With the implementation of the electronic invoicing system, these notes are now subject to the same technical and regulatory requirements as electronic invoices, requiring a deep understanding of their nature, provisions, and methods of electronic issuance.

In this comprehensive guide, we will explore everything you need to know about credit and debit notes in the context of electronic invoicing, focusing on regulatory requirements and practical application for small and medium enterprises.

Definition of Credit and Debit Notes

Credit Note: A financial document issued by the supplier to reduce the amount due from the customer, used in cases that require reducing the value of the original invoice or refunding part of the paid amount.

Debit Note: A financial document issued by the supplier to increase the amount due from the customer, used in cases that require adding additional amounts that were not included in the original invoice.

Regulatory Basis for Notes

Article 54 of the Executive Regulations of the Value Added Tax Law stipulates the cases in which credit and debit notes must be issued, and defines the requirements and procedures necessary for each case.

Within the framework of electronic invoicing, credit and debit notes are subject to the same provisions of electronic invoicing stipulated in the Governor's Decision No. (62738), which means they must be issued electronically and linked with the systems of the Zakat, Tax and Customs Authority.

Cases for Issuing Credit Notes

Credit notes are issued in several specific cases that require reducing the amount due from the customer. The following are the most important cases that call for issuing this type of note:

1. Goods Returns

When a customer returns goods previously purchased, it requires issuing a credit note that includes identifying the reference original invoice, detailing the returned goods, the reason for return, and the return date.

Practical Example: A customer purchased equipment worth 11,500 riyals including VAT and returned one device worth 1,150 riyals. A credit note must be issued for the returned amount.

2. Price Reductions

Granting discounts or reductions that were not included in the original invoice requires clarifying the type of reduction, whether it's a cash discount or quantity discount, determining the percentage or amount of reduction, the reason for reduction, and the validity period of the reduction.

Practical Example: A company granted a customer a 5% discount on an invoice worth 10,000 riyals due to delivery delay, requiring the issuance of a credit note worth 500 riyals.

3. Error Corrections in Customer's Favor

Correcting errors in the original invoice that led to an increase in the required amount requires identifying the type of error, the correct amount, clarifying the correction, and the date the error was discovered.

Practical Example: VAT was applied at 15% instead of 5% on a partially exempt item, requiring the issuance of a credit note for the tax difference.

4. Partial Invoice Cancellation

Canceling part of the services or goods listed in the invoice requires identifying the canceled part, the reason for cancellation, the canceled amount, and the cancellation date.

Practical Example: Part of a consulting services order worth 2,300 riyals was canceled from a total invoice of 11,500 riyals.

Cases for Issuing Debit Notes

Debit notes are issued in certain cases that require increasing the amount due from the customer. Here are the main cases that necessitate issuing this type of note:

1. Additional Fees

Adding fees that were not included in the original invoice requires clarifying the type of additional fees, the reason for imposing fees, the fee amount, and the fee due date.

Practical Example: Late payment fees worth 230 riyals on an overdue invoice.

2. Price Increases

Increasing prices of goods or services after invoice issuance requires determining the percentage or amount of increase, the reason for increase, the effective date of increase, and prior notice to the customer.

Practical Example: An increase in raw material costs led to a 3% increase in product price.

3. Error Corrections in Supplier's Favor

Correcting errors in the original invoice that led to a shortage in the required amount requires identifying the type of error, the correct amount, clarifying the correction, and justification for the correction.

Practical Example: Forgetting to include VAT on part of the invoice, requiring the issuance of a debit note for the missing tax value.

4. Additional Services

Adding services or goods that were not included in the original invoice requires describing the additional services, service value, service delivery date, and customer approval.

Practical Example: Additional installation services requested by the customer after issuing the original invoice.

Technical Requirements for Electronic Credit and Debit Notes

Electronic notes require compliance with a comprehensive set of technical standards and mandatory fields to ensure full compliance with the requirements of the Zakat, Tax and Customs Authority. These requirements include:

• Sequential number of the note • Universally Unique Identifier (UUID) • Previous document hash function • QR code • Non-tamperable counter • Note issuance date (mandatory) • Note issuance time (mandatory) • Supply date (conditional) • Supplier name and address • Supplier VAT registration number • Additional supplier identifiers • Customer name and address • Customer VAT registration number (for registered customers) • Additional customer identifiers (for non-registered customers) • Reference to original invoice (conditional) • Reason for note issuance (mandatory) • XML format (mandatory for linking with Authority) • PDF/A-3 format (optional for sharing with customers) • Appropriate encryption seal according to linked invoice type • Required data in QR code • Timestamp and tax amounts in the code

Differences in Processing Credit and Debit Notes by Invoice Type

The method of processing credit and debit notes differs depending on the type of invoice they are linked to, where each type follows different technical and procedural requirements. The following are the basic differences between the two types of processing:

1. Notes Related to Tax Invoices

Notes related to tax invoices require a strict approval process, where the note must be sent to the Authority before delivery to the customer, waiting for Authority approval and encryption seal, and the note cannot be delivered until after approval.

This type of note requires immediate linking with the Authority through direct connection with Authority systems, real-time sending, immediate response reception, in addition to complete data requirements including all customer data, complete details of goods and services, and comprehensive information about the tax transaction.

2. Notes Related to Simplified Invoices

Notes related to simplified invoices follow a more flexible sending process, where the note is sent to the Authority within 24 hours, without the need for prior approval, with the possibility of delivering it to the customer immediately upon issuance.

These notes provide timing flexibility including the possibility of batch sending, no need for immediate linking, and batch processing, with simplified data requirements including limited customer data, basic transaction details, and simplified information.

Steps for Electronic Note Issuance

The process of issuing electronic credit and debit notes is carried out through an organized series of steps that ensure full compliance with regulatory and technical requirements. The following are the basic stages for issuing notes:

1. Preparation

The first stage requires determining the type of note whether credit or debit, the reason and justification, and the amount to be adjusted. It also requires identifying the reference invoice through the original invoice number, its issuance date, and ensuring data accuracy, in addition to collecting required documents such as return or modification proofs, customer approvals if any, and supporting documents.

2. System Setup

This stage includes entering basic data such as customer information, transaction details, and amounts and taxes. It also requires linking the note to the original invoice through reference indication, determining the relationship, and verifying data, in addition to comprehensive data review including information accuracy, calculation correctness, and completeness of required data.

3. Issuance and Sending

The final stage includes generating the note electronically through creating an XML file, placing encryption seals, and generating QR code. Then sending to the Authority via immediate approval process for tax invoices, or sending within 24 hours for simplified invoices. Finally, delivery to the customer after approval for notes related to tax invoices, or immediately upon issuance for notes related to simplified invoices.

Accounting and Tax Impact of Credit and Debit Notes

Impact on Value Added Tax

Credit notes lead to reducing the tax due on the supplier, granting the customer the right to adjust deductible tax, and affecting tax returns. While debit notes lead to increasing the tax due on the supplier, the customer's obligation to pay additional tax, and adjustment in tax accounts.

Impact on Financial Statements

In the income statement, notes affect revenue adjustment, impact on gross profit, and expense reclassification. While in the balance sheet, they affect adjusting customer balances, impact on receivables, and adjusting tax liabilities.

Common Errors and How to Avoid Them

When managing credit and debit notes, companies may face several challenges and common errors that can be avoided by applying appropriate solutions and following correct prevention procedures. The following are the main challenges and suggested solutions:

1. Not Linking Note to Correct Invoice

This error occurs when the note is linked to a wrong invoice or incorrect reference data, leading to disruption in accounting records and problems with customers and the Authority.

To solve this problem, it is recommended to implement an automatic reference verification system that automatically verifies the correctness of linking the note to the appropriate invoice, with manual review before issuance as an additional preventive measure.

2. Calculation Errors

These include computational errors in note amounts or applied taxes, which may result from entering incorrect data or not applying correct tax rates.

The optimal solution is to use an automatic calculation system that accurately calculates amounts and taxes, with implementing double review to ensure the correctness of all calculations before issuing the note.

3. Incorrect Customer Data

This occurs when customer information such as name, address, or tax registration number is inaccurate or outdated, affecting the note's validity and acceptance by the Authority.

This problem can be avoided by maintaining an updated customer database and regularly verifying data, with mechanisms to verify information accuracy before each transaction.

4. Issuing Notes Without Sufficient Justification

This occurs when notes are issued without clear legal or commercial justifications, which may lead to regulatory violations and problems with the Authority.

To address this challenge, clear and detailed policies for note issuance must be established that define acceptable cases and required justifications, with comprehensive employee training on these policies.

5. Not Obtaining Necessary Approvals

This includes issuing notes without obtaining required internal approvals or customer approval in cases that require it.

The solution lies in implementing an electronic approval system that ensures obtaining all required approvals before issuance, with clear definition of authorities and responsibilities for each administrative level.

6. Delay in Sending to Authority

This occurs when notes are not sent to the Authority within specified deadlines, which may lead to fines and regulatory violations.

This problem can be avoided by implementing an automatic reminder system that alerts employees to deadlines, with automating the sending process whenever possible to ensure compliance with specified deadlines.

How Mezan Helps You Manage Credit and Debit Notes

Mezan provides a comprehensive and advanced solution for managing credit and debit notes that meets all companies' needs in the era of electronic invoicing. Mezan is distinguished by its ability to automatically issue notes with direct and accurate linking to original invoices, ensuring no reference errors occur and saving time and effort for work teams.

Mezan automatically calculates amounts and taxes according to correct regulatory rates and automatically generates required encryption seals, ensuring full compliance with technical requirements. Mezan also connects directly with Zakat, Tax and Customs Authority systems to send notes immediately and receive responses automatically, with continuous monitoring of approval status for each note.

In terms of reference management and tracking, Mezan provides a comprehensive system for automatic linking with invoices and tracking modification chains, while maintaining a complete and detailed record of all transactions. This system helps companies maintain data accuracy and ease of review and audit.

Mezan's additional advantages include comprehensive detailed reports covering issued notes, analysis of issuance reasons, and monitoring the financial impact of each note. It also features a smart alert system that notifies users when notes need to be issued, reminds them of deadlines, and sends compliance alerts for regulatory requirements.

In terms of security, Mezan provides advanced data protection with automatic backups and a comprehensive audit log that ensures protection of sensitive information and the ability to track all operations and modifications. This level of security ensures companies peace of mind and confidence in managing their tax notes.

Frequently Asked Questions

1. What is the difference between a credit note and a debit note?

A credit note is used to reduce the amount due from the customer (such as returns or discounts), while a debit note is used to increase the amount due (such as additional fees or error corrections in favor of the supplier).

2. Must every note be linked to an original invoice?

In most cases yes, the note must be linked to the related original invoice. This linking is required to ensure accounting record accuracy and compliance with regulatory requirements.

3. What is the allowed time period for sending notes to the Authority?

For notes related to tax invoices, immediate approval from the Authority must be obtained before delivery. For notes related to simplified invoices, they must be sent within 24 hours of issuance.

4. What happens if a note is rejected by the Authority?

In case of note rejection, the rejection reasons must be reviewed and errors corrected, then resent. The note cannot be delivered to the customer before obtaining approval from the Authority.

5. Can a note be canceled or modified after issuance?

A note cannot be modified or canceled after being issued and approved by the Authority. In case of errors, a new note must be issued to correct the error.

6. What are the basic technical requirements for issuing notes?

Electronic notes require an accounting system compatible with Authority requirements, the ability to link with Authority systems, and the capability to generate required encryption seals and QR codes.

Conclusion

Credit and debit notes are an essential element in the electronic invoicing system, and understanding their provisions and technical requirements is necessary to ensure compliance and accuracy in business transactions.

Success in managing these notes requires a deep understanding of regulatory provisions and different cases, an advanced technical system that supports all requirements, clear processes and continuous review, and appropriate training for the responsible team.

With Mezan, you get a comprehensive solution that ensures issuing credit and debit notes correctly and in compliance with all regulatory requirements, helping you focus on growing your business with confidence and full compliance.

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For more information about electronic invoicing solutions and tax note management, contact the specialized Mezan team.