Tax Authority
Saudi Arabian General Authority of Zakat and Tax (GAZT)
Relevant Transfer Pricing (TP) regulation
GAZT issued their transfer pricing bylaws (“TP bylaws”) in February 2019. Subsequently, GAZT in March 2019 released the First Edition of the Transfer Pricing Guidelines (“KSA TP Guidelines”) that provided clarity and application of the local Transfer Pricing legislation. Further, GAZT on 1 June 2020 released the second edition of the transfer pricing guidelines providing clarification in relation to documentation requirements and intangibles.
Saudi Arabia TP regulations are based on the Organisation for Economic Co-operation and Development’s (OECD) transfer pricing guidelines. The Guidelines are used for interpretation of the arm’s length principle together with local legislation.
Related Party Disclosure Form Requirement along with Corporate Income-tax Return
All the Taxpayer in Saudi Arabia having related party transactions is required to submit a disclosure form, containing information related to their controlled transactions, along with their annual income tax return. Taxpayers is required to submit the disclosure form within 120 days after the last day of the fiscal year. However, the 120-day period applies irrespective of any exceptions to the deadline for filing the tax return.
Chartered Accountant Certificate (“Affidavit”)
Along with the Disclosure Form, the Taxpayer must upload the Affidavit, signed by a licensed auditor in the jurisdiction, declaring that the Transfer Pricing policy of the MNE Group is consistently applied in relation to the Taxpayer in Saudi Arabia.
With respect to above, GAZT accepts both “limited” and “reasonable” assurance engagements (as endorsed by Standing Committee on Public Accounts) if the certificate is provided by a licensed auditor in Saudi Arabia.
Transfer Pricing Documentations
Saudi Arabia introduced the three-tiered approach as suggested by the OECD i.e. the Country-by-Country report (CBCR), the Master File and the Local File.
1. TP Documentation (Local File and Master File)
Taxpayers in Saudi Arabia is require to maintain contemporaneous transfer pricing documentation which include both Local file and Master File (i.e., documentation in existence at the time the tax return is filed) to support the arm’s length nature of controlled transactions.
Threshold
Taxpayers with related party transactions having aggregate values exceeding 6 million riyal (~USD 1.6 million) during the fiscal year, is required to prepare and maintain a master file and a local file at the time of filing the tax return. This is applicable for fiscal years ending on or after 31 December 2018.
Filing Requirement
The taxpayer needs to maintain the TP documentation (Local and Master file) and indicate in its annual tax return whether such documentation has been maintained or not.
There is no statutory deadline for the submission of TP documentation. It will need to be submitted upon request by GAZT, within 30 days of such request.
Penalty for failure
No specific penalties have been indicated for non-compliance with the requirements. However, all penalties and fines under the Saudi Arabia Income tax law are applicable to all income tax matters including transfer Pricing matters.
Transfer Pricing Methods
Five methods, as prescribed by the OECD, have been accepted for the purpose of determining arm’s length price.
- Comparable uncontrolled profit (CUP) method
- Resale-price method (RPM)
- Cost-plus method (CPM)
- Transaction net margin method (TNMM)
- Transaction profit split method (PSM)
However, taxpayers may apply another transfer pricing method where they are able to demonstrate that none of these methods provides a reliable measure of an arm’s length result. All taxpayers will have to adopt one of the approved methods or otherwise justify why these methods are not appropriate and another method should be applied.
Determination of Arm’s Length Price/ Margin
As per TP Bylaws, the arm’s length range is a range of acceptable results such as prices, margins or profit shares produced by applying the most appropriate transfer pricing method. However, there is no guidance in the TP Bylaws on how to determine the arm’s length range.
The GAZT have confirmed that where there is a range of results the interquartile range is an acceptable approach to determine an arm’s length range.
Language
For master file and local file, the recommended language is official language i.e. Arabic to the extent reasonably possible.
2. Country by Country (CbC) Report and CbC Notification
There is a CbC notification and CbC report submission requirement in Saudi Arabia for fiscal years ending on or after 31 December 2018.
Threshold
Saudi Arabia taxpayers that are members of a multinational Enterprise (MNE) group, having consolidated group revenue exceeding SAR 3.2 billion (approximately EUR750 million) during the year immediately preceding the current reporting year, will be required to submit a CbC report in Saudi Arabia.
Also, it will be required to notify the GAZT regarding the ultimate parent entity and the entity that submits the CbC report. CbC notification ideally formed part of the Disclosure form since its inception; however, as the online portal for this compliance was later set up, it is advisable to register and do the necessary filings through the Automatic Exchange of Information portal (AEOI) portal as well.
Filing Requirement
The CbC Repot shall be filed not later than 12 months after the last day of the reporting year of the MNE group. In cases of more than one constituent entities operating in Saudi Arabia, a designated entity can file CbCR notification on behalf of all other entities by notifying about the same to the tax authority.
CBC notification with the GAZT regarding the ultimate parent entity and the entity that submits the CbC report is required to file within 120 days of the end of the reporting year.
Penalty for failure
No specific penalties have been indicated for non-compliance with the requirements. However, all penalties and fines under the Saudi Arabia Income tax law are applicable to all income tax matters including transfer Pricing matters.
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