Transfer Pricing(TP) refers to determining prices for transactions conducted between related persons, including but not limited to the transfers of goods, services, loans and intangibles (intellectual property). Provisions of Articles 63 and 64 of the Income Tax Law in KSA dealt with such transactions between related persons and therefore, transfer pricing is not a new concept for KSA’s income tax regime.
The General Authority of Zakat and Tax (the “GAZT”) in the Kingdom of Saudi Arabia, released transfer pricing regulations (the “TP Bylaws”) in a draft version for public consultation on December 10, 2018. The final transfer pricing regulations were published on February 15, 2019, with a number of minor clarifications and improvements. The final issuance of the TP regulations also includes Frequently-Asked Questions relating to it. These TP Bylaws are issued in a more detailed and regulated manner.
With the new TP regulations released in KSA, GAZT is planning to expand its revenue base and shifting from an oil-based economy. The introduction of the bylaws is a major step in enhancing the tax system in the KSA which is likely to impact nearly all Multi National Entities (MNE) operating in the region.
Key Highlights of TP Regulation
The introduction of the TP regulations includes certain elements which are as follows:
1. The Effective Date
The effective date of the regulations of the documentation for transfer pricing will be applicable for the reporting year ending on December 31, 2018, and onwards. However, under the Income
Tax Law, the GAZT has the right to request information, documents, or perform an audit for years prior to the effective date of the TP Bylaws.
But, in all situations, the taxpayers will be given 30 days for submitting the required documentation.
2. Applicability of the TP Bylaws
TP Bylaws are applicable to all persons considered taxpayers pursuant to the Income Tax Law (including mixed-ownership entities, the income of which is subject to corporate income tax to the extent attributed to shares owned by the taxable person).
3. Submission of Disclosure Form for Controlled Transactions (‘DFCT’)
Along with the annual income tax declaration, the Taxable Person is required to submit to the GAZT a disclosure form containing information related to its Controlled Transactions with the prescribed contents, within 120 days following the end of the fiscal year.
Such DFCT shall include various details of controlled transactions say, shareholding details (including names, jurisdictions, ownership percentages, information of all stakeholders owning over 5% shares in case of publicly listed entities, transactions undertaken for monetary consideration or without monetary consideration, details of business restructurings say internal reallocation of functions, assets and risks within a group, details with respect to maintenance of master files / local files, and so on.
Along with the disclosure form, the Tax Payer is required to submit an affidavit from a licensed auditor through which the auditor certifies that the Transfer Pricing policy of the MNE is consistently applied.
4. Related parties
For the purpose of TP regulations, related parties or persons are defined broadly and it covers two or more natural persons, natural person related to juridical persons in the prescribed circumstances (say specified control over voting rights, income and capital, participation in the management, control or capital of a juridical person) and two or more juridical persons in the prescribed cases of Common Control or Effective Control.
Further, the GAZT has clarified in its FAQs that unless expressly exempt in the TP Bylaws, all related person transactions shall be within the scope of the TP Bylaws regardless of the place of residence, nationality or domicile of the persons. Therefore, domestic related party transactions can also be within the scope of TP Bylaws.
Also, all transactions with any Related Person whether natural or juridical and as defined in the TP Bylaws are required to be reported.
5. Documentation Requirements
As discussed earlier, Taxable Persons subject to the TP Bylaws are required to submit disclosure form for controlled transactions along with their annual income tax declaration (in electronic form). In addition to the above, taxpayers are required to maintain the following documentation:
- Master File – A transfer pricing master file comprising information on the global business operations and TP policies of the MNE group the taxpayer belongs to (For Controlled Transactions, for which the total Arm’s Length value exceeds SAR 6 million in a 12-month period);
- Local File – A transfer pricing local file comprising detailed information on all Controlled Transaction of the taxpayer (For Controlled Transactions, for which the total Arm’s Length value exceeds SAR 6 million in a 12-month period);
- Country-by-Country (‘CBC’) Report – In case where consolidated group revenue of a multinational enterprise group (‘MNE Group’) exceeds SAR 3.2 billion.
As is evident, the documentation requirements imposed by the KSA includes the preparation of a Master File and a Local File that meet the given threshold. However, following persons are exempt from maintaining the Master and Local Files:
- Natural persons
- Small businesses with arm’s length value of ‘Controlled Transactions’ not exceeding SAR 6 million in a one-year period.
- Businesses or persons that are not part of ‘Controlled Transactions’ or are part of such transactions but the aggregate arm’s length value not exceeding SAR 6 million in a one-year period.
Further, as provided by GAZT in one of its FAQs, it encourages the submission and maintenance of documentation in the official language to the extent it is reasonably possible.
6. Approved TP Methods
The arm’s length price for a controlled transaction can be determined by selecting and applying the most appropriate transfer pricing method, amongst the following methods provided in the TP Bylaws:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Profit Split Method
- Transactional Net Margin Method
The regulations also provide an option to use methods other than approved Transfer Pricing Methods as above, provided that the Taxable Person is able to demonstrate that above methods do not provide a reliable measure of an Arm’s-Length result and the suggested method satisfies the required provisions.
7. Country-by-country Report (CbCR)
A taxable person of an MNE Group with a consolidated group revenue exceeding SAR 3.2 billion are required to submit CbCR report to GAZT within 120 days of the end of the reporting years.
8. TP Adjustment by GAZT
GAZT officials would require to disclose the comparable benchmark to the concerned taxable person when making TP adjustments to the tax base of the taxpayer.
9. Penalty for Non-compliance
TP Bylaws does not include specific provisions relating to penalties for non-compliance. However, one of the FAQs states that all penalties and fines under the Income Tax Law are applicable to all income tax matters.
Therefore, it is likely that penalties for non-compliance with the transfer pricing requirements as set out in the By-Laws shall apply in accordance with the provisions of the Income Tax Law of KSA.
Impact of TP Regulation on Business
It seems that GAZT will examine transfer pricing policies, supply chain management, business activities, inter-company transaction and more in detail. This will come as a necessity that documentation and relevant benchmarking of inter-company transactions comply with the TP regulations. Eventually, the bulk of the impact of TP regulations will be seen on parties or persons that are subject to the tax. Businesses that are subject to Zakat are most likely to have minimal impact.
The TP regulations will have a notable impact on UAE businesses that operate in KSA via group entities or are performing transactions with third parties covered under the bylaws.
PKF UAE can serve you in understanding the requirements and expectations of GAZT and assistance in complying with the regulations.