The transfer pricing law in saudi arabia establishes a regulatory framework for determining the prices of transactions conducted between related persons or entities, with the aim of ensuring that the terms of these transactions comply with the arm’s length principle, meaning the price that independent parties would have agreed upon under similar circumstances.
The transfer pricing instructions in the Kingdom apply to persons subject to income tax, as well as persons subject to Zakat collection in accordance with the relevant provisions.
In today’s article, we review with you a range of information about the transfer pricing law in saudi arabia, in addition to the services provided by CLA.
transfer pricing law in saudi arabia
The transfer pricing law in saudi arabia is based on a set of rules regulating transactions between related parties, including transactions for the sale and purchase of goods and services, loans, intangible assets, and other transactions.
The Zakat, Tax and Customs Authority issued the transfer pricing instructions by a decision of the Authority’s Board of Directors, with an update in 2023.
These instructions aim to establish a clear framework for determining the prices and terms that must govern transactions between related parties.
What is meant by transfer pricing?
Transfer pricing is the determination of the consideration for transactions conducted between related parties within a group or between related companies.
For example, if a Saudi company purchases administrative services from a sister company outside the Kingdom, the price and terms agreed upon must comply with the arm’s length principle, rather than setting the price in a manner that results in profit shifting inconsistent with tax rules.
Transfer pricing includes multiple transactions such as:
- Sale and purchase of goods and products.
- Provision of services.
- Loans and financing.
- Use of trademarks.
- Intellectual property rights.
- Intangible assets.
- Financial transactions between related parties.
The Authority clarifies that the transfer pricing instructions cover the transfer of goods, services, loans, intangible assets, and other transactions between related persons.
What is the purpose of transfer pricing rules?
Transfer pricing rules aim to regulate transactions between related parties and ensure they are priced in accordance with the arm’s length principle.
The most prominent objectives include:
- Achieving tax fairness: Ensuring that relationships between companies are not used to set prices that differ from those independent parties might agree upon.
- Determining profits correctly: Helping determine taxable income or the Zakat treatment in accordance with the applicable rules.
- Limiting profit-shifting risks: Providing a framework for dealing with transactions that may affect the distribution of profits between related companies in different countries.
- Enhancing transparency: Requiring the categories subject to the rules to maintain information and documents supporting the pricing of their transactions.
What is meant by the arm’s length principle?
The arm’s length principle is the foundation on which transfer pricing rules are based. It generally means that the terms and prices used in a transaction between related parties should be similar to what could have been agreed upon between independent parties under similar circumstances.
This principle is used to assess whether the prices or terms specified in transactions between related parties comply with a transaction that might take place between independent parties.
The Zakat, Tax and Customs Authority clarifies that the transfer pricing guide addresses the arm’s length principle and the approved methods for applying it.
Who is subject to the transfer pricing instructions in Saudi Arabia?
The transfer pricing instructions apply to persons subject to income tax, and also extend to persons subject to Zakat collection in accordance with the relevant provisions and controls.
These rules are of particular importance for companies that deal with related parties inside or outside the Kingdom, especially when the transactions are of significant value or have an impact on income or the Zakat and tax base.
What is meant by related persons?
Related persons are parties between whom there is a relationship, control, ownership, or connection that makes the terms of their transactions different from transactions conducted between independent parties.
The relationship may be between:
- A company and its subsidiary.
- The company and the parent company.
- Companies subject to common control.
- The company and a person or entity related to it in accordance with the statutory definitions.
The existence of a relationship must be determined in accordance with the definitions and conditions set out in the transfer pricing instructions, and not merely by the existence of a commercial dealing between two parties.
Transfer pricing methods in Saudi Arabia
Transfer pricing rules include a number of methods that can be used to arrive at the appropriate arm’s length price according to the nature of the transaction and the available data.
The most prominent transfer pricing methods include:
Comparable Uncontrolled Price Method
This method relies on comparing the price used in the transaction between related parties with the price of a similar transaction conducted between independent parties, taking into account differences affecting the comparison.
Resale Price Method
This method starts from the price at which the product is resold to an independent party, then an appropriate margin is deducted to arrive at the appropriate price for the transaction between related parties.
Cost Plus Method
It relies on determining the supplier’s costs related to the transaction and then adding an appropriate profit margin in accordance with the nature of the activity and the transaction.
Transactional Net Margin Method
It is based on comparing the net profit margin realized in the transaction with similar margins of comparable independent transactions or companies.
Profit Split Method
It is used in some cases where transactions are highly integrated or involve intangible assets or unique contributions from the parties, whereby profits are divided according to appropriate bases and criteria.
The Zakat, Tax and Customs Authority clarifies that transfer pricing methods are among the fundamental axes in its instructions and guide.
Transfer pricing documentation in Saudi Arabia
Transfer pricing rules require maintaining information and documents that help prove the compliance of transactions with the arm’s length principle, according to the nature of the taxpayer, the transactions, and the applicable requirements.
Documents related to transfer pricing include:
- The Master File.
- The Local File.
- The Country-by-Country Report in cases where its conditions apply.
- The disclosure form for transactions with related parties.
- The documents and data supporting the pricing method used.
The Authority clarifies that documentation and disclosure requirements are part of the transfer pricing framework in the Kingdom.
The importance of complying with the transfer pricing law
Compliance with transfer pricing rules helps establishments document their policies related to transactions with related parties and reduce the risks of discrepancies between declared prices and prices that can be justified in accordance with the arm’s length principle.
Preparing the functional analysis and appropriate documents also helps explain the nature of the transaction and determine the parties that bear the risks, use the assets, and perform the related functions.
The Zakat, Tax and Customs Authority provides guides and awareness workshops on transfer pricing and how to apply it in the Kingdom.
Steps for applying transfer pricing within the company
An establishment can organize the transfer pricing process through a set of steps, most notably:
- Identifying related parties: Determining all entities and persons to whom the relationship rules apply.
- Identifying transactions: Determining the goods, services, loans, assets, and other transactions between related parties.
- Conducting the functional analysis: Determining the functions performed by the parties, the assets used, and the risks borne.
- Selecting the pricing method: Determining the most appropriate method according to the nature of the transaction and the available data.
- Conducting the comparison: Searching for comparable independent transactions or companies when needed.
- Preparing the documentation: Documenting the analysis, data, and results.
- Reviewing the disclosures: Ensuring that the required information is included in the relevant declarations and forms.
Transfer pricing in Saudi Arabia from CLA
CLA provides specialized services in transfer pricing in Saudi Arabia, including preparing the necessary studies and documentation, and supporting companies in pricing transactions between related parties in accordance with the arm’s length principle, which enhances compliance and limits tax risks.
Frequently Asked Questions about the transfer pricing law in saudi arabia
What is the transfer pricing law in saudi arabia?
It is a framework of rules and instructions regulating the pricing of transactions between related parties, and it relies primarily on the arm’s length principle to ensure that the terms of transactions comply with what could take place between independent parties.
Who is subject to transfer pricing in Saudi Arabia?
The transfer pricing instructions apply to persons subject to income tax, as well as persons subject to Zakat collection in accordance with the relevant provisions.
What is meant by arm’s length?
It is the price or terms that independent parties could agree upon under circumstances similar to the transaction under study, and this principle is used as the basis for applying transfer pricing rules.
What are the most important transfer pricing methods?
Transfer pricing methods include methods such as the Comparable Uncontrolled Price, the Resale Price, the Cost Plus, the Transactional Net Margin, and the Profit Split. The appropriate method is chosen according to the nature of the transaction, the circumstances, and the available data.
What is the Local File in transfer pricing?
The Local File is a document that focuses on the local establishment and its transactions with related parties, and includes the information and analyses that help prove the compliance of those transactions with the arm’s length principle.
With this, we have reached the end of the article, which included a presentation of all the information related to the topic of the transfer pricing law in saudi arabia.
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