Transfer Pricing - Saudi Arabia
Transfer Pricing
Transfer Pricing examines the pricing and terms and conditions of transactions between related parties (Controlled Transactions) and whether these transactions meet the arm’s length principle.
The arm’s length principle mandates that prices and terms and conditions of transactions between related parties should be similar to the ones performed by independent third parties.
The Organisation for Economic Cooperation and Development (OECD) has developed a framework that was published as “OECD Transfer Pricing Guidelines for Multinational Entreprises and Tax Administration”
The original aim of Transfer Pricing was to prohibit the move of taxable income from high to low tax jurisdictions, depriving tax jurisdictions from the relevant taxes.
Transfer Pricing in Saudi Arabia
Saudi Arabia is a member of the OECD. It introduced Transfer Pricing legislation in January 2019, being applicable for financial years ending in 2018 and only for companies subject to Income Tax.
Subsequently, in 2023 the legislation was extended to apply also to Zakat payers for financial years starting on or after 01.01.2024.
Tax Requirements
The Transfer Pricing requirements in Saudi Arabia are the following:
- Controlled Transactions Disclosure Form
This a form detailing the transactions of the taxable person with its related parties and impacting expenses and revenues. It is submitted within 120 days from the company’s year-end with its ZAKAT and/or Income Tax Return - Transfer Pricing Master File
A Master File contains information on the global business operations and Transfer Pricing policies of the Multinational Enterprise Group to which the Taxable Person belongs. This file is prepared by the Group and applies to all Group companies. - Transfer Pricing Local File
A Local File contains detailed information on all Controlled Transactions of the Taxable Person. It is prepared and maintained by each taxable person having Controlled Transactions. - Transfer Pricing Policies
The Transfer Pricing policies details the processes and guidelines used by the company/group for pricing its Controlled Transactions and the methodology used to determine the arm’s length principle. - Country-by-Country Report (CbCR)
A report detailing financial and tax information of a Group by Country.
Requirements by Taxable Person
Income Tax or Mixed Companies are required to maintain:
- Master File if Controlled Transactions exceed SAR 6 million per financial year
- Local File if Controlled Transactions exceed SAR 6 million per financial year
- Controlled Transactions Disclosure form should be filed with the Income Tax Return, irrespective of amount of related party transactions
- CbCR should be filed if the taxable person is a member of a Multinational Enterprise (MNE) exceeding consolidated revenue of SAR 3.2 billion in the previous financial year.
A CbCR notification is filed with the Income Tax return and the CbCR is filed within 12 months from the end of the financial year by:
1. The Ultimate Parent entity if the Group is a Saudi Group
2. The Saudi entity of an MNE if the CbCR is not filed elsewhere or in certain other cases - Saudi Tax Authorities have the right to ask for a Master and Local File from taxable persons with Controlled Transactions less than SAR 6 million. The taxable person will have 30 days to provide them.
ZAKAT Companies are required to maintain:
- Master File if Controlled Transactions exceed SAR 100 million in the financial years 2024 – 2026 and SAR 48 million from financial year 2027 and afterwards.
- Local File if Controlled Transactions exceed SAR 100 million in the financial years 2024 – 2026 and SAR 48 million from financial year 2027 and afterwards.
- Controlled Transactions Disclosure form should be filed with the Zakat Return, irrespective of amount of related party transactions. Companies reported in a consolidated Zakat Return are exempted from reporting Controlled Transactions with the consolidated members in the Zakat return but are still required to report the Controlled Transactions with other Group members.
- CbCR should be filed if the taxable person is a member of a Multinational Enterprise (MNE) exceeding consolidated revenue of SAR 3.2 billion in the previous financial year.
A CbCR notification is filed with the Income Tax return and the CbCR is filed within 12 months from the end of the financial year by:
1. The Ultimate Parent entity if the Group is a Saudi Group
2. The Saudi entity of an MNE if the CbCR is not filed elsewhere or in certain other cases - Transfer Pricing policies as per Guidelines for Zakat Documents issued by ZATCA.
Penalties
There a re no specific monetary penalties associated with Transfer Pricing, but in circumstances where the terms, conditions or remuneration of a Controlled Transaction are not consistent with the arm’s length principle, ZATCA has the right to make its own assessment and reallocate or disregard the result of the controlled transaction, thus adding taxable income and calculating additional taxes.