The Kingdom of Saudi Arabia’s economy is the largest in middle and North Africa.

According to the World Bank (2018), it had a $782 billion Gross Domestic Product (GDP) in
2018. If the underground economy estimates relative to GDP have been hovering over 10%
of the GDP, over $78 billion has been in shadow economy in the country. The government
along with authorities are trying to close the gap and be able to collect these amount to help
reviving the national economy.

The main purpose of the paper is to explore how the new legislation that been
imposed by the authority would contain the shadow economy and have a positive correlation
to the nation economy in Saudi Market. Firstly, the paper will discuss the shadow economy
and will examine the level of the shadow economy through the currency demand approach
(CDA). Secondly, will take a closer look at what is electronic invoicing and how the GZAT
authority would introduce the process to implement it. Finally,

The shadow economy has no specific definition due to different incorporation of it by

the object of the research. For instance, one commonly used definition by Alsubaie (2020, 4)
the shadow economy as ‘all unregistered productive market transactions that would, if
recorded, typically increase the official GDP.’ Another definition by (Friedrich Schneider,
2012)1   The shadow economy includes all market-based legal production of goods and
services that are deliberately concealed from public authorities for avoidance either taxes
(related to income, Value Added or other form of tax), social security contribution, meeting
certain legal labour standards (such as minimum wages, or working hour) or to avoid
complying with certain administrative obligations, such as completing statistical
questionnaires or other administrative forms.

Shadow economy is considered to be a global economic pandemic that government all

around the world are trying to control. For instance, the average size of the shadow economy
of 158 countries over 1991 to 2015 is 31.9 percent (Medina & Schneider, 2017, 2). Most
countries are still grappling with shadow economies, including Saudi Arabia. The countries
that have exceptionally low percentages of their economies under shadow economy are
Austria and Switzerland, with 8.9% and 7.2%, respectively (Medina & Schneider, 2017, 2).
Saudi Arabia has also been tackling with a shadow economy. According to Medina, Saudi
Arabia’s shadow economy has averaged between 13.34 and 19.5 from 1998 to 2015 (Medina
& Schneider, 201, 2).
 Governments and authorities grapple with the effects of the shadow economy and how
to control it. Since it is impossible to eliminate shadow economy, policymakers try to
understand its size to plan accordingly. Understanding the size of the shadow economy is
important because it controls a significant size of the GDP. Which the government is trying to
reduce the shadow economy through implementing more regulation and legislations as in
taxes, easier strategic plans, forced accounting systems and digitizing the transaction cycle
to be more contained and controlled.

Throughout the years; researchers and economist has recognized tax to be one of the
main burden that caused the increase in the shadow economy as cited by Friedrich (2009/5,
vol 60) that had forced many countries to establish new legislation and regulation to try
containing the increase level of shadow market through emphasising cashless society where
they promote for credit cards use; and some countries has forced the electronic invoicing to
have further control over the movement of money and to boost the transparency. 

Recently, the Saudi government has successfully closed the gap in illegal activities
and increased their governmental revenue, yet they are still countering with the shadow
economy as any other country in the world. In order to contain these phenomena even more,
the Zakat and tax authorization has decided to implement the electronic invoicing system that
have been implemented by early December as phase one. 

Electronic invoicing has been cited by GZAT authority as "A tax invoice that is
generated in a structured electronic format through electronic means. A paper invoice that is
converted into an electronic format through copying, scanning, or any other method is not
considered an electronic invoice for the purposes of this Regulation." the main concept
behind the electronic invoicing is to convert the process of issuing invoices, credit cards and
debit notes into more digitized and controlled way, through using an electronic invoicing
system that is utilizing all invoices between seller and buyer and give the access to
the authority to approve and validate the tax invoices in order to have more control and
transparency if the transaction conducted. GZAT had first introduced the e-invoicing system
after the board approval on December 2020 and provided taxpayers one year before the
implementation of the fist phase that will be on December 2021
 Gzat has explained and illustrated the process company's tax representative must
follow in order to register the company in the portal for their unique stamp. As simplified it had
been simplified through the diagram below: 

By applying this procedure the GZAT would has an explicit knowledge about all the
transactions that would be conducted by all companies whether the purchase was made cash
or by credit, which is the main purpose for GZAT in trying to contain the shadow market and
increase the national economy. Thus the process of the transaction that would be conducted
o a daily basis by company whether with supplier or customer has been mostly simplified by
the following diagrammed published by Gzat: 
 Thus, with the adoption of such a technology, businesses will no longer do paper
invoices but will only do electronic or digital invoices. As Deloitte (2021, 2) has elaborated
that “the process to automate the digital exchange of invoice information directly between a
buyer’s and supplier’s accounting systems.” Which means that sellers will no longer be
sending paper-based invoices but will have to use their accounting systems to send invoices
to their buyers’ accounting systems. In doing so, governments can be able to track payments
or any transactions that have been conducted between such businesses. Also, a s is
reported by Deloitte (2021, 4), “some revenue authorities have been seen to use e-invoicing
as a means to conduct a data-matching exercise between the amount of VAT reported by
both the supplier and buyer to the revenue authority.” Such activity can help during the
auditing process and help reveal tax cheats and evaders. Since the shadow economy
operates in the dark, with the aim of avoiding taxes, the government of Saudi Arabia
introduced a mechanism that is mandatory to operate as of December 2021 to eliminate such
businesses and revive the national economy.

Evertsson (2016) notes that tax avoidance has become a global problem, with
corporations finding dubious and suspicious ways of not remitting their taxes to their host
countries. Ha et al. (2021) indicate that in Vietnam, tax avoidance continually and negatively
impacts the value of the country’s firms that are listed on the Ho Chi Minh Stock Exchange.
The researchers note that tax avoidance introduces information asymmetry problems that
impact the relationship of these companies with investors. One solution for the problem of tax
avoidance, at least according to Sikka (2018), is for companies to make their tax returns
publicly available. Alas, companies can still choose opt such information and thus falsify their
reports. There are no procedures or ways for government authorities to determine the
integrity of information made available in such instances. However, with the introduction of e-
invoices, businesses will have to showcase their paper trail that coincides with their earnings
as the process of all their transaction are now not only linked to the platform, but also they
need to authorise them with certificates after applying or the VAT reports. Also, as with the
adoption of e-invoices, it will be possible to track and even tax all citizens who are earning
money and keeping it away from the government. Also by enforcing E-invoicing, Compliance
would be more likely to increase as it would be increasingly difficult to avoid taxes since
earnings will be easy to track and the VAT cycle would be closely monitored and controlled
 Where all these possibilities have rolled to the favour of the possibility of containing the

shadow market, it is also important to point the light on past experience for other countries

that had walked the same path before. Electronic invoicing has been introduced and

implemented different countries around the world to improve the national economy among

another aspects such as faster payments reduce cost, and saving the environment. For the

purpose of this study, we will only consider the aspect of implementing the electronic

invoicing as sole purpose of containing the shadow market. Looking at different studies

conducted in different countries across the world provides us with a more optimistic hope in

recovering the national economy and closing the gap in the shadow economy. For instance,

Italy is one of the first countries in Europe to has applied electronic invoicing as a mean to

control tax evasion, where it has been deployed since 2014. All ministries, tax agencies, and

national security agencies must issue their invoices through the system. The recipients and

issuers must preserve the documents for at least five years (Price, 2020). As of January

2019, the Italian Revenue Agency collects details of all e-invoices before they are sent to the

customers enabling them to accurately calculate the tax due on payment of each invoice

(Price, 2020). Other countries in the EU are racing to emulate the Italian model, and they

have started rolling out their systems. Since Italy implemented the system, its tax revenue

has increased significantly and has reduced tax evasion.

Italy were able to appreciate the early benefits from the early adoption of electronic

invoicing system, were they were able to recover 2 billion in VAT in 2019. After

acknowledging the benefits, other countries in Europe has started to enforce the electronic

invoicing system as a mean to reduce tax revenue and revive their national economy such as

Germany, Greece, United Kingdom, Spain and other countries in Europe.