Saudi Arabia is experiencing a huge digital transformation in every field, and the implementation of e-invoicing by the Zakat, Tax and Customs Authority (ZATCA) is one of the most obvious cases. The project is intended to enhance transparency, to deal with tax evasion, and to make the VAT system in the Kingdom simpler. ZATCA is undertaking the implementation of its e-invoicing system through a two-phase process involving the following: Phase 1 (Generation) and Phase 2 (Integration). Businesses are encouraged to adopt ZATCA e-invoicing software to ensure compliance with these phases and streamline their invoicing operations.

Although the two phases are in the same overarching vision, the two have significant variations in terms of technicalities, business needs, and operational effects. These differences are essential to understand, and any business which has enrolled itself in VAT in Saudi Arabia must comprehend.

Phase 1: The Generation Phase

ZATCA Phase 1 came into effect on December 4, 2021, and marked the official start of mandatory electronic invoicing in the Kingdom. Otherwise known as the Generation Phase, the era revolved around transformation of business to use of skilled labor rather than written documents in form of invoices.

In this period, every business which was registered with VAT had to use e-invoices to capture their transactions either business to business (B2B), business to consumer (B2C) and business to government (B2G).
Invoices had to be created through an electronic system such as ERP software or invoicing tools, which could produce invoices in a structured format. Key fields like seller and buyer VAT numbers, invoice date, tax amounts, and breakdowns had to be included. Additionally, a QR code was mandatory for B2C invoices.

However, the main distinction in Phase 1 is that while invoices had to be generated and stored electronically, they did not have to be shared with ZATCA in real time. This step was more preparatory based on the idea that businesses had to implement digital systems and get acquainted with the principles of e-invoicing.

Phase 2: Integration Phase

Phase 2, more officially known as the “Integration Phase,” started in January 2023, with a wave-based roll out based on company size and revenue. This step built off of the work that had been done in the previous Phase 1 and brought a new level of complication to the mix, real time integration with ZATCA FATOORA platform.

Phase 2 will obligate companies to interconnect their billing systems with ZATCA through safe APIs. Any invoices particularly B2B and B2G invoices are supposed to be sent to the ZATCA to be cleared after which they are supplied to the buyer. In case of the B2C sales, the invoices should be reported to ZATCA within the short time period after issuing.

Technically, the Phase 2 brought more stringent requirements e.g. invoices should be made in a structured XML format, and specific elements had to be included in all invoices e.g. a UUID (Universally Unique Identifier), a digital signature, and a cryptographic stamp. Its software solutions must only be approved by ZATCA and must be able to synchronize in real-time or near-real-time with government system.

What This Implies To The Businesses

Between Phase 1 and Phase 2 is not a small jump. During Phase 1, the majority of businesses had to make sure that they have the right software so that they could generate and store invoices in digital format. Under Phase 2 it is projected that businesses will now interconnect with Government structures and also that the submissions must be compliant with stringent technical requirements as well as produce real time invoice verification and reporting.
This step was more preparatory based on the idea that businesses had to implement digital systems and get acquainted with the principles of e-invoicing.

Getting ready to Transition

In case the activation wave of Phase 2 remains ahead of businesses, the slogan is to plan in advance. The first move is to evaluate your current system of issuing invoices. Next, it is of crucial importance to pick a ZATCA-compliant e-invoicing provider, which provides solid integration and support. Using ZATCA sandbox environment will facilitate tests of your connection to its API, prior to production.
It is also important to train the accounting and finance teams. Understanding the new process of invoicing will minimize the number of mistakes and will make it much easier to comply at the first attempt.

Looking Ahead

The e-invoicing initiative in Saudi Arabia is historic regarding complete digitalization and the modernization of taxes. It is not only about evading penalties in order to understand the differences between Phase 1 and Phase 2; it is also about situating your business in an optimal position concerning efficiency, automation and regulatory compliance in a rapidly evolving economic environment.

The businesses cannot afford to respond to the admonition of ZATCA to adopt the e-invoicing scheme, but they need to transform to action. The preparation time is right now.