Updated transfer pricing guidelines in Saudi Arabia

By Asmae Bazaani, Deloitte Middle East, Dubai

Saudi Arabia’s General Authority of Zakat and Tax (GAZT) on June 1 issued updated transfer pricing guidelines, providing clarification in several key areas, particularly in relation to documentation requirements and intangibles.

It is imperative that taxpayers in Saudi Arabia become aware of the clarifications made in this new guidance and how it potentially affects their obligations and transfer pricing documentation.

These guidelines interpret formal transfer pricing laws and obligations for corporate taxpayers, introduced in 2019, to assist taxpayers to comply with new regulations and obligations.

Saudi Arabia transfer pricing – in general

Saudi Arabia’s transfer pricing bylaws are broadly aligned with the OECD’s transfer pricing guidelines and oblige taxpayers to prepare transfer pricing documentation, including country-by-country reporting, if certain conditions are met.

The bylaws emphasize that taxpayers should apply and enforce the arm’s length principle on transactions between related persons or persons under common control as if they were conducted between independent persons.

Following the publication of the transfer pricing bylaws, GAZT issued a first edition detailed transfer pricing guidelines in March 2019.  The transfer pricing guidelines are not legally binding but provide a clear indication of GAZT’s practical interpretation of the transfer pricing bylaws. The guidelines set out information and guidance for the application of the transfer pricing bylaws, elaborate on those bylaws, and clarify new compliance requirements, which affect all corporate taxpayers in Saudi Arabia.

Any taxpayer with related party transactions must submit a disclosure form along with their tax return. Details on all sections of the disclosure form are found in the transfer pricing guidelines.

Taxpayers with related party transactions exceeding 6 million riyal (USD 1.6 million) measured on an aggregated basis must prepare and maintain a master file and a local file at the time of filing the tax return.

Additionally, taxpayers that are part of a multinational enterprise group (MNE) and have consolidated group revenue exceeding 3.2 billion riyal (USD 850 million) are required to submit a country-by-country report.

The transfer pricing guidelines also explain different theoretical transfer pricing aspects with multiple examples, scenarios, and diagrams illustrating how to apply this theory in practice.

The first edition of the transfer pricing guidelines has been well received by the taxpayer community. With transfer pricing requirements having now been in place for over a year, this second edition of transfer pricing guidelines have now been issued, providing further clarifications in certain areas such as intangibles and documentation requirements.

Scope

The new guidance makes it clear that the arm’s length principle applies in all cases.

In some countries, there is a de-minimis materiality threshold regarding the applicability of the arm’s length principle on the controlled transaction entered into with related persons, removing compliance requirements for lower-value transactions.

However, the guidelines confirm that Saudi Arabia applies the arm’s length principle in all cases, without any de-minimis materiality threshold. Taxpayers must, therefore, disclose all controlled transactions entered into with related persons in the tax return regardless of the amount, to avoid any challenge in case of an audit.

Effective control

The definition of “control” in Saudi Arabia is broader than that stated in the OECD transfer pricing guidelines, as Saudi Arabia has added the effective control concept.

This results in more situations where persons are qualified as related persons and hence will fall in the scope of Saudi Arabia’s transfer pricing bylaws.

As an example, a company that does not own 50% of the shares and votes of another entity can still be regarded as a related party (e.g., if control via governance or control via funding or control via business exists), which is broader than the standard OECD definition.

In the second edition of the transfer pricing guidelines, a clarification has been added that will assist taxpayers in determining whether effective control exists when there is a presumption of control through business decisions. If the totality of the facts and circumstances indicate that there is no effective control, the taxpayer can demonstrate that there is no effective control.

Selection of comparables

The taxpayer should be aware of the importance of the selection of comparable transactions for economic analysis.

The updated guidelines state that the selection of comparable uncontrolled transactions must be obtained within a similar industry and in a geographical market comparable to Saudi Arabia.

If the taxpayer cannot support the appropriateness of the comparable transactions selected, GAZT may challenge this during an audit.

Moreover, the second edition of Saudi Arabia’s transfer pricing guidelines clarifies that companies owned by a natural person may be included in the comparability analysis as a comparable, assuming that the natural person will not materially impact the profitability of the company. This will have an impact on the taxpayer by having potentially additional companies considered as comparables. 

Intangibles

This second edition of Saudi Arabia’s transfer pricing guidelines clarifies that the de-facto owner of an intangible is the person that is in control of the development, enhancement, maintenance, protection, and exploitation (DEMPE) functions. Thus the person must make the significant decisions and be able to manage and bear the respective risks to 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. 

The concept of “de-facto owner” is not present in Chapter VI of the OECD guidelines. Still, the goal is the same: to ensure that the economic owner receives the appropriate return irrespective of the legal owner.

The second edition of the Saudi Arabia transfer pricing guidelines elaborates that legal ownership of intangibles in itself does not mean that the legal owner is entitled to the right to retain all returns and economic benefits derived from the exploitation of intangibles even though such returns may initially accrue to the legal owner due to legal ownership. 

Saudi Arabia transfer pricing documentation

Before the release of the second edition of the transfer pricing guidelines, some taxpayers could omit domestic transactions occurring in Saudi Arabia from transfer pricing documentation.

However, it is now clearly stated that all controlled transactions – including controlled transactions between a taxable person and related person in Saudi Arabia – fall under the scope of the bylaws.

This can pose a particular issue due to the threshold of 6 million riyal for taxpayers to prepare a local file, as domestic transactions can cause the total amount of related party transactions to exceed the threshold and create unexpected compliance requirements for a local file. 

Some additional clarification has been added regarding the deadlines that will help the taxpayer avoid consequences due to late filing.

The 30-day period window to submit transfer pricing documentation is calculated based on calendar days and not business days; taxpayers should ensure their processes are set up to file within this time frame.

Based on current tax laws, there is a 120-day period after the last day of the financial year to submit the tax return, whereas for partnerships there is a 60-day period to submit the tax return.

In both cases, the disclosure form should be submitted 120-days after the last day of the financial year, irrespective of any exceptions to the deadline for filing the tax return.

Disclosure forms

Taxpayers or MNEs that have gone through a business restructuring should only answer “yes” on the disclosure form in cases when there is a business restructuring that directly or indirectly impacts the Saudi Arabian entity.

Furthermore, the disclosure form should be accompanied by a Chartered Accountant Certificate declaring that the transfer pricing policy of the MNE group is consistently applied in relation to the taxpayer in Saudi Arabia.

The second edition of Saudi Arabia’s transfer pricing guidelines clarifies that GAZT accepts both “limited” and “reasonable” assurance engagements (as endorsed by the Standing Committee on Public Accounts) as long as the certificate is provided by a licensed auditor in Saudi Arabia.

Taxpayers should maintain transfer pricing documentation at the time of filing their tax returns. 

Saudi Arabia Country-by-country reporting

It has been clarified that the constituent entities of an MNE group residing in Saudi Arabia will not be required to file a country-by-country report in Saudi Arabia for the given year when the MNE group does not file a country-by-country report in the filing jurisdiction because the MNE group’s consolidated revenue does not meet the statutory consolidated revenue threshold (SCRT) of that jurisdiction; or where the SCRT in the reporting entity’s jurisdiction is less than of 3.2 billion riyals.

However, Saudi Arabian constituent entities to which the exclusion above applies must notify GAZT and provide the necessary information that shows that the laws of the reporting entity’s jurisdiction require country-by-country reporting. The only available reason for non-filing of country-by-country reporting in a certain year is that the MNE group has not met the SCRT in that jurisdiction. 

In practice, many taxpayers considered it sufficient to submit the country-by-country notification with the tax return.

It has now been clarified that every Saudi Arabia taxpayer who is part of an MNE group with a consolidated group revenue exceeding the threshold of 3.2 billion riyals must register (enroll) at the GAZT automatic exchange of information portal and send an Article 3 notification to GAZT 120 days after the last day of the taxpayer’s reporting year.

GAZT added useful and comprehensive step-by-step practical guidance for the registration and submission in GAZT’s country-by-country reporting portal in the second edition of transfer pricing guidelines.

Some thoughts

This second edition of transfer pricing guidelines clarifies and gives additional certainty to the taxpayer on GAZT’s interpretation of key transfer pricing topics.

The tax authority provides its view on the scope of the arm’s length principle de-minimis materiality thresholds, the rebuttable presumption of effective control, the selection of comparables, and the determination of the de-facto owner of intangibles and on transfer pricing documentation requirements.

GAZT has provided extensive guidance materials to inform taxpayers and to assist in complying with transfer pricing obligations, and this guidance will continue to develop as practical and technical scenarios are encountered in practice.

With the transfer pricing regime now firmly established, and an increasing focus on audit activity, taxpayers should ensure their processes and documentation are robust with the developing requirements.

This article has been written solely to provide information.