KSA issues transfer pricing bylaws
The General Authority of Zakat and Tax (GAZT) have issued the transfer pricing bylaw, which introduces new transfer pricing compliance requirements for companies that are taxable in the KSA. The transfer pricing bylaw enables the KSA to bring its tax rules in line with international standards, provide GAZT additional tools to protect KSA’s tax base and prevent companies from using related party transactions to artificially shift profits from KSA to other countries with lower tax rates.
The key features of the KSA transfer pricing bylaw are as follows:
- Arm’s length range: Arm’s length range has been defined as a range of acceptable arm’s length financial indicator figures (e.g. prices, margins or profit shares) produced by applying the most appropriate transfer pricing method to a number of uncontrolled transactions based on a comparability analysis.
- Approved methods: The approved transfer pricing methods, which are based on OECD transfer pricing guidelines, are Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Transactional Net Margin Method and Transactional Profit Split Method.
- Disclosure requirement: All taxpayers with related party transactions will be required to submit to GAZT, along with their annual income tax return, a disclosure form that includes details of their related party transactions. The first disclosure form will be required within 120 days of the 2018 financial year.
- Master file and local file: Taxpayers with related party transactions with an annual value above SAR 6 million and above are required to prepare and maintain a master file containing information on the global business operations and transfer policies of the group and a local file containing detailed information on all controlled transactions.
- Country-by-country reporting: Taxpayers that are part of a Multinational Enterprise (MNE) group and have consolidated group revenue exceeding SAR 3.2 billion are required to submit a country-by-country (CbC) report within 12 months from the MNE’s year-end and notify GAZT about the submission of the CbC report within 120 days of the end of the reporting year. The CbC report should include information related to the aggregate value of revenue, profit (or loss) before tax, income tax paid, income tax accrued, stated capital, accumulated earnings and the number of employees.
- Transfer pricing adjustments: The taxpayer is required to make an adjustments to the tax base if the transactions are not conducted on an arm’s length basis. GAZT may also require the tax base to be adjusted or reallocate and reclassify revenue and expenses in accordance with an arm’s length outcome.
What should you do next?
Given that the transfer pricing bylaw creates a number of compliance obligations for companies taxable in KSA and some of these obligations are required to be met before the submission of the tax return in April, companies must act immediately and assess the impact of the transfer pricing bylaw and take the necessary actions in order to be compliant.
Companies with financial years ending on 31 December 2018 should ensure that they submit the disclosure form and CbC report notification (if required) by 30 April 2019. The CbC report, where relevant, will be required by 31 December 2019. The master file and local file are also required to be prepared on an annual basis before the submission of the tax return and must be submitted to GAZT on request within 30 days from the date of GAZT’s request.
It is important for companies to understand their obligations under the transfer pricing bylaw, review their intercompany transactions to ensure that they are conducted on arm’s length terms and put in place transfer pricing documentation to support the pricing of such transactions.
How can we help?
As the largest law firm in the Middle East and with strong and dedicated tax expertise, Al Tamimi & Company is well placed to advise you on your transfer pricing obligations, assess your intercompany transactions from a transfer pricing perspective, conduct a comparability analysis and assist you with the preparation of transfer pricing documentation including master file, local file and a CbC report.
Please do not hesitate to contact Al Tamimi’s Tax Team if you require any assistance.