Why is Automation Crucial for VAT Reconciliation in Saudi Arabia?

Saudi Arabia implemented phase 2 under e-invoicing in January 2023, which mandates all enterprises to integrate their ERP/accounting system/POS with the Fatoora portal to send B2B invoices for clearance and B2C invoices for reporting. Later, ZATCA calculates Value Added Tax (VAT) liability based on the e-invoicing data and proceeds with audits and penalties for potential discrepancies.

Hence, this scenario requires accurate and efficient VAT reconciliation, especially for large enterprises with multiple systems and stores. While manual reconciliation might be feasible for small businesses, it becomes an error-prone and burdensome process for large enterprises.

This article explains why automation is essential for VAT reconciliation in Saudi Arabia.

What is e-invoicing in Saudi Arabia?

e-Invoicing is the digitalization of the invoice issuance process. Businesses electronically generate and submit invoices to the government platform for validation and record-keeping. This initiative promotes transparency and reduces tax evasion.

Relationship between e-invoicing and VAT

The government calculates VAT liability based on the reported e-invoices. Any discrepancies between e-invoice data and actual sales records can lead to under/over-reporting, resulting in penalties or financial losses for the enterprise.

What is VAT reconciliation?

VAT reconciliation involves comparing e-invoice data with sales records to identify and rectify any discrepancies. This reconciliation ensures accurate VAT reporting and minimizes the risk of penalties from ZATCA.

Need for automation of VAT reconciliation

Manually performing manual reconciliations for large enterprises with multiple systems and stores is

• Time-consuming: Can take up to 28 man-days per month, straining limited finance team members. This may cause delays in monthly VAT filing.
• Cumbersome: Comparing data across multiple systems requires more resources and is prone to errors.
• Inaccurate: Manually identifying and correcting discrepancies can be unreliable.

What are the advantages of automating the VAT reconciliation?

Automating VAT reconciliation brings significant benefits:

• Faster and efficient: Processes large volumes of data from multiple sources quickly and accurately.
• Enhanced accuracy: Reduces human error with automated matching algorithms, achieving >90% accuracy.
• Cost-effective: Saves time and manpower, reducing associated costs.
• Improved compliance: Minimizes the risk of penalties due to discrepancies.
• Better decision-making: Provides clearer insights into sales data and identifies areas for improvement.

Moreover, ZATCA has started issuing notices to seek explanation for incorrect VAT reporting, making accurate reconciliation crucial. Furthermore, penalties can damage an enterprise's reputation and public image.

Therefore, businesses must adopt an automated VAT reconciliation solution to ensure accurate compliance, optimize costs and resources, and avoid the risk of penalties.