Transfer Pricing News Issue 34 - October 2020

Transfer pricing guidelines update 2.0

In February 2019, the Saudi Arabian General Authority of Zakat and Tax (GAZT) issued their transfer pricing bylaws (“TP bylaws”/ “bylaws”). Later, in March 2019 the GAZT released the First Edition of the Transfer Pricing Guidelines (“KSA TP Guidelines”) that provided clarity and application of the local Transfer Pricing legislation.

Aligned with the Organisation for Economic Cooperation and Development (OECD) guidelines, the GAZT guidelines provide their views for the enforcement as well as insight on the interpretation and understanding of the Transfer Pricing bylaws.

On 1 June 2020 the GAZT published the newest version (Second Edition) of the Transfer Pricing Guidelines, which have provided further direction on several key components by focusing especially on handling documentation requirements such as Country by Country (CbC) related compliance, clarification of relevant terms stated under the bylaws, and additional considerations for intangibles, among others.

The main developments to the most recent KSA TP Guidelines are as follows:

1. Scope of KSA TP Guidelines

Prior to the release of the last version of KSA TP Guidelines, there was no clarity on whether there were any exceptions for non-material related party transactions or under common control to be disclosed by taxpayers. In this regard, KSA TP Guidelines have stated that all controlled transactions must be disclosed, notwithstanding their value.

2. Disclosure Form of Controlled Transactions (DFCT)

Under the KSA TP Guidelines, the DFCT must be submitted within 120 days after the fiscal year end, which usually tallies with the annual tax return deadline filing. However, the 120-day period applies irrespective of any exceptions to the deadline for filing the tax return (e.g. such as is applicable for Partnerships, since Partnerships are obliged to submit their tax return 60 days after the last day of the fiscal year). Hence, KSA TP Guidelines now clarify that the disclosure form should be submitted within 120 days after the last day of the financial year, irrespective of any exceptions to the deadline for filing the tax return.

Another relevant interpretation under DFCT concerns the business restructuring section, in which taxpayers should answer “YES” only in those cases that business restructurings have a direct or indirect impact on the KSA taxpayer.

3. Chartered Accountant Certificate (“Affidavit”)

Along with the Disclosure Form, the Taxpayer must upload the Affidavit declaring that the Transfer Pricing policy of the MNE Group is consistently applied in relation to the Taxpayer in the KSA.

Under the new Guidelines, GAZT accepts two assurance engagements - “limited” and “reasonable” - (as endorsed by Standing Committee on Public Accounts), as long as the certificate is provided by a licensed auditor in KSA. Depending on the facts and circumstances, this category of certification provides a relief when reviewing high volumes of intra-group transactions.

4. Intangibles

This edition of the KSA TP Guidelines defines the concepts of ‘Beneficial ownership and ‘De facto owner of intangibles’. The person that is in control of the development, enhancement, maintenance, protection, and exploitation (DEMPE) functions, should make significant decisions and be able to manage and bear the respective risks, in order 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.

5. Effective Control

According to the TP bylaws, “Effective Control” can be categorised as follows:

  • Control via governance;
  • Control via funding; and
  • Control via business.

In this second edition of the TP guidelines, a clarification has been included which will provide support to taxpayers in determining whether effective control exists when there is a presumption of effective control. If, after conducting a thorough analysis on the facts and circumstances, the taxpayer can demonstrate that there is no effective control, this can be argued so the transactions are no longer part of the scope. It is advisable to document the assumptions and criteria followed to arrive at such conclusions, since the burden of proof lies on the taxpayer.

6. Selection of Comparables

The updated KSA TP Guidelines state that information on uncontrolled transactions within a similar industry and in a geographical market comparable to KSA should be obtained as part of the search process.

For the purposes of performing a benchmarking study, companies owned by a Natural Person may be included in the Comparability Analysis as a comparable, if it is reasonable to assume that the Natural Person will not materially impact the profitability of the company.

7. Country by Country (CbC) Notification

This edition of the KSA TP Guidelines includes a detailed step-by-step registration (enrolment) process for the CbC notification and CbC reporting. The Automatic Exchange of Information portal (“AEOI”) allows KSA resident entities to electronically file their CbC notification and/ or report (as applicable).

KSA taxpayers who are part of a MNE group whose annual consolidated turnover is in excess of SAR 3.2 billion (about USCy $850M or EUR 750M) are obliged to file the CbC notification in the DFCT (forming part of the Income tax/ Zakat declaration) and on the AEOI portal regarding the details of the Ultimate Parent Entity (“UPE”) and reporting entity, within 120 days after the last day of the taxpayer’s reporting year.

CbC notification ideally formed part of the Disclosure form since its inception; however, as the online portal for this compliance was later set up, it is advisable to register and do the necessary filings from previous years through the AEOI portal as well.

8. CbC Report

A CbC report requires qualifying entities to provide a range of quantitative information annually and for each tax jurisdiction in which the MNE does business (usually filed by the UPE). In this regard, the newest KSA TP Guidelines state that constituent entities of an MNE group residing in Saudi Arabia will not be required to file a CbC report in the Kingdom when the Statutory Consolidated Revenue Threshold (SCRT) is not met in the Jurisdiction where the MNE Group’s UPE is a tax resident)

Meanwhile, KSA Constituent Entities to which the above is applicable must notify GAZT of such, and provide the necessary information accordingly.

Final comments

The transfer pricing provisions in Saudi Arabia are in the second year of being enforced. Such clarifications provide taxpayers with further practical and theoretical interpretations to assist them and build strong and well-supported TP documentation, minimising the taxpayer risk within the intercompany operation structure.

Ismael Navarro