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Saudi Arabia: Transfer pricing guidelines (second edition)

Saudi Arabia: Transfer pricing guidelines

The General Authority of Zakat and Tax (GAZT) on 1 June 2020 released the second edition of the transfer pricing guidelines.


Related content

The first edition of the transfer pricing guidelines was released in March 2019, following the release in February 2019 of the “final” transfer pricing bylaws.

Highlights of second edition of transfer pricing guidelines

The second edition of the transfer pricing guidelines includes the following:

  • Definitions have been added for certain terms, such as:
    • “Beneficial ownership” is defined to mean a natural person who ultimately owns or controls the funds of the clients or on whose behalf a transaction or activity is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.
    • “De facto owner of intangibles” is defined to mean the person that is in control of the DEMPE functions, makes the significant decisions and is able to manage and bear the respective risks, and thus can be regarded as the “economic owner” of the intangibles. It is possible that the legal owner and de facto owner are not the same person.
    • “Group” is defined to mean two or more enterprises who are related persons such that they are required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.
  • The transfer pricing guidelines reinforce the fact that there is no materiality threshold for the applicability of the arm’s length principle on controlled transactions. Hence, the underlying principle is that all controlled transactions, irrespective of the value, are to be at arm’s length.
  • The transfer pricing guidelines state that when identifying related persons by reference to effective control, the facts and circumstances of the situation must be carefully considered to determine if this results in effective control. Even though there is a presumption of control through governance, funding or business, it would be up to the taxpayer to evaluate and demonstrate that there is in fact no effective control.
  • The transfer pricing guidelines further reinforce the fact that for audit procedures and penalties, reference is to be made to the applicable articles of the income tax law.
  • Further guidance is provided in respect of country-by-country reporting (CbC reporting), specifically in terms of the following instances:
    • The exemption threshold for CbC reporting was set at SAR 3.2 billion (that is, the January 2015 equivalent of €750 million). However, due to currency fluctuations, if the amount of SAR 3.2 billion is no longer aligned with €750 million, the transfer pricing guidelines apparently refer to the exchange rate as of FY 2018 for purposes of identifying the exemption threshold for CbC reporting. Further clarification may be required from GAZT on this point.
    • Under the first edition of the transfer pricing guidelines, it was stated that even if the ultimate parent entity (UPE) or surrogate parent entity (SPE) of a multinational entity (MNE) does not file a CbC report because it does not meet the statutory consolidated revenue threshold of its own jurisdiction, the MNE would be required to file a CbC report in Saudi Arabia, provided it meets the threshold of SAR 3.2 billion. However, GAZT revised this position in the second edition, and the guidelines now state that the MNE is not required to file a CbC report in Saudi Arabia even if the threshold of SAR 3.2 billion is met, provided that the UPE or SPE is not required to file a CbC report because the threshold of its own jurisdiction is not met.
    • The registration process for GAZT’s CbC reporting portal is explained in details in an appendix to the second edition of the transfer pricing guidelines. This content has been provided previously by GAZT when the CbC reporting portal was launched.
  • Article 14 (B) of the transfer pricing bylaws states that the disclosure form for controlled transactions must be submitted within 120 days of the end of the taxpayer’s financial year (this would usually coincide with the deadline for filing the tax declaration). However, the transfer pricing guidelines state that the 120-day period would still apply for filing of the disclosure form for controlled transactions—even if there were exceptions to the deadline for filing the tax declarations.
  • The transfer pricing guidelines state that, in terms of the Chartered Accountant’s Certificate (TP Affidavit), GAZT would accept both “limited” and “reasonable” assurance engagements provided the same is provided by a licensed auditor in Saudi Arabia.

KPMG observation

As has been observed, most of the changes in the second edition of the transfer pricing guidelines appear to be merely cosmetic in nature. However, taxpayers now have the possibility to “opt out” of transfer pricing if they can substantiate that no effective control relationship exists. It remains unclear how taxpayers are expected to demonstrate this fact and how GAZT would approach this situation.

Read a July 2020 report [PDF 1.76 MB] prepared by the KPMG member firm in Pakistan

Read also a July 2020 report prepared by KPMG International


For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 |

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