Saudi Arabia Proposes Transfer Pricing Documentation Rules

• Would require multinationals to document intercompany transactions
• Kingdom trying to stop profit shifting to low-tax countries

Saudi multinational companies would have to prepare transfer pricing documentation beginning Jan. 1, 2019, under draft rules aimed at the disclosure of all intercompany transactions.

The draft regulations, issued Dec. 10 by the General Authority for Zakat and Tax (GAZT), would incorporate some of the Organization for Economic Cooperation and Development’s base erosion and profit shifting final reports into domestic law, Shiraz Khan, a senior tax adviser at Al Tamimi and Co. law firm in Dubai, told Bloomberg Tax. They would “expand the tax base in Saudi Arabia by targeting companies that are using related party transactions to shift profits to other countries with lower tax rates.”

Because many countries require multinationals with operations in their jurisdictions to prepare transfer pricing documentation, many Saudi multinationals already have transfer pricing policies in place in those countries.

“Under the current Saudi income tax law, companies that are subject to tax are already required to conduct related party transactions on an arm’s-length basis,” Khan said by email Dec. 17. “However, there is no specific requirement to have transfer pricing documentation in place. Companies will now have to comply with the additional requirements.”

The draft regulations are open for public comment until Jan. 9.

Disclosure Forms

Under the draft regulations, companies would have to complete controlled transaction disclosure forms, and maintain files detailing the group’s transfer pricing policy, and those of its entities, including an explanation of the transfer pricing methods, said Laurent Bertin, an adviser at Aurifer Tax Consultants in Dubai. The regulations apply to controlled transactions with an annual aggregate value exceeding 6 million riyals ($1.6 million).

Bertin said the regulations would also require companies with a turnover of more than 3.2 billion riyals ($850 million) to file country-by-country reports. The reports provide a snapshot of a company’s financial data—including taxes paid and number of employees—for each country in which the company operates.

Companies would have to submit the appropriate notification that transfer pricing documentation has been prepared to GAZT within 120 days after the end of its fiscal year.

Country-by-country reports would have to be filed within 12 months of the last day of the fiscal year.

“Saudi headquartered multinationals will have to incur professional services fees, as well as allocate staff and time toward maintaining this documentation,” Bertin said by email Dec. 17. “Companies must keep evidence of the invoiced work, especially when it is intangible,” such as management fees for “rendered services” including internal seminars, memoranda and presentations, he said.

Profit Shifting

Saudi tax authorities may say that more of the companies’ profit should be attributed to the kingdom, Khan said. “It is possible that GAZT may argue that additional profit should be recognised in Saudi Arabia where the prices for related party transactions were manipulated to pay less tax in the kingdom or otherwise where there is no transfer pricing documentation in place to support the price,” he said.

With a 20 percent corporate income tax, Saudi Arabia has an incentive to attribute more profit to the foreign company, Bertin said. Saudi companies “with affiliates in low tax jurisdictions will be the subject of greater scrutiny. Thanks to the new TP rules, GAZT can easily track all controlled transactions and adjust the tax base when the transactions are not considered priced at arm’s length.”

GAZT’s implementation of a value-added tax since January 2018 suggests it will “take a close look at TP documentation and learn quickly how to implement these new rules and to perform comprehensive tax audits,” he said. “An increase in tax audits due to these regulations is definitely to be expected.”

Companies must ensure they are compliant by revising their group structures and intragroup transactions, maintaining appropriate documentation in a timely manner and preparing for increased audits “since GAZT now has a new base for tax reassessments,” Bertin said.