• Foreign and domestic companies must comply with new intercompany pricing regulations
• Short deadline for new compliance burden and accountant certification poses challenges

Multinational companies operating in Saudi Arabia must for the first time submit transfer pricing documentation to the tax authority.

Saudi Arabia’s final transfer pricing regulations, published by the General Authority of Zakat and Tax (GAZT) on Feb. 15, require companies operating in the kingdom to le transfer pricing documentation by April 30, for nancial years ending on Dec. 31, 2018.

Companies must complete controlled transaction disclosure forms, and maintain les detailing the multinational group’s transfer pricing policy and methods. The regulations apply to controlled transactions with an annual aggregate value exceeding 6 million riyals ($1.6 million).

Transfer pricing underlies most, if not all, disputes involving companies and international profit shifting. Global companies use transfer pricing methods to ensure that units within the group sell goods and services to one another at an arm’s-length price that is equivalent to that of transaction between unrelated parties.

Companies must immediately “take the necessary actions in order to be compliant,” Shiraz Khan, head of taxation at Al Tamimi and Co. law rm in Dubai, told Bloomberg Tax by e-mail Feb. 20.

Companies must also prepare transfer pricing master and local les before submission of the tax return, Khan said. The les must be submitted to GAZT within 30 days of the tax authority’s request.

Accountant Certication

A significant change from the Dec. 10 draft transfer pricing regulations is that an accountant must certify that a company’s transfer pricing policies are consistently applied to their taxable entities located in Saudi Arabia.

Companies must file the certification with their controlled transaction disclosure form.

The certication requirement “will place a big burden on all taxpayers,” especially those companies due to report by April 30, said Mohamed Serokh, a partner and Middle East transfer pricing leader at PwC in Dubai.

In the final regulations, the GAZT “encourages the submission and maintenance of documentation in the ocial language to the extent it is reasonably possible.”

If a company doesn’t use the Arabic language when submitting documentation, it is unclear what the tax authority will do, Serokh said by telephone Feb. 19.

While the draft rules didn’t address penalties, the. FAQ document issued with the final regulations states: “All penalties and fines under the Income Tax Law are applicable to all income tax matters.”

“By implication, that means they are also applicable” if companies don’t comply with the nal transfer pricing regulations, Serokh said.

Global Tax Reporting

The final regulations, like the draft rules, require companies with a turnover of more than 3.2 billion riyals ($850 million) to le country-by-country reports.

Country-by-country reports provide a snapshot of a multinational company’s financial data—including taxes paid and number of employees—for each country in which the company operates.

Companies will have to designate which reporting group entity will le their country-by-country report by April 30, 2019, and must file the report with the GAZT by Dec. 31, 2019.

Saudi-owned businesses are also required to comply with the country-by-country reporting rules, according the nal regulations.

Gulf Cooperation Council

Gulf Cooperation Council (GCC) companies engaged in controlled transactions with a Saudi company will have to comply with the Saudi transfer pricing rules, Laurent Bertin, an adviser at Aurifer Tax Advisers in Dubai, said by email Feb. 19. “The valuation of its intra-group sales must comply with the valuation methods recommended by the Saudi transfer-pricing rules.”

The GCC is a political and economic alliance of six countries in the Arabian Peninsula: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

GCC affiliates with a Saudi headquarters will have to prepare a local file describing their own transfer pricing policy for transactions with their Saudi-related parties, Bertin said. Important accounting information must be gathered and sent to the Saudi headquarters to be compiled in the country-by-country report, he said.

• 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.

• Businesses with turnover exceeding $13 million must register by Jan. 1
• Companies await implementation regulations and timetable for smaller firms

Bahrain wants large companies to register for the 5 percent value added tax ahead of its official rollout in January.

Companies with an annual turnover exceeding 5 million dinars, ($13.26 million) are being asked to register for the VAT on all goods and services before the system is officially launched at the beginning of the year, according to Bahrain’s finance ministry. Bahrain will be the third Gulf Cooperation Council country after the United Arab Emirates and Saudi Arabia to introduce the tax. Oman, Kuwait and Qatar are expected to follow shortly.

Under a 2017 agreement, all GCC states will collect VAT from businesses with revenues of 375,000 Saudi riyals ($100,000) or more by Jan. 1, 2019. Registration thresholds for smaller companies haven’t yet been announced.

“Taxpayers who have commenced their preparations should see them through,” Michael Camburn, head of VAT for Deloitte in Bahrain, said in an emailed comment Nov. 29. “The interim threshold for VAT registration could be altered at any time which would leave little time for the necessary changes to be made to accounting, financial, and other systems.”

VAT implementation details and the treatment of different sectors is left to the individual jurisdictions. In launching the tax system, the Gulf states are seeking to stabilize their budgets and replace lost revenues from oil, the price of which has fluctuated dramatically since 2014.

To charge, collect and remit VAT on time in compliance with the tax law, companies in GCC countries must update their information technology, accounting and billing systems, train employees and, in many cases, engage external tax advisers, according to practitioners. They must also maintain new tax records, together with original documentation in case of queries, for inspection on demand by the authorities.

Early indications are that VAT revenues are set to exceed an earlier EY estimate that 5 percent VAT will produce more than $25 billion per year for the six GCC countries. In the first three quarters of 2018 alone, Saudi Arabia collected more than 80 billion riyals ($21.3 billion) in taxes on goods and services, according to Jadwa Investment Research.

Staggered Implementation

Bahrain’s decision to require large companies to register early suggests that the introduction of VAT in the country will be staggered, Deloitte said in a note to clients Nov. 29.

The country has yet to announce when other companies above the minimum 37,500 dinars-threshold must register or whether they can do so voluntarily.

Bahrain’s National Bureau for Taxation will hold a series of briengs to help companies prepare to implement the executive regulations, which haven’t yet been published but “include a detailed explanation of the operational and procedural aspects of the law,” approved Oct. 9, Rana Faqihi, the bureau’s assistant undersecretary for development and revenue policies said in a statement Nov. 28.

“It does take pressure off SMEs and allows the National Bureau of Taxation to manage a smaller group of businesses in the first instance,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. “In adopting this policy, Bahrain’s finance ministry is copying the Saudi tax authority, which had the exact same smart policy.”

Businesses Want Details

“With one month to go, the executive regulations are still not published,” whereas Saudi Arabia published its regulations nearly five months before its tax began on Jan. 1, Vanhee said by email Nov. 29. Bahrain’s finance ministry “will need to communicate extensively between now and Jan. 1, 2019, in order to inform businesses as much as possible.”

For multinationals, Bahrain’s VAT should pose few problems because they operate in other tax jurisdictions, including the Gulf for the past year, but the lack of information is causing some concern.

“The situation is very blurry,” said Katrijn De Naeyer, indirect tax manager EMEA for projects and planning at Johnson Controls, a multinational conglomerate that produces and ships batteries and electronics. “We don’t have the 5 million dinars revenue that they’re asking for so we’re more at ease but at the same time there’s so much uncertainty for a company, which is making it difficult to plan ahead.”

The firm is using its experience in the UAE last year, along with external advisers, to prepare. VAT won’t have much impact on revenue, so the main issue is compliance, De Naeyer said by phone from Brussels.

“In the UAE it was also very last-minute. In the end we were fine,” she said. “But here in Bahrain they are even later issuing the implementation guidelines. It’s a bit more stressful now because we know nothing. At least in the UAE we knew half a year before it actually went live. We are getting our VAT systems ready to go ahead. From the moment we know something more we’ll be able to press a button and go live.”

Under the GCC’s VAT treaty, other member states were due to start implementing the tax within 12 months from its start in the UAE and Saudi Arabia. That timetable has slipped.

“Although Bahrain will technically have introduced VAT just within the requisite time period, the registration threshold is by far the highest in the world, is in breach of the GCC Unied VAT Agreement, which provided for a threshold of the equivalent of 375,000 Saudi riyals,” said Jeremy Cape, tax and public policy partner at Squire Patton Boggs law rm in London.

“There is some sense in trying to avoid the issues that arose with the ‘Big Bang’ approach in the UAE, and the struggles that the tax authorities and smaller taxpayers faced,” but the high threshold provides “straightforward avoidance opportunities for large businesses, distorts the market and is unsustainable in all but the very short term. It will be interesting to see the reaction of the UAE and Saudi Arabia,” Cape said by email Nov. 29.

• Refunds available from Nov. 18, maximum daily amount 10,000 dirhams ($2,700)
• Scheme does not include motor vehicles, boats and aircraft

 

The UAE on Nov. 12 announced the details of a value-added tax refund scheme for visitors designed to boost tourism and sales of luxury goods.

 

From Nov. 18, foreign residents aged 18 and over with proof of purchase and a refund form issued by the retailer can reclaim VAT on goods they are exporting from the UAE, with the exception of motor vehicles, boats and aircraft, according to the Federal Tax Authority’s Decision No. (02) of 2018, by Sheikh Hamdan bin Rashid Al Maktoum, UAE minister of nance and FTA chairman.

 

Merchants and leisure operators hope it will revive the sale of luxury goods and increase tourism, reversing a decline in retail sales of jewelry and gold since the 5 percent tax was introduced on Jan. 1.

 

The items must have been bought within the past 90 days and have a total value of at least 250 dirhams (about $68). The maximum tax refund to any tourist within a 24-hour period will be 10,000 dirhams. Refunds can be claimed in cash or credited to cards.

 

An administrative fee of 15 percent of the VAT refund plus a fixed fee of 4.8 dirhams will be deducted from each claim by Planet, which is operating the digitized system on behalf of the tax authority. The item must be exported whole and must be accompanied out of the country by the tourist claiming the refund.

 

The scheme will start at Abu Dhabi, Dubai, and Sharjah International Airports on Nov. 18 and be extended to the UAE’s other land, sea and airports on Dec. 16.

 

“Due to the now practical implementation of the VAT refund scheme, retailers who focus on tourists can expect an increase in sales, especially for high value goods, such as the sale of jewelry and luxury items,” Thomas Vanhee, founding partner at Aurifer Tax Advisers, in Dubai, said by email Nov. 13.

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The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and the United Arab Emirates. The three Gulf countries began applying a 50 percent excise tax to carbonated drinks except water and a 100 percent tax to energy drinks and tobacco products in 2017. The Kuwaiti government said in May that it would accelerate plans to impose similar measures. The measure is supposed to reflect the impact on health but is actually “discriminatory,” with shoppers opting for similar local products that are now cheaper, said Taina Sateri, a trade counselor at the EU delegation to the UAE in Abu Dhabi. “Consumers have not necessarily reduced consuming these products but have changed their consumption habits to similar types of products which have escaped the tax,” Sateri said in a July 19 email. Fruitless Talks The EU has been raising the issue with its Gulf Cooperation Council partners since the GCC framework agreement came to light in 2016, according to Lucie Berger, head of trade and economic affairs in the GCC at the EU delegation in Riyadh. After months of fruitless bilateral negotiations, the U.S., EU and Switzerland turned to the World Trade Organization, most recently at the Council for Trade in Goods on July 3. “Since the introduction of the selective tax, the industry has noted considerable decline in sales of their products,” Berger said in a July 20 email. The tax had a “severe impact” on the sales of energy drinks in Saudi Arabia and slowed sales growth in soft drinks, Euromonitor confirmed in February. Consumers are “shifting to cheaper products that contain often higher level of sugar and other ingredients such as caffeine,” Berger said, adding that the 50 percent and 100 percent tax rates are “unprecedented” and far exceed the 20 percent recommended by the World Health Organization. “Without scientific evidence, it is difficult to understand why some products have been included—such as sugar free products, or flavored carbonated water—while other products are not subjected to the tax, such as juices or caffeinated drinks,” she said. “The EU understands the need to promote a healthy diet through a variety of tools, taxes included. Taxes should ideally be designed in a way to help consumers make healthier choices, while this particular tax might potentially be discriminatory, pushing consumers towards cheaper—and not healthier—alternatives,” she added. Protecting Health? While the Gulf states argue that the excise taxes are designed to protect health and the environment, not to shield local industries, they don’t fulfill that aim, Sateri said.   “The tax is based on carbonization, whereas there are many non-carbonated drinks with high sugar content not taxed,” said Sateri.   However, flavored carbonated drinks continue to be taxed despite having almost no sugar content. “If health is used as a reason then the range of products would need to be modified. Similarly the energy drinks are taxed at 100 percent but there are many caffeinated drinks on the market with higher caffeinated levels which do not fall under the tax,” Sateri said. Sluggish Resolution The dispute could take some time to resolve, leaving other Gulf states unable to advance their own tax plans, said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. “The claims could pose a serious challenge to the GCC Excise Tax and may prevent the other GCC states from implementing it in its current form,” Vanhee said in a July 19 email. He noted that under the WTO dispute settlement system, the issue is currently in the consultation phase. If no mutually agreed solution in line with the WTO agreement is found, the case will be referred in a first stage to a WTO panel. “A potential ruling is binding on the WTO members. The majority of WTO disputes get resolved in the consultation phase,” Vanhee said. Coca-Cola Co. declined to comment. Austrian-based energy drink manufacturer Red Bull didn’t respond to a request for comment.

A last-minute public protest against the UAE’s implementation of VAT by leaders of the gold and diamond industry is heartfelt, but also reflects widespread uncertainty over the new tax, practitioners said.

 

Dubai’s status as a world trading hub for gold and diamonds could be threatened by the introduction of VAT in January 2018, industry leaders warned in the first high-profile protest against the new tax. They urged government officials to apply a zero tax on loose diamonds and gold when they publish the executive regulations for the tax.

 

The value of the UAE’s diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

 

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

 

Industry Concerned

 

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

 

“I’m already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe’s largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

 

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn’t clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

 

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India’s Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

 

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

 

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

 

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

 

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn’t practically be moved in reaction to a change, the same doesn’t hold in the gold and diamond market,” Daly said by email on Oct. 18.

 

Even though there is some justification for their concern and the executive regulations aren’t yet finalized, the jewelry executives had left their protest very late, he said.

 

“VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.”

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