The Arm’s Length Principle

The arm’s length principle applies to transactions between related parties or parties under common control. This principle now applies for all cases, as opposed to prior when low-value transactions did not apply. As a result, must disclose all controlled transactions entered into with related persons in the tax return regardless of the amount, to avoid any challenge in case of an audit. 

Control

Saudi Arabia identifies control more broadly than the OECD transfer pricing guidelines; in Saudi Arabia, the concept of Effective Control exists. This results in more scenarios where parties are defined as related, and therefore more cases fit into the transfer pricing bylaws category. The newly-issued edition of the transfer pricing guidelines dives deeper into the definition of effective control and clarifies it for taxpayers. 

Selection of comparables

The updated guidelines state that the selection of comparable uncontrolled transactions must be obtained within a similar industry and in a geographical market comparable to Saudi Arabia. If the taxpayer cannot support the appropriateness of the comparable transactions selected, GAZT may challenge this during an audit.

Companies owned by a natural person may be included in the comparability analysis as a comparable, assuming that the natural person will not materially impact the profitability of the company. This will have an impact on the taxpayer by having potentially additional companies considered as comparables.

Ownership

The concept of “de-facto owner” is created to ensure that the economic owner receives the appropriate return irrespective of the legal owner. The new guidelines specify that the de-facto owner of an intangible is the person that is in control of the development, enhancement, maintenance, protection, and exploitation (DEMPE) functions. Thus the person must make significant decisions and be able to manage and bear the respective risks to be regarded as the “economic owner” of the intangibles. It is possible that the legal owner and de-facto owner are not the same people. This does not mean that the legal owner is entitled to the right to retain all returns and economic benefits derived from the exploitation of intangibles even though such returns may initially accrue to the legal owner due to legal ownership.

Transfer pricing documentation

All controlled transactions, including controlled transactions between a taxable person and a related person in Saudi Arabia, fall under the scope of the bylaws. Whereas prior some taxpayers could omit domestic transactions occurring in Saudi Arabia from transfer pricing documentation.

This can pose a particular issue due to the threshold of 6 million riyal for taxpayers to prepare a local file, as domestic transactions can cause the total amount of related party transactions to exceed the threshold and create unexpected compliance requirements for a local file. The disclosure form should be submitted 120-days after the last day of the financial year, irrespective of any exceptions to the deadline for filing the tax return.

Disclosure forms

Restructured businesses must have the ‘yes’ box ticked on disclosure forms when the restructuring has directly or indirectly affected the Saudi entity. These forms are accompanied by a Chartered Accountant Certificate declaring that the transfer pricing policy of the business or MNE group is consistently applied in relation to the taxpayer in Saudi Arabia. The new edition of the guidelines clarifies that GAZT accepts both ‘limited’ and ‘reasonable’ assurance engagements as long as the certificate is provided by a licensed auditor in the Kingdom. 

Country-by-country reporting

It has now been clarified that every Saudi Arabia taxpayer who is part of an MNE group with a consolidated group revenue exceeding the threshold of 3.2 billion riyals must register (enroll) at the GAZT automatic exchange of information portal and send an Article 3 notification to GAZT 120 days after the last day of the taxpayer’s reporting year. GAZT added useful and comprehensive step-by-step practical guidance for the registration and submission in GAZT’s country-by-country reporting portal in the second edition of transfer pricing guidelines.