All About Transfer Pricing in Saudi Arabia

Related party transactions in businesses always come with more compliance requirements, and Saudi Arabia's taxation system is no exception to that. The Saudi government implemented Transfer Pricing (TP) bylaws to ensure fair and transparent pricing in related party transactions.

This article explains all about transfer pricing, including what it is, its importance, regulations, and implications.

What is transfer pricing in KSA?

Transfer pricing applies to goods, services, or intangibles exchanged between related companies within the same multinational group. These transactions should be conducted at "arm's length", i.e., at the price that unrelated/independent companies would agree upon in the open market. This rule prevents profit shifting and ensures a fair tax base for Saudi Arabia and other countries involved.

The KSA tax system and transfer pricing

Understanding Saudi Arabia's taxation system is important for comprehending transfer pricing.

• Corporate Income Tax (CIT): This tax applies to foreign-owned companies with a branch or permanent establishment in KSA.
• Zakat: An Islamic levy applicable to businesses and individuals based on their assets and wealth.
• Transfer pricing bylaws: Regulations issued by ZATCA govern transfer pricing practices in KSA.

Who is subject to transfer pricing regulations in KSA?

Companies with related party transactions exceeding below thresholds are subject to the regulations.

Transfer pricing regulations

Here are a few key aspects of transfer pricing regulations in KSA:

• Arm's length principle: The guiding principle for transfer pricing, ensuring transactions are comparable to independent market transactions.
• Transfer pricing methods: Different methods, such as Comparable Uncontrolled Price and Transactional Net Margin Method, are used to determine arm's length prices.
• Documentation requirements: Businesses must prepare documentation supporting their transfer pricing practices.
• Country-by-Country Reporting (CbCR): Large multinational groups with consolidated revenue exceeding specific thresholds must submit CbCR reports to ZATCA.

Why is transfer pricing important?

Transfer pricing plays a crucial role in:

• Ensuring fair taxation: Prevents businesses from transferring profits to low-tax jurisdictions, ultimately safeguarding tax revenues for KSA.
• Maintaining a level playing field: Creates a fair, competitive environment for local and foreign businesses.
• Reducing disputes: Transfer pricing guidelines reduce potential tax disputes between businesses and the Zakat, Tax and Customs Authority (ZATCA).

Industry-specific applications of transfer pricing

Transfer pricing applies across various industries in KSA, including:

• Oil & Gas: While pricing the intra-group crude oil sales and services.
• Construction: When transferring equipment or materials between affiliated companies involved in projects.
• Manufacturing: Making intra-group royalty payments for intellectual property use.

Penalties for non-compliance with transfer pricing bylaws

Companies failing to comply with transfer pricing regulations will face significant penalties, including:

• Tax adjustments: ZATCA can adjust taxable income based on their assessment of arm's length prices.
• Fines and penalties: Additional financial penalties can be imposed.
• Reputational damage: Non-compliance can harm a company's reputation and investor confidence.

ZATCA's approach to transfer pricing audits

ZATCA adopts a risk-based approach to transfer pricing audits, focusing on high-risk transactions and industries. They offer various compliance resources and encourage transparent communication with taxpayers. Further, the Mutual Agreement Procedure provides a mechanism for resolving disputes between taxpayers and ZATCA.

Hence, companies must accurately report to ZATCA and mitigate risks through diligent documentation justifying their transfer pricing practices.