As organizations in Saudi Arabia move with advances in digital transformation, they tend to begin the new phases of e-invoicing initiated by the Zakat, Tax, and Customs Authority (ZATCA) to bring transparency in payments, lessen fraud, and improve VAT compliance. The ZATCA Phase 2 initiative is the second and probably most significant step toward integration of business systems with ZATCA’s digital platform. Unlike Phase 1, which requires businesses to only generate and store an e-invoice, Phase 2 mandates businesses to connect their invoicing systems directly to ZATCA’s portal for real-time reporting and approval of invoices. This means that a set of technical and legal specifications will have to be met before any invoice is issued.
Understanding and complying with ZATCA Phase 2 requirements is critical for businesses to avoid penalties and maintain operational continuity. This transition will take place in waves that first affect large corporations and then small and medium-sized enterprises. From technical specifications down to XML formatting and ERP or billing system compliance, every detail must be covered. There are comprehensive guidelines on compliance and timeline provided by ZATCA, but companies should be vigilant because failure to meet deadlines or standards usually incurs fines and disruption. One has to stay ahead by being proactive, well informed, and prepared in such an evolving regulatory landscape.
Here are some of the ZATCA Phase 2 requirements: What Your Business Must Know
1. What is ZATCA Phase 2?
ZATCA Phase 2, also called the Integration Phase, is a continuation of the e-invoicing journey started by Phase 1 (the Generation Phase) in December 2021. While Phase 1 required businesses to generate and securely store e-invoices in a compliant system, Phase 2 requires businesses to integrate their invoice-generating systems with ZATCA’s central platform in real-time. This phase gives ZATCA the ability to review invoices at the time of issuance so that fraud can be curtailed, tax compliance improved, and the overall oversight of business transactions ramped up in the Kingdom of Saudi Arabia.
2. Who is required to comply with ZATCA Phase 2?
All businesses in Saudi Arabia registered for VAT purposes will have to comply with ZATCA Phase 2. These include businesses issuing tax invoices, simplified tax invoices, and debit/credit notes. However, the rollout will be phased. ZATCA has started to notify taxpayers based on annual turnover, with notifications going out to large companies first.
Business with turnover exceeding 3 billion SAR is included in the first wave (January 1, 2023).
Smaller companies will be notified later.
ZATCA has been giving each wave of notification 6 months so that the businesses can prepare accordingly.
It is hence important to check the ZATCA portal regularly to see if notification has been received and what would be the deadline for implementation.
A high-level requirement as compared to Phase 1, ZATCA Phase 2 is more technical. Your business must ensure that the invoicing software or ERP system complies with a series of key requirements:
a. Integration with ZATCA’s FATOORA Platform
Your system must be able to connect securely to the FATOORA platform. This includes:
Obtaining digital certificates.
Setting up API connectivity.
Allowing real-time data transmission of invoices to ZATCA.
b. UUID & QR Code Requirement
Every invoice must bear a UUID, which means Universal Unique Identifier, and a cryptographic stamp. The QR Code for simplified invoices is required to facilitate easy verification of invoice particulars by customers and auditors.
c. XML Format
All invoices must be generated in a ZATCA-compliant XML format with the schema requiring the following fields:
Buyer and seller information
Type of invoice
Line-item breakdown
VAT data
Cryptographic hash and digital signatures
d. Clearance and Reporting Mechanism
Tax invoices (B2B) must be cleared by ZATCA prior to the issuance of the invoice to the buyer.
Simplified tax invoices (B2C) must be reported to ZATCA within 24 hours of issuance.
The benefits are numerous that come with ZATCA Phase 2, and though it may seem to entail strict technical compliance rules, it is advantageous for businesses, such as:
An increased degree of transparency where real-time validation of invoices builds trust into business records.
B. Reduces Fraud-the system reduces even the chances of the creation of false invoices or keeping transactions hidden.
C. Faster Audits-Simplifying the whole audit process with ZATCA by digitizing everything.
D. Global Readiness – Saudi Arabia is another among the countries embracing modern tax systems for easy transaction across borders.
5. Preparing for ZATCA Phase 2
Prepare early enough, here are ways your business can be on board:
a. Evaluate Your Current System
Check if the existing billing or ERP system meets the requirements of Phase 2. If that is not the case, then upgrade or use a ZATCA-compliant e-invoicing software.
b. Choose a compliant Solution Provider
Partner with ZATCA-compliant e-invoicing provider, entirely facility integration with FATOORA solution into the existing system. Some good examples of the above are QuickDice ERP, SAP, Oracle, and others-they are already helping businesses follow the compliance standards.
c. Register Digital Certificate
Obtain and install the necessary digital certificates that will sign the invoices. This secures and traces the invoices.
d. Train Your Staff
A very important area of knowledge to have is the new processes for the invoicing, accounting, and IT teams. Conduct training and create a compliance checklist.
e. Test and Validate
Before going live, test the system well using ZATCA’s sandbox environment to net out potential problems.
6. Common Problems and Solutions
A majority of the businesses have problems like data migration, lack of internet connection, or incompatible software. Here are very easy solutions to these:
Incompatibility of the Legacy Systems
Solution: Migrating to Cloud-Based Invoicing Systems or Middleware Integration
Issue: Lack of technical knowledge
Solution: Partnering with an expert or software vendor who specializes in ZATCA compliance.
Issue: Delay Response from ZATCA server:
Solution: Establishing a smart queuing and retry mechanism for invoices submissions.
What Will Happen If You Do Not Adhere? Defaulting compliance with ZATCA Phase 2 may comprise
Financial fines
Suspension of VAT registration
Legal actions
Strict enforcement has been set forth by ZATCA for ensuring smooth operations in transitioning to the fully digital tax system.
Conclusion
ZATCA Phase 2 Introduction toward E-compliance in Saudi Arabia- it concerns rights from VAT control to transparency and accountability in the business ecosystem. Enterprises that get the requirements in earlier time and act accordingly will have a lot of advantages by undergoing faster approval processes with much fewer errors and better reputations with the tax authorities. Preparation for such phase would encompass much more than just the upgrading of the software for internal training, system testing, and ensuring that every single e-invoice generated is in line with what ZATCA has in the form and structure.
A business ignoring or putting off delayed compliance with ZATCA Phase 2 may end up being slow in operations or face penalties, either financial or of a legal nature. That’s why it is important for every business, regardless of whether small or large, to seek the services of qualified consultants or adopt ZATCA-compliant ERP solutions that facilitate the integration.” So that now they are ahead of the game in compliance and put their business up for future growth in a digitally driven economy. Business alignment with ZATCA’s vision will be the first step in taking the smoothest possible journey toward full digital transformation.
