SAUDI ARABIA - Transfer pricing and VAT developments
On 10 December 2018, the Saudi Arabian General Authority of Zakat and Tax (GAZT) published draft transfer pricing (TP) regulations for taxpayer consultation. Taxpayers should carefully review their business operations to identify transfer pricing risks and ensure that they can comply with the forthcoming requirements. The draft regulations follow international standards, including the arm’s-length principle and documentation standards set out in the Organisation for Economic Cooperation and Development (OECD) TP 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 implement the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations on TP. Specifically, the draft regulations introduce requirements for the OECD’s three tiers of documentation - Master File, Local File and Country-by-Country report, as well as an annual Disclosure Form for controlled transactions.
The draft regulations contain new compliance requirements for fiscal years ending on or after 31 December 2018. These include the submission of a Controlled Transaction Disclosure Form, due within 120 days from the end of the fiscal year end, and filed as part of the annual income tax declaration. The draft regulations also introduce TP 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.
VAT in Saudi Arabia is now one year old, having been introduced on 1 January 2018, at a rate of 5%. Generally, businesses have adapted well to the new tax, and the GAZT has published a great deal of guidance material to assist taxpayers. However, some areas continue to cause problems, particularly for international businesses.
The main difficulty is where an international business is required to register for VAT in Saudi Arabia but does not have a Saudi establishment. Strictly, according to the law, such businesses must appoint a ‘tax representative’ who will be jointly liable for the taxpayer’s tax debts. This is an onerous responsibility and it has been very difficult, and often impossible, to find anyone willing to take it on.
It is understood that the GAZT is working on a solution to this problem and that in the future it may be possible for non-established businesses to register without a tax representative, possibly by arranging a bank guarantee as an alternative. There has been no official announcement at this stage.
GAZT has taken a very proactive approach to policing VAT compliance during this first year. The monthly or quarterly VAT returns filed by taxpayers are monitored closely, and GAZT commonly requests further information, particularly where the taxpayer has reported zero-rated or exempt sales. This approach is likely to continue, and the first full VAT audits of Saudi businesses are likely to take place in the first part of the year.