New Saudi Arabia tax guidance addresses mutual agreement procedure

By Asmae Bazaani & Mohammed Abu-Hijleh, Deloitte Middle East, Dubai

Saudi Arabia’s General Authority of Zakat and Tax (GAZT), on June 9, published new guidance on making requests under the mutual agreement procedure (MAP) in tax treaties.

The guidelines aim to set out the process through which taxpayers may resolve tax treaty disputes by way of requesting assistance from the competent authority in Saudi Arabia. 

The introduction of MAP in Saudi Arabia will provide taxpayers with increased certainty towards resolving cross-border double taxation, typically arising from transfer pricing adjustments, and resolving treaty-related tax disputes.

The guidelines cover a number of topics and steps concerning the MAP process, including an overview of the MAP, conditions for requesting a MAP, how to request a MAP, timeframes for resolving a MAP case and the MAP stages.

As a member of the Base Erosion and Profit Shifting (BEPS) Inclusive Framework, the issuance of the MAP guidance is in line with the Saudi Arabia’s commitment to the BEPS Action 14 minimum standard.

Description of the MAP

The guidelines provide an overview of the MAP and offer examples when a taxpayer may request a MAP.

The guidelines mention that MAP provides a bilateral mechanism that ensures the GAZT engages with the competent authority of another contracting state to negotiate and resolve the request of the taxpayer covered by a double tax treaty.

Where the actions Saudi Arabia and/or another contracting state result or will result in taxation not in accordance with the provisions of a double tax treaty, a MAP can be requested by a taxpayer for GAZT to assist with resolving these issues.

Competent authorities may also attempt to relieve double taxation in cases not covered by the tax treaty through unilateral action by trying to resolve the case by mutual agreement with the contracting state’s competent authority.

The examples provided in the guidance when a taxpayer may request relief include: the taxpayer is deemed to be a resident of both states or where there is no agreement on the state of residence; the taxpayer disagrees with the tax authorities on the existence of a permanent establishment or on the characterization of certain items of income for the purposes of the application of the double tax treaty; the taxpayer disagrees with the tax authorities on the interpretation and application of provisions or principles of the double tax treaty; transfer pricing adjustments between associated enterprises of different states have occurred or will occur; adjustments of profits attributable to a permanent establishment situated in a state of an enterprise of the other state have occurred or will occur; and the taxpayer disagrees with the tax authorities that have made an adjustment as to whether the application of a domestic law anti-abuse provision is in conflict with the provisions of a double tax treaty.

This section makes clear that taxes included in a tax treaty include income tax and Zakat. Penalties and interest on such taxes are excluded. Zakat payers with operations outside Saudi Arabia may also engage in the MAP if there is an adjustment in another country.

Conditions for requesting MAP

The GAZT outline certain conditions for taxpayers when requesting a MAP, who can request a MAP, the role of the taxpayer, and the time limit for requesting MAP.

A MAP request may be made when a taxpayer considers the actions of one or both contracting states results, or will result, in taxation not in accordance with a tax treaty, and such risk is probable.

Probable risk may arise where a contracting state carries out any of the following: a notice of assessment or notice of amendment; a statement of audit position; or a certification of withholding.

Any taxpayer resident in Saudi Arabia or of another country (depending on the wording in the MAP article of the relevant tax treaty) may request a MAP from the GAZT within three years (time limit may differ depending on the double tax treaty) of the taxpayer considering themselves subject to an action which gives rise to taxation not in accordance with a tax treaty.

Subject to the time limitations, requests for multi-year resolution through the MAP of recurring issues with respect to filed tax years will be permitted by the GAZT in certain cases. The guidance makes clear, while a MAP is in progress, the taxpayer is not permitted to attend MAP negotiations with the competent authorities.

How to request a MAP

The guidance provides a detailed overview of the information required to file a MAP request and the MAP’s interaction with already available domestic procedures.

For the GAZT to accept a taxpayer’s request, it must contain sufficient information for the GAZT to determine if the case can be taken forward.

Some of the information and documentation required includes: the taxpayer’s identity and contact details; the basis for the request, specifying the articles of the relevant treaty that the taxpayer considers that one or both contracting states are not applying correctly and the contracting state that is not applying the treaty; income years covered under the request and amounts involved; taxpayer’s analysis of the issues they want resolved and their view of how the relevant tax treaty provisions should be applied; copies of tax assessments, audit or other tax administration documentation reflecting what the taxpayer considers to be the incorrect application of the relevant treaty provisions; and a statement confirming all information and documentation provided in the MAP request is accurate and that the taxpayer will provide any other information or documentation requested by the specified dates.

Further, the taxpayer must respond to all reasonable and appropriate requests made by the GAZT in relation to the MAP request.

The MAP does provide an additional domestic dispute resolution process, which can be initiated simultaneously alongside other domestic procedures.

However, if a MAP request is made by the taxpayer, the domestic procedure will, therefore, be temporarily frozen until the determination of the MAP. The guidance clarifies that where a final judicial decision has been made in Saudi Arabia covering the taxpayer’s issues, the GAZT will abide by that decision and inform the other competent authority that they should attempt to resolve any outstanding issues.

Timeframes for resolving MAP

In accordance with most of the Saudi Arabia’s tax treaties, MAP cases should be resolved within two years, depending on the complexity of the taxpayer’s case.

The GAZT will endeavor to resolve all MAP requests on a timely basis and inform the taxpayer of the progress of their cases.

The GAZT has also indicated that they will work with the competent authorities of its treaty partners to ensure that all MAP agreements are implemented in due time.

MAP stages

The first stage of the MAP process involves the taxpayer submitting their request to the GAZT, the GAZT considering whether their request is justified and, if so, whether the GAZT is able to reach an appropriate solution itself (i.e. provide unilateral relief).

If providing unilateral relief is not possible, then the GAZT will proceed to the second stage, which involves negotiating with the competent authority in the other contracting state.

The GAZT will seek to understand the other competent authority’s position and reach an agreement to resolve the MAP request.

If an agreement is reached by the competent authorities, then the taxpayer will be informed, and a decision whether to accept the agreement or not will be made by the taxpayer.

If accepted, the taxpayer is obliged to withdraw any pending judicial or administrative cases. If not accepted, the competent authorities will close the MAP case without implementing the agreement reached.

The taxpayer may still contest the matter through the other domestic procedures (i.e., domestic objection, review, and appeal rights).

The guidelines mention that positions taken by the competent authorities in resolving a MAP request are based on the taxpayer’s sole case and specific facts and that a MAP settlement is not a binding precedent for Saudi Arabia and the other contracting state.

Some thoughts

The publication of the MAP guidance will be welcomed by many taxpayers with sizable operations in Saudi Arabia.

The guidance will provide greater certainty on how the GAZT can support taxpayers faced with double taxation and tax treaty interpretation and implementation issues.

With the introduction of the Saudi Arabia transfer pricing rules in February 2019 and Saudi Arabia’s significant network of tax treaties, it is expected the MAP process will see a great uptake.

With the introduction of the Saudi Arabia transfer pricing rules in February 2019 and Saudi Arabia’s significant network of tax treaties, it is expected the MAP process will see a great uptake.

The GAZT has been actively auditing taxpayers’ transfer pricing and reviewing profit attribution and withholding taxes applicable on cross border recharges. These tax authority challenges will raise issues on double taxation and double tax treaty interpretations and therefore bring about MAP requests asking the GAZT to support with resolving double taxation issues.

Many countries include transfer pricing rules in their self-assessment tax regime. We note that the guidance states that a MAP request can be made “(…) when a taxpayer considers the actions of one or both Contracting States results, or will result, in taxation not in accordance with a tax treaty(…)”.

A minority of tax administrations take the view that this would not include a self-adjustment made by the taxpayer without instruction from a tax authority in preparing the initial tax return. It remains to be seen how the GAZT will interpret this rule, but it would be sensible for taxpayers to ensure that they can point to an action of a tax authority which led to the potential double taxation.

Moreover, the new Saudi Arabia MAP guidelines provide that taxpayers making a MAP request must provide the GAZT with transfer pricing documentation in addition to the information required to justify the case to the GAZT.

This information is requested to allow the GAZT to understand how the transfer pricing policy has been set. Provisions for arbitration are not present in all of Saudi Arabia’s tax treaties, therefore, in case of no agreement on MAP between the competent authorities of the two contracting states, the case cannot be submitted to arbitration.

Taxpayers currently faced with probable or final transfer pricing assessments may think about how suspending domestic procedures and asking the GAZT to resolve the matter with another competent authority may benefit their case. Another interesting observation will be to what extent taxpayers with regional headquarters in low or no tax jurisdictions (for example, the United Arab Emirates) will benefit from Saudi Arabia’s MAP.

This article has been written solely to provide information.