Transfer Pricing Alert

Introduction

• The General Authority of Zakat and Tax (‘GAZT’) of the Kingdom of Saudi Arabia (‘KSA’) issued final Transfer Pricing Bylaws (‘TP Bylaws’) in February 2019 followed by the release of the first edition of the Transfer Pricing Guidelines (‘TP guidelines’) in March 2019.
• The TP Bylaws were made applicable from the fiscal year ending 31December 2018 and the TP guidelines serve to provide insight and guidance in the transfer pricing practice of the KSA and represents the GAZT’s views on the application of the TP Bylaws.
• Recently, the GAZT issued second edition of the TP guidelines in May 2020 (‘revised TP guidelines’). The second edition of the TP guidelines provide some additional detail and information and the goal of publishing the revised TP guidelines is to minimize any ambiguities for taxpayers on the implementation and application of the local transfer pricing legislation, which is at a very nascent stage in KSA.
• This alert discusses the key highlights of the second edition of the TP guidelines issued by GAZT.

Key Highlights

• Disclosure Form
  • Deadline: Pursuant to article 14(B) of the TP Bylaws, Disclosure form for controlled transactions shall be submitted within 120 days of the end of the taxpayer’s fiscal year which generally coincides with deadline for filing the tax return. The revised TP guidelines emphasise the 120-day period is irrespective of any exceptions to the deadline for filing the tax return.
  • Chartered Accountant Certificate: With respect to Chartered Accountant Certificate which is mandatory to attach with Disclosure Form declaring that the transfer pricing policy of the MNE group is consistently applied in relation to the taxpayer in the KSA, the revised TP guidelines clarify that the GAZT accepts both “limited” and “reasonable” assurance engagements (as endorsed by the Standing Committee on Public Accounts) as long as the certificate is provided by a licensed auditor in KSA.
  • Business Structuring: The revised TP guidelines clarify that those taxpayers or MNEs that have gone through a business restructuring shall only answer “yes” in the Disclosure form in cases when there is a business restructuring that directly or indirectly impacts the Saudi Arabian entity.
• Country by Country Reporting (CbCR)
  • The exemption threshold for CbC reporting was set at SAR 3.2 billion (being January 2015 equivalent of EUR 750 million). However, specific situations can arise where the exemption threshold is no longer aligned with EUR 750 million due to currency fluctuations. In such cases, the CbC reporting requirements are enforceable as of January 1, 2018 and thus CbC report has to be prepared with respect to the 2018 reporting year. The revised TP guidelines apparently refer to the exchange rate as of FY 2018 for purposes of identifying the exemption threshold for CbCR.
  • As per the first edition of TP guidelines, MNE would be required to file a CbCR in KSA if it meets the statutory consolidated revenue threshold of SAR 3.2 billion, even if the ultimate parent entity (UPE) or surrogate parent entity (SPE) of a MNE does not file a CbCR because UPE or SPE does not meet the statutory consolidated revenue threshold of its own jurisdiction.
  • However, this position has now been revised by the GAZT in the second edition of TP guidelines. This would imply that a constituent entity in KSA is not required to file a CbCR in KSA (even if the statutory consolidated revenue threshold of SAR 3.2 billion is met), provided that neither the UPE nor the SPE of MNE is required to file a CbCR in their jurisdiction as UPE or SPE do not meet statutory consolidated revenue of its own jurisdiction.

• No materiality threshold
  • The revised TP guidelines clarify that no materiality threshold is in force for the applicability of the arm’s length principle on the controlled transactions entered into by the related persons. Hence, all controlled transactions with related persons shall be at arm’s length price irrespective of their value.

• Identification of related persons
  • For identification of related persons, the TP Bylaws are extended to the situations in which there is strictly no legal ownership but there is Effective Control from an economic point of view.Effective Control was earlier defined as the ability of a person to control the business decisions of another person. The various levels of effective control can be categorized as control via governance, funding, business.
  • The revised TP guidelines emphasize that even though there is a presumption of control through aforementioned ways, other factors may also be considered to determine whether there is effective control. In such cases, it is up to the taxpayer to evaluate and demonstrate that there is no effective control.

• Benchmarking analysis
  • The revised TP guidelines provide that for the purposes of performing a benchmarking study, companies being owned by Natural Person(s) may be included in the comparability analysis as a comparable, if it is reasonable to assume that the Natural Person(s) will not materially impact the profitability of the company.

• Audit Procedures and Penalties
  • The revised TP guidelines also reinforce the fact that for audit procedures and fines, reference is to be made to the applicable articles as included in the Income Tax law of KSA. Therefore, in case the taxpayer does not provide the required information/ documentation as requested by the GAZT, the provisions for levy of fines, penalties and audit procedures as pertinent to all income tax matters under the Income Tax Law shall be applicable. 

• Definition of following terms has been added
  • Authorized OECD Approach means an approach on how to allocate profits to permanent establishments.
  • Beneficial Ownership means a natural person(s) who ultimately own(s) or control(s) the funds of the clients or on whose behalf a transaction or activity is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.
  • De Facto Owner of Intangibles is defined to mean the person that is in control of the DEMPE functions, making the significant decisions and is able to manage and bear the respective risks, and thus can 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.
  • Group is defined as two or more enterprises who are related persons such that they are required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

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The above information is the summary of recent development and is not intended to be advice on any particular matter. Bhatia & Bhatia expressly disclaim the liability to any person in respect of anything done in reliance of the content of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of Bhatia & Bhatia, this Alert may not be quoted in whole or in part or otherwise referred in any documents.