asset then it is considered to be disposed off at market price.

· Para (g) states that if the 50% of of compensation for asset disposed off in the previous or taxable year exceeds the balance in the group then the balance of the asset group is considered ‘0’ and the remaining compensation is included as income.

Eg. 50% of compensation = 4000 , value of group of asset = 3500

In that case, the value of group is reduced to 0 and balance 500 is treated as taxable income.

· Para (h) to (l) deals with other cases of construction on land, part use of asset etc.

Answer (b)

Example: Following is the details of ABC company as on 31 December 2019.

Value of group of furniture as on 01 Jan 2019 = 32000

New furniture purchased on 25 Aug 2019 :5000

Furniture purchased on 12 Sept 2018 : 6000

Furniture sold on 17 Oct 2019: 3000

Calculation of Value of group of furniture as on 31 Dec 2019

PARTICULARS

AMOUNT

Value of group as on 1 Jan 19

32000

Add: 50% of purchase in 2019 (5000 * 50%)

2500

Add: 50% of purchase in 2018 (6000 * 50%)

3000

Less: 50% of sale in 2019 (3000 * 50%)

-1500

Less: 50% of sale in 2018

0

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Value of group of furniture as on 31 Dec 2019

36000

Calculation of Depreciation for 2019

Rate of depreciation as per Para (b) of Article 17 = 10%

Depriciation = 36000 * 10% = 3600.