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Saudi Arabia: Draft transfer pricing rules

Saudi Arabia: Draft transfer pricing rules

The General Authority of Zakat and Tax (GAZT) in the Kingdom of Saudi Arabia issued draft transfer pricing rules (or “bylaws”).


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The transfer pricing rules are proposed to be effective from the date of publication in the official gazette, but would apply to all “controlled transactions” of a taxpayer during the fiscal year ending 31 December 2018. 

The transfer pricing documentation requirement would be effective from 31 December 2018.

Highlights of draft transfer pricing rules

As proposed, the transfer pricing rules would apply to a broad range of “controlled transactions” between related persons or persons under common control. Various terms are defined. The transfer pricing rules would also apply to transactions between resident entities. However, it appears that entities that are subject to Zakat only would not be subject to the rules. 

The term “related persons” would be broadly defined. The following would be considered to be “related persons” or related parties under the transfer pricing rules:

  • If one entity has the ability to control business decisions of another entity or entities
  • If two or more entities are under common control or are controlled by the same group of persons

Unlike the tax law provisions, the draft transfer pricing rules would not link the definition of control with direct or indirect ownership of voting rights; rather, the definition is based on substance rather than the legal form of (ownership-based) control. Accordingly, it is possible that two or more entities could be considered to be “related persons” even if there is no common ownership.

Exceptions to Master file, Local file requirements 

The requirement to maintain a Master file and Local file would not apply for: (1) natural persons; (2) small-size enterprises (entities with arm’s length value of “controlled transactions” not exceeding SAR 6 million (U.S. $1.6 million) in a 12-month period;) and (3) entities that either do not enter into controlled transactions or that are a party to such transactions and the aggregate arm’s length value does not exceed SAR 6 million (U.S. $1.6 million) during any 12-month period.

Transfer pricing methods

There are five transfer pricing methods available under the draft transfer pricing rules:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Transactional profit split method

A taxpayer could adopt transfer pricing methods other than the approved methods, provided the taxpayer is able to demonstrate with supporting documents that none of the five methods provide a reliable measure of an arm’s length result and that the suggested method satisfies the provisions of the transfer pricing method rules.

The GAZT would issue additional guidelines for selection of suitable methods (possibly identifying relevant databases for benchmarks) to be used and other matters relating to transfer pricing.

Annual transfer pricing disclosure form 

Taxpayers would be required to file specified disclosure forms concerning controlled transactions with their annual income tax declaration (within 120 days following the end of the taxpayer’s fiscal year). The transfer pricing disclosures would include details for all controlled transactions even if there is no consideration or there is some non-monetary consideration, such as barter arrangements.

Transfer pricing documentation, country-by-country reporting

The mandatory transfer pricing documentation requirements broadly appear to be consistent with the requirements under the OECD BEPS Action 13. The time limits would be as follows:

  • Transfer pricing documentation—when requested, taxpayers would be required to submit transfer pricing documentation to the GAZT within 30 days of such a request.
  • Master file and Local file—taxpayers would be required to maintain and make available the following on request from the GAZT:
    • Master file containing information on the global business operations and transfer pricing policies of the multinational enterprise (MNE) group to which the taxpayer belongs
    • Local file containing detailed information on all controlled transactions of the taxpayer. When requested by the GAZT, the Local file or any part thereof would be submitted within seven days from the date of the request or any other time limit indicated by the GAZT in the request (since this requirement is only for taxpayers, it appears that entities that are subject to Zakat only would not be subject to these documentation requirements).

Country-by-country (CbC) reports and CbC notification of persons who are members of the MNE group with the consolidated group revenue exceeding SAR 3.2 billion (approximately U.S. $852 million or €750 million) would be submitted to the tax authority within 120 days following the end of the fiscal year. Also, the CbC report would have to be filed within 12 months after the last day of the fiscal year of the MNE group.

Transfer pricing adjustments

The scope of the corresponding effect of transfer pricing adjustments made by tax authorities in other jurisdictions would be restricted to treaty-partner jurisdictions only.  Moreover, a claim for corresponding adjustments would be subject to time limitation provisions set out in the tax law (five years).

Concerning transfer pricing adjustments made by GAZT, there would be disclosure by GAZT officers of the comparable benchmark to the taxpayer concerned.

Advanced pricing agreements (APAs)

The draft regulations do not suggest that the GAZT would enter into APAs with taxpayers. The draft transfer pricing rules refer acceptable arm’s length range—the rules, conditions, and limitations for which would all be provided in future guidelines to be issued by GAZT.

Penalties for non-compliance

Specific provisions for imposing penalties for non-compliance of the transfer pricing documentation requirements or the failure to submit information are not outlined in the draft rules.  However, a failure to file the declaration within the due date or for not using the prescribed forms would apparently trigger penalties under the income tax law.

KPMG observation 

As a member state of G20, Saudi Arabia had already endorsed the BEPS Action Plan. In September 2018, Saudi Arabia signed the Multilateral Convention (MLI) to implement tax treaty-related measures to prevent base erosion and profit shifting.  Thus, developing regulations for implementing the CbC initiative as part of the BEPS Action Plan were expected.

The GAZT is becoming more cognizant of the importance of tax collection, particularly as the Saudi Arabian government is seeking to diversify its revenue base and move away from being an oil-only based economy. The issuance of draft transfer pricing rules demonstrates GAZT’s commitment to bring transformation in the taxation system of the country. Accordingly, with release of the draft rules, taxpayers will want to consider reviewing their transactions with related parties if potentially affected by the transfer pricing rules.

It appears that GAZT will scrutinize transfer pricing policies, business activities, supply chain arrangements, and inter-company transactions of companies in greater detail. Therefore, documentation and appropriate benchmarking of inter-group transactions to comply with the transfer pricing rules will be is important for managing related tax risks. Also, by extending the scope of regulations to transactions between resident entities, the GAZT is seeking to address “tax leakage.”


Read a December 2018 report [PDF 179 KB] prepared by the KPMG member firm in Saudi Arabia

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