Saudi CIT Long-Term Contracts: Percentage of Completion

Test the statutory definition before selecting the calculation

Income Tax Law Article 26 and Implementing Regulations Article 20 address long-term contracts for taxpayers using accrual accounting. The definition concerns the specified manufacture, installation, construction, turnkey and related-service arrangements not completed in the year execution begins, subject to the six-month exception.

The regulation includes related services such as supervision of construction. That does not make every multi-year service agreement a qualifying contract. Identify the actual work and statutory category before applying the formula.

Dariba recommendation: retain the contract, scope, actual commencement, expected completion and year-end position. Contract signature, mobilisation, billing and actual start of execution can be different dates.

A cross-year contract is not automatically a long-term contract

The provisions exclude a contract expected to be completed within six months from the actual start of the contracted work. A short project can therefore cross a financial year-end without satisfying the tax definition.

Dariba illustration: work expected to begin in November and finish the following February crosses 31 December but remains within six months on those assumptions. The year boundary alone does not establish the long-term-contract treatment.

Review the evidence for expected completion and the actual facts if scope or timing changes materially. The provisions should not be presented as a rule that an original timetable conclusively fixes every later result regardless of implementation.

The formula uses actual annual costs and total estimated costs

Article 26 determines the completed portion by comparing costs incurred during the tax year with the total estimated contract cost. Regulations Article 20(1) sets out the annual calculation: actual costs incurred during the year multiplied by the total contract value, divided by total estimated contract cost.

Use the actual annual numerator. It should not be confused with total costs to date if earlier years have already been recognised. The estimate must concern the same contract scope as the total value and costs in the calculation.

Dariba recommendation: keep a contract-level cost ledger and an approved total-cost estimate, reconciled to the accounts. Explain which costs were incurred in the year, what remains to complete and any unsupported or misallocated amounts.

Follow a complete, stable-estimate illustration across the years

Dariba illustration: assume a qualifying contract value of SAR 10 million and total estimated costs of SAR 8 million that remain unchanged. Actual costs are SAR 2 million in year one, SAR 4 million in year two and SAR 2 million in year three.

The annual proportions are 25%, 50% and 25%. Applied to the contract value, they give SAR 2.5 million, SAR 5 million and SAR 2.5 million of annual contract revenue. The three years reconcile to SAR 10 million revenue and SAR 8 million actual costs.

This is an original illustration of the stated formula, not a numbered ZATCA example. It assumes the estimate, scope and price remain stable and all costs used are correctly identified. It does not prescribe a complete adjustment algorithm for changed estimates, disputed variations or contract losses that the example does not contain.

Billing and collection do not replace the tax progress computation

The accrual and long-term-contract provisions determine the relevant recognition; a payment certificate, invoice or cash receipt does not automatically supply the same annual amount. Establish the taxpayer’s actual right, work and contract calculation.

Dariba recommendation: reconcile the tax progress figure to accounting revenue, invoices, certifications, advances and collections. Explain material differences. An unbilled amount or customer retention should not be excluded solely because cash has not arrived; the actual accrual and contract provisions must be applied.

Conversely, receiving cash is not proof that the entire payment is current taxable profit without examining the transaction. Identify its nature and the relevant recognition rule rather than treating every receipt as identical contract revenue.

The regulation also addresses the relevant contract expense side

Regulations Article 20(1) describes the calculation for contractor revenue and the relevant expense of the contract owner or main contractor. Determine the taxpayer’s position and the specific contract or subcontract being analysed.

That recognition rule does not remove the separate conditions governing expense deduction or capitalisation. A project owner acquiring a capital asset should not assume the whole allocated construction amount is an immediate deductible operating expense merely because the contract spans tax years.

Dariba recommendation: distinguish contract expenditure, an asset being constructed, a subcontract cost and an operating expense. The deductions guide and tax depreciation guide explain the surrounding tax computation.

Changes in estimates and disputed amounts require a documented reconciliation

The denominator is an estimated total cost, so its factual basis matters. Keep dated estimates, reasons for revisions, scope changes and approval evidence. Reconcile contract-value changes and disputed claims to the legal and accounting records.

Dariba analysis: the stable-estimate illustration above does not establish that every later revision should be ignored or that all earlier recognised amounts must automatically be reversed. Analyse the actual change and statutory method, and obtain clarification if a material proposed treatment depends on an unresolved adjustment question.

Do not replace a weak estimate with an arbitrary margin selected to achieve the desired current-year profit. The calculation must remain reproducible from the actual contract information.

Non-compliance permits ZATCA to determine the contract income

Regulations Article 20(3) permits ZATCA, where the taxpayer does not comply with the prescribed calculation, to determine long-term-contract income using the information, evidence and indicators available to it.

Dariba recommendation: retain the definition analysis, commencement and completion evidence, annual costs, total-cost estimate, contract value, progress computation and accounts-to-tax reconciliation. Maintain the applicable records and disclosure obligations and filing timetable alongside the computation.

The CIT calculation does not independently decide a foreign contractor’s Saudi taxable presence, withholding treatment or the Zakat treatment of a different taxpayer. Establish those separate legal positions before applying this guide to a wider project structure.