11 December 2018 Saudi Arabia’s tax authority releases draft transfer pricing bylaws On 10 December 2018, Saudi Arabia’s General Authority of Zakat and Tax (GAZT) published draft transfer pricing bylaws (TP bylaws) for public consultation. The TP bylaws follow international standards, including the arm’s-length principle and documentation standards set out in the OECD1 Transfer Pricing Guidelines. As per the GAZT website, “the TP bylaws are applicable to persons considered taxpayers in Saudi Arabia under the corporate Income Tax Law. Generally, this includes – without limitation – multinational enterprise groups (MNE Groups), one or many members of which are deemed a taxable person in Saudi Arabia.” The TP bylaws introduce new compliance requirements for fiscal years ending on or after 31 December 2018, including the submission of a Controlled Transaction Disclosure Form – due within 120 days from the end of the fiscal year end and filed as part of the annual income tax declaration. Additionally, the TP bylaws introduce transfer pricing documentation and country-by-country (CbC) reporting requirements that are broadly aligned with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 Final Report. Specifically, taxpayers with controlled transactions exceeding SAR6 million during the fiscal year will need to prepare (and make available to the GAZT upon request):
Additionally, Saudi Arabian taxpayers that are members of an MNE Group with consolidated group revenue exceeding SAR3.2 billion will be subject to CbC reporting in Saudi Arabia, and will be required to notify the GAZT regarding the submission of the CbC Report within 120 days of the end of the reporting year. The TP bylaws are available on the GAZT website (https://www.gazt.gov.sa/en/transfer-pricing) and the GAZT is in the process of seeking feedback from the public. The deadline for submitting feedback is 9 January 2019. Article 63(c) of the Saudi Arabian Income Tax Law allows the GAZT to re-allocate revenues and expenses associated with transactions among related parties, as well as in the attribution of income and expenses to branches, such that the returns reflect those that would have resulted if the parties were independent and unrelated. This provision in the primary tax legislation provides a statutory authority to the GAZT to review and adjust transfer prices that it determines are not in accordance with the arm’s-length standard. However, until now no formal guidance has previously been provided by the GAZT on how taxpayers should demonstrate their transfer pricing compliance, and there has been no explicit requirement for taxpayers to produce comprehensive transfer pricing documentation and analysis to support the arm’s-length basis of their related party transactions. The TP bylaws that have been released by the GAZT for public consultation address this by including an explicit definition of the arm’s length principle, details of acceptable transfer pricing methods, and a clear statement outlining the transfer pricing documentation that the GAZT expects taxpayers to maintain. Article 2 of the TP bylaws state that the transfer pricing provisions apply to all taxable persons under the Income Tax Law. As such, it appears the GAZT has at this stage elected to exclude pure zakat-paying companies from the application of the transfer pricing provisions. The TP bylaws define controlled transactions as “any” transaction involving related parties and, therefore, do not directly exclude domestic transactions from the scope of the transfer pricing provisions. The TP bylaws contain an expanded definition of “Related Persons” for transfer pricing purposes, which introduces into Saudi tax law for the first time the concept of effective control. This means that taxpayers may be considered to have a related party relationship for transfer pricing purposes, regardless of any common ownership of share capital among them, if they are able to control the business decisions of the other entity. The TP bylaws provide several conditions that may be considered to indicate such ability to control business decisions, including (but not limited to):
All income tax payers in Saudi Arabia will be required to submit to the GAZT together with their annual income tax declaration a disclosure form containing information related to their controlled transactions. Saudi Arabian taxpayers that have related party transactions will have to submit the first disclosure form within 120 days of the end of financial year 2018. Article 14 of the TP bylaws indicates that the content of the disclosure form includes (but is not limited to):
The TP bylaws implement the three-tier standard for transfer pricing documentation established by the OECD BEPS Action 13 Final Report and the subsequent “model” legislation documents. In line with the new requirements, affected Saudi Arabian entities and branches of foreign companies are required to prepare and maintain:
The thresholds for maintaining transfer pricing master file and local file documentation are connected to the aggregate annual arm’s length value of the controlled transactions. In case the annual value is below SAR6 million in a given fiscal year, that entity will be exempted. The TP bylaws do not specify the language in which the documentation should be maintained, nor do they contain specific penalty provisions that will apply in case of non-compliance. The TP bylaws introduce a CbC reporting obligation in line with Saudi Arabia’s commitment to the BEPS minimum standards. Saudi Arabian taxpayers that are members of an MNE Group with consolidated group revenue exceeding SAR3.2 billion will be subject to CbC reporting requirements in Saudi Arabia, and will be required to notify the GAZT regarding the submission of the CbC report within 120 days of the end of the reporting year. The CbC report requires aggregate jurisdiction-wide information regarding an MNE group’s global allocation of income, taxes paid, and certain indicators of the location of key economic activity where the group members operates. The CbC report also includes quantitative data on business operations in each jurisdiction, such as the number of employees, stated capital, retained earnings and tangible assets, along with an identification of each entity within the group doing business in each jurisdiction. The various other provisions of the TP bylaws, such as the embodiment of the arm’s-length principle, determination of an arm’s-length range, and the description of acceptable transfer pricing methods, are broadly based on OECD standards. With reference to comparability analysis, Article 13 of the TP bylaws indicates that the GAZT may permit the use of foreign comparable data in the absence of local comparables, and prohibit the use of comparables that are not in the public domain (so-called “secret comparables”) by both the taxpayer and by the GAZT. The TP bylaws also contain some important provisions relating to the determination of the tax base of permanent establishments (PEs) of nonresident entities in the Kingdom. Specifically, the TP bylaws require that the tax base of a PE is determined in accordance with the arm’s-length principle. Furthermore, “notional” transactions between an entity and its PE are considered as controlled transactions to the extent that they are recognized for the purposes of the law. These two features resemble the methodology established under the “Authorized OECD Approach” to the attribution of profits to PEs. Additionally, there is also a reference to the deductibility of expenses by PEs in accordance with the Saudi income tax law, subject to the provisions of double taxation treaties. The TP bylaws also provide for a mechanism known as “compensating adjustments,” which is a relief for taxpayers if any TP adjustments are made by the counterparty or non-Saudi jurisdiction on controlled transactions with a local Saudi Arabian entity. This, however, only applies if: (i) the foreign jurisdiction has concluded an international agreement on tax matters with Saudi Arabia (similar provisions are customarily found within the scope of Article 9 “Associated Enterprises” of the OECD Model Tax Convention), and (ii) the GAZT is satisfied that the adjustment amount is consistent with the arm’s-length principle. If the GAZT considers that the adjustment made by the foreign tax authority is not appropriate, it would refer the case to the mutual agreement procedures set out in the respective international tax agreements. The TP bylaws empower the GAZT to issue more detailed application guidelines that will explain and elaborate on provisions in the TP bylaws. The introduction of formal TP bylaws marks an important milestone for the tax environment in Saudi Arabia. The TP bylaws are an essential step in Saudi Arabia’s commitment as an Associate Member of the BEPS Inclusive Framework to align with the shared international consensus on international tax rules. Until now, the GAZT has made transfer pricing adjustments under Article 63(c) of the Income Tax Law as part of routine corporate income tax procedures. The introduction of TP bylaws, and, in particular, the expectation that Saudi Arabian income tax paying entities will disclose details of all controlled transactions and prepare transfer pricing documentation annually, suggests that the GAZT may intend to review transfer pricing issues more closely in the future. However, the commitment to adhere to the internationally accepted arm’s-length principle as set out in the OECD Transfer Pricing Guidelines should help taxpayers focus any inquiries onto the appropriate issues and established principles. Given the broader definition of related parties for the purposes of transfer pricing, taxpayers in Saudi Arabia with controlled transactions (above SAR6 million) will need to consider the potential implications that the introduction of these TP bylaws have, not only for themselves, but also for their domestic and overseas affiliates. It will also be important for taxpayers to ensure they can prepare adequate transfer pricing documentation covering controlled transactions entered into during the current fiscal year ended 31 December 2018.
Document ID: 2018-2454 |
