Relation Between e-Invoicing and Transfer Pricing in KSA

e-Invoicing for Value Added Tax (VAT) invoices in the Kingdom of Saudi Arabia (KSA) is effective from 4th December 2021. While taxpayers need to comply with the KSA rules of e-invoicing, the other tax compliances such as Transfer Pricing (TP) in KSA should not be overlooked.

This article will explain the relation between e-invoicing and TP rules in KSA and its impact on taxpayers’ compliance.

Implementation of e-Invoicing in KSA

The e-invoicing KSA is mandatorily going to be implemented from 4th December 2021, where every taxpayer must submit tax invoices to ZATCA using the e-invoicing compliance solutions. 

Zakat, Tax and Customs Authority (ZATCA) has also provided a toolkit that will help taxpayers and software developers issue and submit the tax invoices, credit and debit notes and generate QR codes that are compliant with the e-invoicing regulations in KSA. 

As per the requirements of the e-invoice Saudi Arabia:

• The taxpayers will have to issue e-invoices taxable supplies taxed at the standard and zero VAT rates. 
• The e-invoices must be issued in Arabic or translated into Arabic if published in any other language. 
• The e-invoicing KSA rules apply to KSA residents and non-resident taxpayers. 

How does e-Invoicing impact transfer pricing in KSA?

To understand the impact of e-invoicing on transfer pricing in KSA, let us first study transfer pricing and how it should be applied. 

Transfer pricing in KSA

Transfer pricing refers to the international sale or purchase of goods or services between related parties. The relationship could influence the prices charged for the sale or purchase in such cases. Hence, the transfer pricing rules ensure the fair or reasonable pricing of such transactions called ‘arm’s length price’ for taxation purposes.

Impact of e-invoicing on transfer pricing in KSA

e-Invoicing in KSA requires a taxpayer to issue tax invoices for all the taxable supplies made to customers. The e-invoicing and transfer pricing rules could clash in the following scenario: 

Example:

When a taxpayer in KSA sells or purchases goods or services internationally, and the other party is a taxpayer’s relative, the transfer pricing and VAT e-invoicing rules must be followed. 

On the one hand, the taxpayer will calculate the arm’s length price to comply with the transfer pricing rules. While on the other hand, he will also have to consider e-invoicing requirements in Saudi Arabia for his taxable supplies. 

The e-invoicing in Saudi Arabia requires applying VAT amount on the total gross price of the taxable supplies. But if the price applied is not the arm’s length price, it could impact taxpayers’ non-compliance with the transfer pricing rules. 

Potential risks and how to avoid

While both rules are independent in themselves, applying the provisions requires co-relation between the two. The significant risk would be non-compliance with one of the regulations. 

Other potential risks include partial compliance, unclear rules, or lack of knowledge of the transfer pricing requirements. 

Understanding all the requirements clearly and staying ahead of time to be well-prepared is the only solution to avoid the risks mentioned. Taxpayers who understand the rules for e-invoicing in KSA and the transfer pricing rules will better address these risks.