This comprehensive guide aims to provide a deep understanding of Phase 2 of the electronic invoicing system, starting from basic definitions and technical invoice requirements to issuance procedures and compliance. We will cover all important aspects that organizations need to ensure smooth transition and full compliance with Phase 2 requirements, including invoice types and elements, penalties for non-compliance, and how to choose appropriate technical solutions for Phase 2.

What is Phase 2 of the Electronic Invoicing System in Saudi Arabia?

Phase 2 of the electronic invoicing system in the Kingdom of Saudi Arabia, officially known as the "Integration and Connectivity Phase," represents an important evolution from the implementation of the initial Phase 1. While Phase 1 focused on creating and storing electronic invoices, Phase 2 establishes a direct real-time connection between companies and ZATCA through the "Fatoora" platform.

Key Differences from Phase 1

The fundamental difference between Phase 1 and Phase 2 lies in the level of integration required for the invoicing system. Phase 1 allowed companies to create electronic invoices using compliant software without the need for mandatory real-time reporting. Phase 2, however, requires direct integration through APIs with ZATCA's Fatoora system, enabling immediate verification and approval of each invoice upon creation.

Who Must Implement Phase 2 of Electronic Invoicing?

Phase 2 of the electronic invoicing system in the Kingdom of Saudi Arabia applies to all taxpayers registered for Value Added Tax (VAT). This Phase 2 requires integration with ZATCA's Fatoora system and sending each invoice to the authority for verification. Phase 2 implementation occurs in gradual stages according to the timeline set by ZATCA, where it is applied to different groups of taxpayers at varying dates to ensure smooth and effective implementation of Phase 2.

Requirements for Electronic Invoice Issuance in Phase 2

Phase 2 of implementing the electronic invoicing system in the Kingdom of Saudi Arabia, known as the "Integration and Connectivity Phase," represents a qualitative leap in the digital tax system, requiring targeted organizations in Phase 2 to comply with basic requirements to ensure full compatibility with ZATCA systems:

1. Use software that meets all ZATCA requirements and is connected to the internet
2. Connect the company's invoicing software with ZATCA's "Fatoora" system
3. Create and store each electronic invoice in the format specified by ZATCA (XML or PDF/A-3 with XML)
4. Use electronic signatures approved by ZATCA to protect invoices from tampering and ensure their authenticity
5. Comply with all rules and conditions set by ZATCA for Phase 2

Implementation Phases of Phase 2 Electronic Invoicing

ZATCA follows a gradual approach in implementing Phase 2 of the electronic invoicing system (Integration and Connectivity Phase), having divided taxpayers into twenty-two groups based on their annual VAT-liable revenue. This phased implementation of Phase 2 aims to ensure smooth and organized transition to the digital tax invoicing system, giving each group sufficient time to prepare and comply with integration requirements with the "Fatoora" platform.

Implementation Schedule for Phase 2 Electronic Invoicing, you can find it by visiting this ([[linkhttps://zatca.gov.sa/en/E-Invoicing/Introduction/Pages/Roll-out-phases.aspx]]).

Important Notes for Phase 2:

• Advance Notice: ZATCA notifies targeted organizations at least six months before the specified date for Phase 2
• Gradual Implementation: Phase 2 is applied to groups gradually according to revenue size
• Mandatory Integration with Fatoora Platform: All organizations targeted in Phase 2 must connect their invoicing systems with the "Fatoora" platform before the specified date

Types and Elements of Electronic Invoices in Phase 2

In Phase 2 of the Saudi electronic invoicing system (Integration and Connectivity Phase), the requirements for each invoice become more detailed and technical. This Phase 2 requires linking organizations' electronic invoicing systems with ZATCA systems (Fatoora) according to the technical and procedural provisions and requirements stipulated.

Electronic invoice elements vary according to invoice type in Phase 2:

1. Tax Invoice (B2B/B2G):

• Document description specifying it as a "tax invoice"
• Unique sequential number for each invoice
• Date the invoice was issued
• Comprehensive supplier data: name, location, VAT registration number, and commercial registration number
• Complete customer data: name, address, VAT registration number, and commercial registration number
• Product and service details specifying quantity, unit price, tax value, tax rate for each item, and totals with and without tax
• Total value of goods and services before adding VAT
• Total VAT amount applied to the entire invoice
• Final amount including all items with VAT
• QR Code for each invoice

2. Simplified Tax Invoice (B2C):

• Document description clarifying it as a "simplified tax invoice"
• Unique sequential number for each invoice
• Company or business establishment name
• Company or establishment location and address
• Date the invoice was issued
• Establishment's VAT registration number
• Product and service details showing quantity, unit price, tax value, and total including tax
• Total value of goods and services without adding VAT
• Total VAT value applied to the entire invoice
• Final amount including items with VAT
• QR Code for each invoice

Important Note for Phase 2: When issuing credit notes in Phase 2 of the electronic invoicing system, the justification or reason that led to issuing this note must be mentioned, whether for regular or simplified tax invoices.

Method of Issuing Electronic Invoices in Phase 2

The mechanism for issuing electronic invoices in Phase 2 varies based on the type of business transaction and the receiving party for each invoice. This Phase 2 requires direct integration with ZATCA's "Fatoora" platform, with different timing for sending and approval according to the nature of each invoice. The issuance process in Phase 2 is divided into two main types of invoices, each with specific procedures:

1. Simplified Tax Invoice (B2C):

• Seller creates the electronic invoice ensuring all required elements for simplified tax invoices are included
• Customer receives a copy of the simplified tax invoice
• Electronic archiving of the invoice
• Send the invoice to ZATCA through the "Fatoora" platform within a maximum of 24 hours

2. Tax Invoice (B2B):

• Seller creates the electronic invoice ensuring all required data for tax invoices is included
• Send the invoice to ZATCA through the "Fatoora" platform for approval
• Receive the approved invoice from ZATCA and resend it to the seller
• Provide the buyer with an approved and readable copy of the tax invoice
• Electronic archiving of the invoice

Penalties for Non-Compliance with Phase 2 Electronic Invoicing Implementation

Based on ZATCA regulations, Phase 2 of the electronic invoicing system imposes a specific system of financial penalties on organizations that violate electronic system requirements. These financial penalties for Phase 2 range between different levels according to the severity of the violation and its impact on the tax invoicing system, with stricter penalties applied for repeated violations in Phase 2. The following details the financial penalties applied in Phase 2:

• Financial penalty of SAR 5,000 imposed on organizations that fail to issue invoices electronically or fail to store them in the required electronic method in Phase 2
• Financial fine of SAR 10,000 for companies that do not include QR code in simplified tax invoices
• Penalty of SAR 10,000 for organizations that delete or modify electronic invoices after issuance and approval in Phase 2
• Fine of SAR 10,000 applied to companies that fail to report technical failures that prevent electronic invoice issuance to ZATCA
• Application of additional penalties and other stricter measures in case of repetition of any of these violations by the same organization in Phase 2, where fines may reach SAR 50,000

To ensure full compliance with Phase 2 electronic invoicing system requirements and avoid financial penalties, organizations must prepare early and plan in advance before Phase 2 deadlines with sufficient time, especially since ZATCA provides six months advance notice. It is essential to ensure complete technical integration with the "Fatoora" platform and conduct comprehensive tests of all invoicing system functions before the Phase 2 deadline. This also requires training all relevant employees on the new electronic invoicing system and continuous communication with technical solution providers to solve any problems that may appear in Phase 2. Finally, it is recommended to establish a contingency plan to deal with technical failures and immediate reporting to ZATCA of any problems that prevent electronic invoice issuance.

Choosing the Appropriate Technical Solution for Phase 2 Electronic Invoicing

Choosing the appropriate technical solution for the electronic invoicing system is one of the most important strategic decisions organizations make to comply with Phase 2 requirements. This solution must be fully compatible with ZATCA specifications and ensure seamless integration with the government "Fatoora" platform in Phase 2. The solution should also provide advanced technical capabilities to ensure security and reliability in sending and receiving operations for each invoice, in addition to the ability to handle all types of invoices and notifications required in Phase 2. When evaluating different solution providers for Phase 2, ensure the chosen solution provides:

• Official approval from ZATCA with inclusion in the approved solution providers directory to ensure full compliance with Phase 2
• Immediate and direct integration with Fatoora platform with guaranteed real-time sending for each standard tax invoice
• Multiple format support including XML and PDF/A-3 with the ability to switch between them according to invoice type in Phase 2
• Cryptographic security features (unique identifier and digital signatures)
• Guarantee that invoices cannot be modified or tampered with through the electronic issuance system applied in Phase 2
• QR Code generation capabilities

Frequently Asked Questions

1. What is the difference between Phase 1 and Phase 2 of electronic invoicing?

Phase 1 only requires creating and storing electronic invoices, while Phase 2 (Integration and Connectivity Phase) requires direct integration with ZATCA's "Fatoora" platform, with sending each invoice to ZATCA in real-time for verification and approval.

2. When should my organization implement Phase 2?

The implementation timing depends on your organization's annual VAT-liable revenue size. ZATCA notifies targeted organizations at least six months before the specified date. Implementation occurs across 22 groups gradually according to revenue size.

3. Can the same Phase 1 system be used for Phase 2?

It depends on the current system's capabilities. If it supports integration with the "Fatoora" platform and meets all Phase 2 requirements, it can be used. If it only supports invoice creation, it needs updating or replacement.

4. What happens if the system fails while sending invoices to ZATCA?

ZATCA must be immediately notified of any technical failure that prevents invoice sending. It is recommended to establish a contingency plan that includes a backup system and alternative procedures to ensure business continuity and avoid financial penalties.

5. Can invoices be cancelled or modified after being sent to ZATCA?

Invoices cannot be modified or deleted after being sent and approved by ZATCA. In case of errors, a credit or debit note must be issued with the justified reason for issuing the note, and sent to ZATCA according to the same Phase 2 procedures.

Conclusion

Phase 2 of the electronic invoicing system represents a real leap in the Saudi tax system, requiring all VAT-registered organizations to prepare for direct integration with ZATCA's "Fatoora" platform. This transformation in Phase 2 aims to enhance transparency and combat tax evasion through immediate monitoring of business transactions via electronic invoices.

Success in implementing Phase 2 requires careful advance planning, starting from choosing the appropriate technical solution for the electronic invoicing system and ensuring proper integration with ZATCA systems, to training employees and preparing new work procedures for Phase 2. Organizations must begin preparation immediately upon receiving notification from ZATCA for Phase 2, as delays in implementation may lead to significant financial penalties of up to SAR 50,000.

Finally, it is strongly recommended to work with solution providers approved by ZATCA to ensure full compliance with Phase 2 and avoid any technical problems that may affect business operations. Phase 2 is not just a regulatory requirement, but an opportunity to improve operational efficiency and enhance the reliability of your organization's accounting invoicing system.