A Saudi income-tax-paying company holds two depreciable assets in its asset pool: an office building it uses for its own administrative operations, and a piece of factory machinery used in production. Under Article 17 of the Saudi Income Tax Bylaws' declining-balance depreciation groups, which annual rate generally applies to each asset respectively?
- 5% for the building, since fixed buildings form their own depreciation group, and 25% for the machinery, which falls into the group covering factories, machines, equipment, computers and vehicles
- 25% for the building, because Article 17 depreciates all real property used for business purposes at the same rate as machinery and equipment
- 10% for both assets, because buildings and machinery are pooled together in a single general depreciation group under Article 17
- 5% for both assets, because the lowest of the five group rates applies uniformly whenever a taxpayer holds assets from more than one group
Why A? And why not the others?
Correct answer: A. 5% for the building, since fixed buildings form their own depreciation group, and 25% for the machinery, which falls into the group covering factories, machines, equipment, computers and vehicles
Article 17 of the Income Tax Bylaws sets up separate declining-balance depreciation groups at different fixed rates, and fixed buildings are their own group depreciated at 5% per year, while factories, machines, equipment, computers and vehicles form a different group depreciated at 25% per year, so the building and the machinery here fall into two distinct groups at two distinct rates. The option applying the machinery rate to the building is wrong because real property used for business purposes is not folded into the machinery-and-equipment group; buildings keep their own lower rate regardless of business use. The option pooling both assets at a single 10% rate is wrong because 10% is the rate reserved for a different group entirely (other tangible and intangible assets such as furniture, vessels and goodwill), not a general rate covering buildings and machinery together. The option applying the lowest group rate uniformly across a taxpayer's whole asset pool is wrong because each of the five groups is depreciated independently at its own rate; a taxpayer holding assets from multiple groups does not get to apply the lowest rate to everything.
Source: Saudi Income Tax Law Implementing Regulations (Bylaws), Article 17 depreciation groups and declining-balance rates (zatca.gov.sa)