Transfer Pricing Solutions and Rules - Saudi Arabia

In February 2019, the Zakat Tax and Customs Authority (ZATCA) in the Kingdom of Saudi Arabia (KSA) formally released the final Transfer Pricing Bylaws (TP Bylaws). The ZATCA also subsequently issued the first edition of the Transfer Pricing Guidelines in March 2019 (2019 TP Guidelines).[3] The 2019 TP Guidelines serves to provide guidance on how the TP Bylaws are to be applied in the KSA.

On 1 June 2020, the ZATCA issued the second edition of the Transfer Pricing Guidelines (2020 TP Guidelines). The 2020 TP Guidelines do not usher in any significant changes/additions to the application of the TP Bylaws.

The arm’s length principle can be found in article 10 of the Bylaws to the Income Tax Law (Income Tax Bylaws). This regulation allows the ZATCA to disallow any expense that is caused by applying non-arm’s length pricing between related parties.

This article already announced in 2014 that the ZATCA would issue detailed guidance on this topic aligned with international standards. Accordingly, the 2019 and 2020 TP Guidelines were issued in March 2019 and in June 2020, respectively.

Scope of Legislation

The TP Bylaws are applicable on all taxable persons, as defined in the Income Tax Law. This includes entities that are jointly owned by Gulf Cooperation Council (GCC) and foreign (non-GCC) shareholders (mixed entities). The TP Bylaws also apply to mixed companies, but only to the extent that they are subject to income tax.
The TP Bylaws apply to resident capital companies, with respect to shares of non-Saudi partners. Further, the provisions of Income Tax Law also apply to:
– a resident non-Saudi natural person who conducts business in the KSA; – a non-resident who conducts business in the KSA through a permanent establishment (PE); – a non-resident with other taxable income from sources within the KSA; – a person engaged in the field of natural gas investment; and – a person engaged in the field of oil and hydrocarbons production

Companies that are owned fully by GCC nationals, and are subject only to zakat, are not subject to TP documentation requirements relating to the Master File, Local File and Disclosure Form for Controlled Transactions (DFCT). Such entities are subject to requirements relating to the filing of Country-by-country (CbC) reports, provided they meet the threshold requirement for global gross revenues (being in excess of SAR 3.2 billion). The controlled transactions may be domestic or cross-border transactions.
Article 18 of the TP Bylaws requires the ultimate parent entity (UPE) or surrogate parent entity (SPE) resident in Saudi Arabia to submit CbC report if the consolidated group revenues exceed SAR 3.2 billion in the preceding year. The rules in Saudi Arabia are effective for fiscal years beginning on or after 1 January 2018. The 2020 TP Guidelines clarify that, in the event that an MNE is not liable to CbC reporting because of a different threshold in their country of residence or because the exchange rate towards SAR has changed, no reporting obligations will be created for the KSA entity of the group.

Article 18(B) of the TP Bylaws specifies the conditions for a secondary filing. An entity (subject to tax or zakat in the KSA) needs to submit a CbC report if one of the following conditions applies:

– the UPE or SPE of the MNE group is not obliged to file a CbC report in the jurisdiction in which it is a tax resident; – the jurisdiction in which the UPE or the SPE is tax resident is party to an international agreement that is valid and enforceable at the time specified in paragraph D of article 18(B) of the TP Bylaws, but is not a party to qualifying competent authority agreement that is enforceable at the time specified in paragraph D of article 18(B) of the TP Bylaws; or

– the jurisdiction in which the UPE or the SPE is tax resident systemically fails to automatically provide the Kingdom with CbC reports related to the activities of MNE groups that have constituent entities in the Kingdom.

Besides the CbC filing requirement, every constituent entity of a MNE group resident in the KSA must (as per section 5.5. of the 2020 TP Guidelines):

– submit a CbC notification as part of their tax/zakat return; and
– register and file an “article 3 notification” on the ZATCA CbC portal.
Both submissions are due 120 days after the financial year end.
In addition to CbC reports, articles 16 and 17 of the TP Bylaws require every taxpayer with related-party transactions exceeding SAR 6 million to maintain a Master File and Local File
According to article 16 of the TP Bylaws, every taxpayer with related-party transactions exceeding SAR 6 million must maintain a Master File, which must contain information on the global business of the group and the transfer pricing policies applied. It can be prepared in English. The required information is specified in Appendix 8 of the 2020 TP Guidelines, and it is consistent with the OECD Model. The Master File only needs to be submitted to the ZATCA upon request. There is no filing requirement for the Master File. However, when filing the tax return, taxpayers need to confirm that a Master File (for the filing year) is maintained.
According to article 17 of the TP Bylaws, every taxpayer with related-party transactions exceeding SAR 6 million must maintain a Local File, which must contain detailed information on all controlled transactions of the taxpayer. It can be prepared in English. The required information is specified in Appendix 9 of the 2020 TP Guidelines, and is consistent with the OECD Model. The Local File only needs to be submitted to the ZATCA upon request
According to article 14 of the TP Bylaws, every taxpayer needs to submit as part of his annual tax declaration a Disclosure Form of Controlled Transactions (‘DFCT’). It is worth mentioning that the DFCT must be submitted regardless of the amount of related-party transactions.

Along with the DFCT, taxpayers are also required to produce an auditor’s certificate confirming that the MNE’s transfer pricing policy has been consistently applied by and in relation to the taxpayer.

The TP Bylaws are generally only applicable to entities subject to income tax. Entities subject to zakat have CbC obligations only.

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Mohammad Taher Shaikh [FCA, LL.B.]

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20+ years, experience in International Tax and Transfer Pricing space.
Worked with A.F. Fergusson, KPMG, Ernst & Young and Deloitte wherein he served numerous Fortune 500 clients in different business space like consumer goods, automotive, IT and ITES. He did his masters in Law with Mumbai University and was part of the Tax Controversy Management Team at Deloitte.

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