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    Introduction of Transfer Pricing bylaws

SAUDI ARABIA - Introduction of Transfer Pricing bylaws

July 2019

On 10 December 2018, the Saudi Arabian General Authority of Zakat and Tax (GAZT) published draft transfer pricing bylaws (TP bylaws/bylaws) for taxpayer consultation. Taxpayers are recommended to take a detailed look at their business operations to identify transfer pricing (TP) risks and ensure they can comply with the upcoming requirements. The TP bylaws follow international standards, including the arm’s length principle and documentation standards set out in the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines.

Transfer Pricing in Saudi Arabia

This is the first time that TP regulations of any kind have been published by the GAZT and it demonstrates the Kingdom of Saudi Arabia’s commitment to implementing the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations on TP. Specifically, the draft by-laws introduce requirements for the OECD’s three tiers of documentation, namely Master File, Local File and Country-by-Country report, as well as an annual Disclosure Form for controlled transactions.

The TP bylaws introduce new compliance requirements for fiscal years ending on or after 31 December 2018. This includes the submission of a Controlled Transaction Disclosure Form – due within 120 days from the end of the fiscal year, and filed as part of the annual income tax declaration. Additionally, the TP bylaws introduce transfer pricing documentation and country-by-country reporting requirements that are broadly aligned with the OECD’s BEPS Action 13, Final Report. Taxpayers with controlled transactions exceeding SAR 6 million during the fiscal year will need to prepare the reports and make them available to the GAZT upon request.

This new development will enhance business transparency between groups of companies and related persons and, despite the additional work that will be required to comply with the regulations, both can come out winners. Transfer pricing improves business efficiency and simplifies the accounting process.

BDO comments

The issue of the draft TP Bylaws is a welcome step by the GAZT and displays Saudi Arabia’s efforts to meet its commitment of being part of the Inclusive Framework to implement BEPS measures.  The TP Bylaws are mostly in line with the principles laid down by the OECD. 

TP is one of the most litigated tax issues globally, especially in countries where TP as a concept is at a nascent stage. While the introduction of a formal TP law is an economically progressive step taken by the Kingdom it will, no doubt, come with associated issues - some that will be resolved with experience and some through litigation. 

The timeframes given to businesses to prepare for such revolutionary tax changes are rather short. However, multinationals operating in jurisdictions that have TP requirements will be able to leverage some of their existing TP studies and analysis for their obligations in Saudi Arabia, especially given that the TP regulations of Saudi Arabia are closely aligned with the OECD TP guidelines.

With the introduction of TP in Saudi Arabia, we expect more foreign companies to re-examine how their business arrangements are structured in order to determine whether a PE exists in Saudi and/or the applicability of the TP Bylaws.

Gihad Al-Amri
[email protected]