Introduction
The Kingdom of Saudi Arabia (KSA) has detailed regulations in place for Transfer Pricing (TP) which are governed by the Zakat, Tax and Customs Authority (ZATCA). In this write-up, we have given an overview of the TP regulations and the recent changes applicable from 1 January 2024.
Applicability
KSA’s TP regulations are applicable to the following taxpayers, which undertake controlled transactions (including domestic transactions) between related persons:
- all taxable persons subject to the income tax law (ITL);
- 100% Zakat paying entities effective from 1 January 2024 in a phased manner.
Implementation Phases | Aggregated Value of Related Party Transactions | Compliance Status |
Phase 1 (Effective 1 January 2024) ** | ≤ SAR 48 m* | Not Applicable |
> SAR 48 m and < SAR 100 m | Voluntary | |
≥ SAR 100 m | Mandatory | |
Phase 2 (Effective 1 January 2027) | ≤ SAR 48 m | Not Applicable |
> SAR 48 m | Mandatory | |
≥ SAR 100 m | Mandatory |
* m = millions
** Investment Funds are exempt in Phase 1
Thus, a branch of a foreign company as well as multinational entities having presence in KSA must comply with TP regulations.
TP Methods
KSA’s TP regulations are in tandem with the OECD’s TP Guidelines with respect to the accepted TP methods, which are:
- Comparable Uncontrolled Price Method;
- Resale Price Method;
- Cost Plus Method;
- Transactional Net Margin Method; and
- Transactional Profit Split Method.
Taxpayers may also apply the ‘Other Method’ if the aforesaid methods are not suitable for the relevant transaction, provided they are able to demonstrate that the Other Method would be more appropriate.
Documentation
KSA’s TP regulations incorporate the Master File, Local File and Country-by-Country Reporting (CbCR) concepts, as recommended by the BEPS Action 13 on TP documentation.
General documentation
Companies/entities operating in the KSA must maintain general documentation viz. details of the global organization structure, directors and key managerial persons, related persons, controlled transactions as well as the manner of arriving at the arm’s length price.
Master File and Local File
Likewise, companies/entities operating in the KSA must prepare and maintain the Master File and Local File if the arm’s-length value of controlled transactions exceeds SAR 6 million in a 12-month period. Until recently, 100% Zakat payers were not required to prepare and maintain Master File and Local File. However, they are now required to comply with this requirement in a phased manner as discussed above.
Country-by-Country Reporting (CbCR)
This report must be submitted if the consolidated group revenue of an MNE group exceeds SAR 3.2 billion in the preceding tax year.
Reporting
Taxpayers are required to submit a disclosure form, along with the annual tax return, containing information related to their controlled transactions. These forms must be filed with the tax authorities within 120 days from the end of the relevant tax year.
The Master File and the Local File must be prepared and maintained within 120 days from the end of the relevant tax year. They must be filed within 30 days of request from the tax authorities.
Other TP mechanisms
KSA’s TP provisions incorporate provisions for Mutual Agreement Procedure (MAP) to settle international litigation. Further, the provisions regarding Advance Pricing Agreement (APA) are introduced with effect from 1 January 2024. The APA mechanism provides for a 3-year tenure without any roll-back mechanism.
The TP regulations do not provide any specific rules for thin capitalization or Controlled Foreign Companies (CFCs).
Conclusion
Generally speaking, KSA’s TP regulations are in tandem with international TP regulations. 100% Zakat taxpayers covered under Phase 1 must understand these guidelines, especially in terms of determination of arm’s length valuation of controlled transactions and documentation to remain tax compliant.
