Final Transfer Pricing By-Laws issued by Saudi Arabia
The General Authority of Zakat and Tax (GAZT/Authority) has released the final transfer pricing By-Laws for the Kingdom of Saudi Arabia (KSA) on 15 February 2019. This marks a new beginning in the international taxation amongst the Gulf Cooperation Council (GCC) countries. We have summarized the newly introduced By-laws in three broad categories:
- Discussions on the applicability of By-Laws and meaning assigned to the relevant terms
- Compliances triggered along with a deadline and corresponding monetary thresholds
- Other important points for consideration in question and answers format
Applicability: The transfer pricing By-Laws are applicable to all persons, except persons who are subject only to Zakat. Also, Country-by-Country Reporting (CbCR) related compliance would be applicable to all persons regardless of whether that person or entity is subject to only income tax, zakat or both.
Controlled Transactions: All transactions involving Related Persons or Persons Under Common Control, including notional transaction and transactions with Permanent Establishment
Related persons for Companies, Partnership Firm, etc., will include Person Under Common Control (i.e., Sister concerns) and where a person (alone or together with a Related Person) has “effective control” over the other person. Furthermore, the term “Effective Control” has been given a very comprehensive definition to include various situations.
Transfer Pricing compliance requirements for covered persons and key deadlines:
|Compliance requirement||Time limit as per By-Laws|
Furnishing relevant Form ‘CTDF1 ’ (i.e., Controlled Transaction Disclosure Form)
120 days after the financial year ends, i.e., 30 April 2019
Where the arm’s length value of the controlled transactions exceeds SAR six million in a year maintaining and making available on request ‘Local File,’ and also ‘Master File’
120 days after the financial year end. However, 60 days extension is granted for the year 2018 (effective due date 29 June 2019)
Furnishing CbCR, where consolidated revenue of MNE exceeds SAR 3.2 Billion
12 months after the reporting year of the Multinational Enterprise (MNE) Group
Intimation of CbCR (Notification about the identity and residence of the reporting entity)
Within 120 days from the end of the reporting year, i.e., 30 April 2019
From the above, it can be inferred that the By-Laws intend to provide relief to the ‘small enterprises’ from the compliance requirement to maintain ‘Local file’ and ‘Master file.’ However, the ‘small enterprises’ will have to furnish Form ‘CTDF’ within due date yet.
Transfer Pricing documentation requirements
KSA, being part of G20 nations and owing to its commitment to the Base Erosion and Profit Shifting (BEPS) inclusive framework, has introduced transfer pricing documentation regulations, which are largely modelled on BEPS Action Plan 13 - ‘Transfer Pricing documentation and Countryby- Country Reporting.’ The three-tiered documentation approach recommended by the authority comprises of 1) Master File 2) Local File and 3) CbCR.
As compared to the Master file regulations in most of the other Asian countries, the applicability threshold in KSA of six million SAR appears to be on the lower side, resulting in more number of taxable persons requiring to comply with the Master File related compliance. Also, the timeline of 120 days after the financial year is shorter resulting in increased compliance pressure. Furthermore, while the Authority is yet to establish and specify the types, contents and recommendations in relation to CbCR, it cannot be very different from the CbCR prescribed by the OECD.
Other important considerations
GAZT suggests submission and maintenance of documentation in the official language (i.e., Arabic) to the extent it is reasonably possible.
The By-Laws are applicable to transactions with the domestic related party.
Frequency of arm’s length test
GAZT suggests that comparability analysis should be undertaken every three years, provided there is no change in the condition or circumstances of the taxpayer and their controlled transactions.
Data for comparability analysis
Only data that is available or can be made available to the public may be used in conducting comparability analysis. Hence, the taxpayer cannot use information that cannot be made available to GAZT and vice versa.
Notional transactions, i.e., transactions without any consideration (e.g., interest-free loan, etc.) are subject to the transfer pricing By-Laws. Notional transactions need to be reported in Form CTDF alongside information on the Fair Market Value of the consideration for such transaction.
It is observed that transfer pricing legislation is rapidly putting its footsteps in GCC countries. Quite a few jurisdictions have either adopted or will be soon adopting transfer pricing (TP) regulations.
The introduction of the transfer pricing regulations would have far-reaching impact on the compliance requirement and the intercompany pricing policies adopted by the persons operating in the KSA.
Businesses need to initiate the functional analysis of their group transactions, determine the factors which influence these types of transactions in the uncontrolled scenario and document them appropriately.
Senior Executive Director - Transfer Pricing and
Transaction Advisory Services
The Organisation for Economic Development (OECD) initiated a project with G20 countries, aimed at creating single set of consensus-based international tax rules to protect tax bases while offering increased certainty and predictability to taxpayers, which was named/designed as Base Erosion & Profit Shifting (BEPS) Action Plans comprising of 15 action items to equip governments with domestic and international instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.
One of the four minimum standards include Action 13 (transfer pricing documentation and Country-by-Country Reporting) and others are Actions 5, 6 and 14, which relate to harmful tax practices, treaty abuses and dispute resolution respectively.