Saudi Arabia

1. Introduction

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​This comprehensive summary provides an in-depth overview of the legal framework, key laws, scope, documentation requirements, methodologies, compliance measures, high-risk industries and transactions, and future outlook of Saudi Arabia’s transfer pricing regime.

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2. Legal and Regulatory Framework

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2.1 Core Legislation and Regulations

 

Saudi Arabia’s transfer pricing regime has evolved significantly over recent years. Key components of the legal framework include:

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• 2017 - Initial Transfer Pricing Guidelines:

  • In 2017, the Zakat, Tax and Customs Authority (ZATCA) issued the first set of Transfer Pricing Guidelines for multinational companies (MNEs) operating in Saudi Arabia. These were non-binding recommendations, aimed at encouraging companies to apply the arm's length principle to intercompany transactions and to prepare for more comprehensive regulations in the future.

• 2018 - Introduction of Transfer Pricing Bylaws:

  • On December 5, 2018, Saudi Arabia introduced the Transfer Pricing Regulations through the issuance of the ZATCA Transfer Pricing Bylaws, effective in 2019. The regulations required compliance with the OECD guidelines and mandated the submission of transfer pricing documentation, including:

    • Master File

    • Local File

    • Country-by-Country (CbC) Report for large MNEs.

  • The regulations applied to Zakat payers and those subject to corporate income tax, setting a threshold of SAR 3.75 million in annual revenue for documentation requirements.

  • The legislation aimed to combat profit shifting and ensure fair taxation by introducing penalties for non-compliance.

• 2019 - Enforcement and Penalties:

  • ZATCA began enforcing the regulations, with companies required to submit documentation as part of their tax filings. Companies with annual revenues above the threshold were mandated to submit their transfer pricing documentation within 60 days of a tax audit request.

  • Zakat payers were included in the requirements, and non-compliance was met with significant penalties.

• 2020 - Transfer Pricing Compliance Update:

  • In 2020, Saudi Arabia introduced clarifications and updates to its transfer pricing regulations, particularly regarding documentation requirements and pricing methods.

  • The updated regulations placed more emphasis on ensuring the economic substance of intercompany transactions, providing more specific guidance on handling intangible assets and related-party transactions.

• 2021 - Alignment with OECD's BEPS 2.0 and Enhanced Regulations:

  • Saudi Arabia aligned its regulations further with the OECD's BEPS 2.0 framework, focusing on preventing base erosion and ensuring proper allocation of taxing rights.

  • Companies were required to ensure that their intercompany transactions reflected true economic activity and value creation.

  • Zakat payers had specific obligations to report and demonstrate arm's length pricing for transactions, especially for transactions involving intangible assets and complex intercompany structures.

• 2022 - Updates to Transfer Pricing Guidelines:

  • In 2022, ZATCA issued updated Transfer Pricing Guidelines, including detailed guidance on valuing intangibles and applying appropriate pricing methods for different types of intercompany transactions.

  • The updates also clarified the application of the arm's length principle to ensure that companies, including Zakat payers, could follow international best practices in determining transfer prices.

• 2023 - Implementation of Country-by-Country Reporting (CbCR):

  • In 2023, Saudi Arabia adopted further alignment with OECD BEPS Action 13 on Country-by-Country Reporting. Multinational groups with revenue exceeding SAR 3.75 billion were required to submit CbC Reports, detailing global income, tax payments, and business activities.

  • This requirement applied to both Zakat payers and entities subject to corporate tax, enhancing transparency and combating tax avoidance.

 

2.2 Alignment with International Standards

 

Saudi Arabia’s transfer pricing framework is broadly aligned with the OECD Transfer Pricing Guidelines. Key areas of

alignment include:

• Methodological Guidance: Taxpayers are encouraged to adopt internationally recognized pricing methods—such as the Comparable Uncontrolled Price (CUP), Cost Plus, and Transactional Net Margin Method (TNMM)—when determining arm’s length prices.

• Documentation Requirements: Robust and contemporaneous documentation is mandated to support transfer pricing positions, in line with OECD recommendations.

• Dispute Resolution Mechanisms: Provisions such as Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs) are in place (or under development) to resolve disputes and prevent double taxation.

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3. Scope and Application of Transfer Pricing Rules

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3.1 Definition of Related Parties and Associated Enterprises

 

Saudi Arabia’s transfer pricing rules apply to transactions between “related parties.” These typically include:

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• Definition of Related Parties in Saudi Arabia:

  • Related parties in Saudi Arabia are defined as entities where one party has the ability to control, influence, or significantly affect the financial and operational decisions of the other party. This is generally determined based on ownership interests, voting rights, or other mechanisms that result in the ability to control or significantly influence the decision-making of another entity.

• Ownership and Shareholding:

  • An entity is generally considered a related party if one entity directly or indirectly owns 50% or more of the share capital or voting rights of another entity.

  • Alternatively, if an entity is able to control the management decisions of another entity, it will also be considered a related party, even if its ownership stake is below 50%.

• Family and Personal Relationships:

  • For individuals, entities may also be related if they are controlled or owned by family members or close associates. This can include situations where family members own significant shares in different entities, and their financial decisions are interlinked.

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Key Differences Between Tax and Zakat Payees:

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• Tax Payers (Corporate Tax):

  • Corporate tax regulations in Saudi Arabia follow the same basic principles as international norms for determining related-party relationships. This includes the typical control mechanisms, such as ownership, voting rights, and management influence.

  • Foreign MNEs operating in Saudi Arabia need to follow these rules in determining related-party transactions, and the scope of related parties is assessed based on the ability to control or influence the entity.

• Zakat Payees:

  • Zakat payers (businesses subject to Zakat) also follow a similar definition of related parties for the purpose of transfer pricing. However, the application might differ in terms of the treatment of ownership and equity interests.

  • In practice, Zakat is a religious-based tax on Saudi-owned businesses or those that are primarily owned by Saudi nationals or GCC nationals, rather than foreign multinational enterprises. Zakat payers are often required to report related-party transactions when the company has substantial ownership or control within a related group of businesses, particularly where one or more parties are Saudi nationals.

  • Zakat also may treat ownership thresholds for related parties differently, depending on the structure of the business (e.g., if the entities are considered to be in the same economic group under Zakat law, additional considerations may apply). However, the general ownership threshold for related-party status remains consistent across both tax and Zakat payers at 50% or more.​

• Conclusion:

  • The definition of a related party in Saudi Arabia is broadly aligned for both Zakat payers and corporate tax payers, with the main criterion being the ability to control or significantly influence another entity, typically through ownership of 50% or more of share capital or voting rights.

  • While there are no significant differences in the definition itself, Zakat payers may have more nuanced considerations based on ownership by Saudi nationals or GCC nationals, while corporate tax payers (including foreign entities) follow broader international norms. Both groups are subject to the same transfer pricing regulations, requiring documentation and compliance for intercompany transactions involving related parties.

 

3.2 Types of Transactions Covered

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In Saudi Arabia, the transfer pricing regulations cover a wide range of related party transactions that are subject to documentation and compliance requirements. These transactions involve the exchange of goods, services, or other financial arrangements between entities within the same multinational group or those having a related-party relationship. The key types of related party transactions covered by the regulations include:

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• Sale and Purchase of Goods:

  • Transactions involving the sale or purchase of tangible goods, including finished products, raw materials, and components, between related entities.

• Provision of Services:

  • Charges for services provided between related parties, such as management services, technical support, marketing, IT services, research and development, and administrative services.

• Intangible Assets:

  • Transactions involving the transfer, licensing, or use of intangible assets like trademarks, patents, copyrights, know-how, and software. This includes royalties, license fees, and the allocation of profits related to intellectual property rights.

• Financing Arrangements:

  • Loans, interest payments, and financial guarantees between related entities. These arrangements should be priced according to market terms (e.g., interest rates, repayment terms).

• Intercompany Guarantees:

  • Transactions where one related party provides a guarantee for the liabilities of another related party. These transactions are scrutinized to ensure that the guarantee is priced according to arm's length principles.

• Cost Sharing Arrangements:

  • Agreements where related parties share the costs of research and development (R&D), marketing expenses, or any other operating costs. These arrangements must reflect an allocation of costs and benefits according to each party’s contribution.

• Transfer of Financial Assets:

  • The transfer of financial assets like bonds, shares, or other securities between related parties. Pricing must reflect market conditions.

• Profit Sharing and Royalties:

  • Profit-sharing agreements and royalty payments for the use of intellectual property, branding, technology, or other intangible assets between related parties.

• Management Fees:

  • Fees charged for management services provided by one related party to another, such as administrative, legal, and strategic planning services.

• Lease Arrangements:

  • Transactions involving the leasing of tangible assets, such as real estate, machinery, or vehicles, between related parties. This includes the determination of appropriate lease payments based on market rental values.

 

These transactions must adhere to the arm’s length principle, meaning they should be priced in a manner consistent with what would be agreed upon by independent parties operating under similar conditions in the open market. To ensure compliance, businesses must maintain detailed documentation that justifies the pricing and terms of these transactions, aligning with OECD guidelines and Saudi Arabia's transfer pricing regulations.

 

3.3 Exemptions and Thresholds

 

In Saudi Arabia, there are certain exemptions and relaxations under the transfer pricing regulations that apply to specific categories of businesses and transactions. These exemptions mainly focus on documentation requirements and compliance obligations, which are designed to ease the administrative burden on smaller businesses or those with less complex intercompany transactions. Below are the key exemptions specific to Saudi law:

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• Small Businesses and Revenue Thresholds:

  • Businesses with annual revenue below SAR 3.75 million (approximately USD 1 million) are generally exempt from the detailed transfer pricing documentation requirements. This means that smaller companies with revenue below this threshold do not need to prepare the full set of transfer pricing documentation, such as the Master File, Local File, or Country-by-Country Reporting (CbCR), unless they are part of a larger multinational group that exceeds the revenue threshold.

  • However, they must still ensure that transactions with related parties are conducted at arm's length, even if they are not required to submit full documentation.

• Certain Intra-Group Transactions:

  • Low-value added services: Saudi regulations offer a simplified approach for low-value added services provided between related parties. These transactions can be exempt from the need to prepare detailed documentation if the services meet specific criteria, such as being routine and not resulting in significant economic benefits. These services typically include administrative, support, or back-office functions that are standardized and do not involve significant value creation or the use of intellectual property.

  • In this case, businesses are not required to prepare a comprehensive analysis of the arm's length range, as long as they provide a simplified description of the services and demonstrate that the charges for such services are based on an agreed-upon markup or cost-plus method.

• Intercompany Financing Transactions:

  • Certain intercompany financing transactions (such as loans or guarantees) may be exempt from the need for detailed documentation, especially if they are straightforward and involve relatively small amounts of financing. However, these transactions still need to be priced at arm’s length, meaning the interest rate charged on loans and the terms of guarantees must be consistent with market conditions.

• Related Party Transactions Within the Same Economic Group:

  • Companies that are part of a domestic economic group (e.g., a group of Saudi companies owned by the same family or local group of investors) might have reduced transfer pricing compliance obligations, especially for transactions that are conducted wholly within the domestic market. This exemption may apply if the transactions do not significantly affect Saudi Arabia’s tax base or if the intercompany transfers are simple, involving only local products or services with limited cross-border activities.

• Non-Complex Transactions:

  • Transactions involving only tangible goods that do not involve significant intellectual property, risk-sharing arrangements, or intangible assets may be subject to lighter documentation requirements. If the transactions are straightforward (i.e., they involve the purchase or sale of standard goods with clear market pricing), businesses may not be required to prepare full documentation as long as they can justify that the pricing is in line with market rates.

• Temporary Exemptions During Tax Audits:

  • In the case of an ongoing tax audit, ZATCA may grant temporary exemptions or more lenient documentation requirements while the audit is being conducted. However, businesses are still required to provide sufficient information to demonstrate that their related-party transactions comply with the arm's length principle.

• Certain Types of Business Structures:

  • Publicly listed companies that follow the Saudi Stock Exchange (Tadawul) rules may receive some exemptions related to documentation requirements, as their financial activities are generally subject to enhanced transparency and external audits. These businesses may be required to provide less detailed transfer pricing documentation, particularly for intra-group transactions that have already been disclosed in their public financial reports.

• Exemptions for Zakat Payers:

  • Zakat payers may receive certain exemptions under Saudi law. Zakat is levied on businesses owned by Saudi nationals or GCC nationals, and these businesses may be subject to simpler compliance requirements. While Zakat payers are still required to comply with the arm’s length principle, the documentation requirements can be less burdensome, particularly for smaller businesses that do not engage in complex cross-border transactions or extensive intercompany financing arrangements.

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4. The Arm’s Length Principle

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Central to Saudi Arabia’s transfer pricing rules is the arm’s length principle, which mandates that transactions between related parties must be priced as if the parties were independent. This ensures that profits are allocated fairly across jurisdictions and prevents the artificial shifting of income to lower-tax environments.

 

4.1 Determination of Arm’s Length Price

 

Taxpayers must use reliable and internationally recognized methods to determine the arm’s length price. Common methods include:

• Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction with that in a similar uncontrolled transaction.

• Cost Plus Method: Adds a reasonable markup to the costs incurred by the supplier.

• Transactional Net Margin Method (TNMM): Compares net profit margins with those of comparable independent enterprises.

• Resale Price Method: Evaluates the margin earned by an entity that purchases products from a related party and resells them to independent parties.

• Profit Split Method: Allocates the combined profits from related transactions based on the relative economic contributions of each entity.

 

4.2 Comparability and Functional Analysis

 

A robust comparability analysis is essential:

• Functional Analysis: A detailed examination of the functions performed, risks assumed, and assets employed by each party in the transaction.

• Economic Analysis: Consideration of market conditions, competitive environments, and industry-specific factors that may influence pricing.

• Contractual Analysis: Review of formal agreements between related parties, including payment terms, pricing conditions, and performance-related clauses.

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5. Documentation and Disclosure Requirements

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Robust documentation is a cornerstone of Saudi Arabia’s transfer pricing regime. Taxpayers are required to maintain detailed records to justify the pricing of intercompany transactions.

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5.1 Key Documentation Elements

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Saudi Arabian taxpayers must prepare and maintain the following documentation:

• Master File: Provides a global overview of the multinational group’s organizational structure, business operations, overall transfer pricing policies, and the allocation of income and risks among group members. This is particularly important for larger enterprises and those engaged in cross-border transactions.

• Local File: Contains detailed information specific to the Saudi entity’s transactions, including functional analyses, transaction-specific details, financial data, and the methodologies used to determine arm’s length prices.

• Country-by-Country (CbC) Report: For multinational groups meeting certain revenue thresholds (in line with international standards), a CbC report must be prepared and filed. This report outlines key financial and tax information for each jurisdiction in which the group operates.

 

5.2 Timing and Accessibility

 

In Saudi Arabia, the deadlines related to transfer pricing documentation are primarily focused on when companies need to submit their reports and the timeframes for providing them during audits. The specific deadlines are as follows:

• Submission of Transfer Pricing Documentation with Tax Returns:

  • Annual submission deadline: Transfer pricing documentation must be submitted to the Zakat, Tax and Customs Authority (ZATCA) as part of the annual tax return.

    • This should be done within 120 days after the end of the company's fiscal year. For most companies, this would mean submitting the transfer pricing documentation by April 30th of the following year, assuming a December 31st fiscal year-end.

    • The documents should include the Master File, Local File, and, if applicable, the Country-by-Country Report (CbCR) for larger multinational enterprises.

• Deadline for Providing Documentation Upon Request:

  • If ZATCA initiates a tax audit, companies are required to submit their transfer pricing documentation within 60 days of receiving a request.

  • This includes providing the relevant documentation that supports the pricing of intercompany transactions, ensuring that the transactions comply with the arm's length principle.

• Penalties for Late Submission:

  • If a company fails to submit its transfer pricing documentation on time, or does not provide the required information during a tax audit, ZATCA may impose penalties. These penalties can range from SAR 10,000 for minor delays to much higher amounts for non-compliance or failure to provide adequate documentation.

• Country-by-Country Reporting (CbCR) Submission:

  • The Country-by-Country Report (CbCR) must be submitted within 12 months of the end of the fiscal year of the ultimate parent company if the company is part of a multinational group with consolidated revenues exceeding SAR 3.75 billion.

  • This report is typically required to be submitted electronically through ZATCA's e-filing system.

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5.3 Penalties for Non-Compliance

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In Saudi Arabia, non-compliance with transfer pricing regulations can lead to various penalties imposed by the Zakat, Tax and Customs Authority (ZATCA). These penalties are aimed at ensuring businesses adhere to the arm's length principle and maintain proper documentation for related-party transactions. Below are the key penalties for non-compliance:

• Failure to Submit Transfer Pricing Documentation:

  • Companies that fail to submit required transfer pricing documentation (including the Master File, Local File, and Country-by-Country Report (CbCR)) within the prescribed deadlines may face a penalty of up to SAR 100,000 for non-compliance.

  • Failure to comply with the documentation requirements for related-party transactions could also result in additional penalties if ZATCA finds discrepancies or insufficient supporting documentation during audits.

• Inaccurate or Incomplete Documentation:

  • If the submitted transfer pricing documentation is deemed inaccurate, incomplete, or not in line with the arm’s length principle, the business may face penalties.

  • ZATCA has the authority to assess the correct value of the intercompany transactions and adjust the taxable income. If adjustments are made, additional penalties may apply based on the revised tax assessments.

• Failure to Provide Documentation During a Tax Audit:

  • If a company fails to provide transfer pricing documentation upon ZATCA's request during a tax audit, the business may face a penalty of up to SAR 50,000.

  • If the company does not respond to audit requests in a timely manner or provides insufficient information, the audit may be prolonged, and ZATCA can impose further fines.

• Penalties for Transfer Pricing Adjustments:

  • If the ZATCA determines that the prices charged in related-party transactions do not meet the arm’s length standard, it may adjust the taxable income of the company. This adjustment could result in higher taxes due to the recalculation of income or expenses.

  • In such cases, penalties can be imposed on the adjusted tax liabilities. These penalties are typically based on the severity of the discrepancy, and additional interest charges may apply for overdue payments.

• Late Payment Penalties:

  • If the company owes additional taxes due to transfer pricing adjustments and fails to pay the owed tax on time, late payment penalties will apply. These can range from 1% to 5% of the overdue tax amount for each month of delay.

• Additional Penalties for Non-Compliance:

  • In extreme cases, ZATCA may impose administrative fines or initiate further legal actions if the company consistently fails to comply with the transfer pricing rules, particularly if the failure to comply is viewed as intentional or evasive.

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6. Transfer Pricing Adjustments

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In Saudi Arabia, transfer pricing adjustments are made when the Zakat, Tax and Customs Authority (ZATCA) determines that the prices applied to intercompany transactions between related parties do not align with the arm's length principle. Under Saudi law, these adjustments typically involve changes to the taxable income or expenses of the business, and the adjustments are aimed at ensuring the correct allocation of profits and tax liabilities between related entities.

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The specific transfer pricing adjustments under Saudi Arabian law include:

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• Income Adjustments:

  • When ZATCA finds that the pricing of related-party transactions does not reflect the arm's length principle, it can adjust the taxable income of the business by increasing or decreasing the reported income from the intercompany transactions.

  • For example, if the selling price of goods or services in a related-party transaction is set too low (below arm's length), ZATCA may increase the income of the selling entity to reflect what it would have received in an arm's length transaction.

  • Conversely, if the price is set too high (above arm's length), ZATCA may decrease the income of the receiving entity to reflect the market price that would apply in a transaction between independent entities.

• Expense Adjustments:

  • In cases where an entity has incurred expenses in related-party transactions that are deemed excessive or not in line with the arm’s length principle, ZATCA may adjust the deductions allowed for those expenses.

  • For example, if an entity is charged an inflated amount for services or goods provided by a related entity, ZATCA may disallow a portion of those expenses, reducing the taxable deductions claimed by the business.

• Interest Rate Adjustments:

  • For intercompany financing transactions (e.g., loans or guarantees), ZATCA may adjust the interest rates applied to loans between related entities to ensure that the rate is in line with market conditions and reflects the arm’s length principle.

  • If the interest charged on an intra-group loan is considered too low (or non-existent), ZATCA may increase the interest rate for the lending entity, which could result in higher taxable income for that entity.

  • On the other hand, if the interest rate is considered too high, ZATCA could reduce the interest deductions available to the borrowing entity.

• Allocation of Profits from Intangible Assets:

  • ZATCA may adjust the allocation of profits related to intangible assets such as intellectual property (IP), trademarks, patents, and licenses.

  • If the profits from the use or sale of intangible assets are not allocated appropriately between related parties, ZATCA will adjust the profit allocations to reflect what would have been agreed upon in an arm's length transaction. This often involves analyzing the economic contributions of the entities involved in the creation, use, and protection of the intangible asset.

• Adjustments for Low-Value-Added Services:

  • If the cost of low-value-added services (e.g., administrative services, back-office functions) provided between related entities is not consistent with arm's length pricing, ZATCA may adjust the charges for these services to reflect a market-based cost.

  • Such adjustments typically involve a fixed markup on the costs incurred for providing these services, which should be similar to what independent entities would charge for similar services under similar circumstances.

• Cross-Border Adjustments:

  • In cases involving cross-border related-party transactions, ZATCA may adjust the allocation of income between Saudi and foreign entities, ensuring that profits are correctly allocated based on where value is actually created and where economic activities are performed.

  • This may involve adjustments to reflect the economic substance of transactions rather than the contractual terms alone.

• Adjustments for Cost Sharing and Profit Sharing:

  • For cost-sharing arrangements (CSAs) or profit-sharing agreements between related entities, ZATCA may adjust the amounts allocated between the parties to ensure that the distribution of costs or profits is aligned with the arm's length principle.

  • In the case of cost-sharing arrangements, if one entity is contributing more than its fair share of the costs, ZATCA may adjust the allocations to ensure that costs are shared in accordance with the benefits received by each entity.

  • Similarly, for profit-sharing arrangements, ZATCA may adjust the share of profits allocated to each entity to reflect what would have been agreed upon in a transaction between independent parties.

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7. Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs)

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Given the complexity of transfer pricing, Saudi Arabia provides mechanisms to resolve disputes and offer certainty:

 

7.1 Advance Pricing Agreements (APAs)

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In Saudi Arabia, the Advance Pricing Agreement (APA) procedure is a mechanism designed to provide certainty to taxpayers regarding the transfer pricing treatment of their intercompany transactions. The Zakat, Tax and Customs Authority (ZATCA) administers the APA process, allowing companies to agree in advance on the method and terms used to determine the arm’s length price for related-party transactions. This procedure is especially useful for businesses seeking to avoid disputes with tax authorities over transfer pricing and to manage cross-border tax risks.

Here’s an overview of the APA procedure under Saudi law:

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• A taxpayer (usually a multinational enterprise, or MNE) can request an APA by submitting an application to ZATCA. The application must contain detailed information about the proposed transactions, the transfer pricing methods being used, and any relevant documentation that supports the taxpayer's transfer pricing position.

• The application must include:

  • A detailed description of the related-party transactions involved.

  • Information about the transfer pricing method being used to determine the arm’s length price.

  • A description of the economic analysis supporting the use of that method.

  • The taxpayer’s financial information and the tax jurisdictions involved.

 

7.2 Mutual Agreement Procedures (MAPs)

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• The taxpayer must submit a formal request to initiate the MAP process with the Zakat, Tax and Customs Authority (ZATCA), the tax authority of Saudi Arabia.

• The request should be made within 3 years from the date of the first notification of the action leading to the dispute or double taxation, such as a transfer pricing adjustment or additional tax assessments imposed by Saudi authorities or by the tax authorities of the other contracting state.

• The request must include:

  • Detailed information about the transactions in question.

  • The relevant tax assessments or adjustments made by the foreign tax authority.

  • A description of the double taxation issue.

  • The taxpayer’s preferred resolution or proposed adjustment.

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8. Industries and Transactions with Higher Transfer Pricing Risk

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Certain industries and transaction types are inherently more complex and, therefore, present a higher risk for transfer pricing matters in Saudi Arabia.

 

8.1 High-Risk Industries

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• Oil, Gas, and Petrochemicals:

  • Nature of Transactions: These industries often involve large-scale projects, shared services, technical support, and resource allocation across jurisdictions.

  • Risk Factors: High capital intensity, fluctuating commodity prices, and strategic importance result in complex intercompany arrangements that require careful documentation and rigorous functional analyses.

• Financial Services:

  • Nature of Transactions: Intra-group loans, guarantees, derivative transactions, and other financial instruments are common in this sector.

  • Risk Factors: The pricing of these financial transactions must accurately reflect credit risk, market conditions, and regulatory capital requirements. Any mispricing can lead to significant adjustments.

• Technology and Intellectual Property:

  • Nature of Transactions: Licensing, royalty arrangements, and transfers of intangible assets such as patents and software.

  • Risk Factors: The valuation of intangibles is inherently complex due to the difficulty in identifying reliable comparables, rapid technological changes, and the high mobility of intellectual property across jurisdictions.

• Pharmaceuticals and Life Sciences:

  • Nature of Transactions: R&D activities, licensing of research outcomes, and distribution arrangements.

  • Risk Factors: High investment in research and the allocation of returns on innovation require detailed functional analysis to ensure that pricing reflects the underlying value creation.

 

8.2 High-Risk Transaction Types

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• Intercompany Financing:

  • Key Considerations: Determining appropriate interest rates, fees, and risk premiums for loans and guarantees between related entities.

  • Risk Factors: Mispricing can lead to significant tax adjustments, especially in volatile market conditions.

• Intangible Asset Transfers and Licensing:

  • Key Considerations: Valuation of intangible assets, including intellectual property and technology.

  • Risk Factors: The lack of direct comparables and rapidly evolving market conditions increase the complexity of these transactions.

• Service Agreements and Cost Sharing:

  • Key Considerations: Allocation of costs and benefits among group companies for shared services, centralized management, or support functions.

  • Risk Factors: Complex functional analyses are required to ensure that costs are allocated on an arm’s length basis.

• Capital Asset Transactions:

  • Key Considerations: Transfers of significant fixed assets or equity interests require independent valuation.

  • Risk Factors: Inaccurate valuations may lead to adjustments affecting capital gains, depreciation claims, and overall taxable income.​​​

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9. Challenges and Emerging Trends

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9.1 Digital Economy and New Business Models

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• Valuation of Digital Assets: Traditional valuation methods may need adaptation to capture the true value of digital assets and data-driven business models.

• Complex Global Supply Chains: Establishing comparability and accurately allocating income across increasingly digitalized networks poses significant challenges.

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9.2 Evolving International Standards and BEPS Initiatives

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• Integration of BEPS Measures: Saudi Arabia continues to refine its transfer pricing framework in line with OECD BEPS recommendations, impacting documentation, adjustments, and disclosure requirements.

• Enhanced Transparency: Global initiatives toward increased tax transparency lead to more detailed reporting requirements and greater information exchange among tax authorities.​

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10. Future Outlook and Recommendations

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10.1 Continuous Monitoring and Proactive Management

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• Dedicated Transfer Pricing Functions: Establish specialized teams to monitor regulatory changes, market conditions, and internal compliance.

• Regular Policy Reviews: Continuously update transfer pricing policies and documentation to reflect changes in business operations and regulatory requirements.

• Investment in Technology: Leverage data analytics and advanced IT systems to enhance the robustness of benchmarking studies and documentation processes.

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10.2 Strengthening Engagement with ZATCA

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• Advance Pricing Agreements (APAs): Pursue APAs early to secure clarity and reduce future disputes.

• Utilize Mutual Agreement Procedures (MAPs): Engage in MAP processes to resolve cross-border disputes and prevent double taxation.

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10.3 Preparing for Heightened Regulatory Scrutiny

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• Enhanced Documentation: Ensure all transfer pricing documentation is comprehensive, current, and aligned with both domestic requirements and OECD standards.

• Ongoing Training: Regularly update the expertise of personnel involved in transfer pricing to stay abreast of evolving methodologies and regulatory changes.