Published 23 July 2026 · Reading time ~7 minutes
A question that has occupied Saudi practitioners since IFRS 18 was issued now has a credible answer. At its meeting on 22 July 2026, the IASB agreed to propose an amendment that would move income-tax-substitute levies — Saudi Zakat named explicitly among them — out of the operating category and into income taxes.
What the IASB decided
At its 22 July 2026 meeting, the International Accounting Standards Board agreed to propose amending IFRS 18 so that any levy imposed by a jurisdiction as a direct substitute for income tax is classified within the income taxes category of the statement of profit or loss. The condition is that the legislation requires the entity to pay the specified levy in place of income tax, or gives it the option to do so.
An exposure draft is expected to be published for public comment in the fourth quarter of 2026.
Why this matters in Saudi Arabia
In the Kingdom, income tax applies to the share attributable to non-Saudi partners, while the Saudi and GCC share is subject to Zakat. Zakat therefore functions in practice as the statutory charge imposed instead of income tax, even though it sits technically outside the scope of IAS 12.
Notably, the IASB staff paper AP12B named Saudi Zakat directly as an example of the situation being addressed, alongside tonnage taxes and hybrid taxes. More significant still: the Board chose a principle-based solution rather than a narrow carve-out tailored to Saudi Zakat. Two approaches were on the table, and the Board selected the broader one on the grounds that it improves financial reporting beyond the specific fact pattern that prompted the discussion.
The problem with a literal reading
Applying IFRS 18 as written would have produced three different presentations of the same economic reality:
Presentation outcomes under a literal application of IFRS 18
| Ownership structure | Charge | Category |
|---|---|---|
| Wholly Saudi-owned | Zakat | Operating |
| Wholly foreign-owned | Income tax | Income taxes |
| Mixed ownership | Both | Split across the two |
The result is that operating profit becomes non-comparable between companies in the same sector and the same market, for one reason only: a difference in ownership structure. This is precisely the point the Board raised — users need to analyse and compare operating profit independently of how the tax charge happens to be levied.
Expected effects if the amendment is adopted
- Zakat presented within the income taxes category rather than charged against operating profit
- Improved comparability between Saudi, foreign, and mixed-ownership companies
- An operating profit figure that reflects business performance before the effect of the Zakat or tax regime
- Reduced need for additional subtotals or management-defined performance measures (MPMs) to explain the effect of Zakat
- Better alignment of IFRS 18 with local regimes that use substitutes for income tax
Three clarifications, to avoid any confusion
One — this is a presentation matter
This does not mean Zakat has become an income tax under IAS 12. The proposal concerns where the charge is presented and classified within the statement of profit or loss. It does not change the nature of Zakat, nor the rules for its recognition and measurement.
Two — the scope is narrow
The amendment would not cover sector-specific levies imposed in addition to income tax, non-compulsory contributions (such as Malaysian zakat), or charges imposed in jurisdictions that have no income tax regime at all. The condition is that the levy is an exclusive substitute for an income tax that would otherwise have been imposed.
Three — this is a proposal, not a final amendment
Nothing applies until the final amendment is issued and locally endorsed. Note also that the effective date of IFRS 18 itself is 1 January 2027.
The wider point
What is appealing about this case is that when international standards listen to practical application across different economies, the outcome is clearer and more comparable presentation. It is a good illustration that accommodating a local particularity does not necessarily require departing from the standard.
Sources
- IASB meeting decisions, July 2026 — ifrs.org
- IASB staff paper AP12B, Possible approaches — ifrs.org (PDF)
- Income Tax, Zakat, Tax and Customs Authority — zatca.gov.sa