By Omer Saleem
The past months have shifted the business world dramatically, and central hubs of business have been leading the world through the strategic actions necessary to overcome these extreme situations. Remote work adoption is at an all-time high as a matter of necessity and with new guidelines, while business service providers began re-tailoring their services to fit changing business models. Saudi Arabia has led the response for COVID-19 emergency, and the Kingdom continues to update its policies in response to the ramifications of the pandemic as well as other global events.
Recent news revealed updates on WPS (Wage Protection System) and customs fees, and more recently the Saudi Arabia GAZT (General Authority of Zakat and Tax) issued updated transfer pricing guidelines highlighting documentation requirements and intangibles. A now-year-old version of the guidelines was met positively upon release. It emphasized enforcement and application of transaction principles between related parties or parties under common control as if those parties were independent. The guidelines are not legally binding, but do represent GAZT’s implementation of transfer pricing bylaws.
It is important for businesses to be aware of these guidelines and the recent update they underwent in order to maintain compliance. Taxpayers with related party transactions must file a disclosure form with their tax return, with applicable sanctions mentioned in the guidelines as well. For those taxpayers with transactions exceeding SR6 million with related parties, a master file and a local file must be prepared and maintained at the time of filing the tax return. The guidelines additionally mention taxpayers that are part of a multinational enterprise group and have consolidated group revenue exceeding SR3.2 million, and they are required to present a country-by-country report.
Transfer pricing bylaws are a spawn of the Corporate Income Tax Law. In their latest form, the guidelines include the arm’s length principle, which has been expanded to include low value transactions, therefore fitting more cases into the bylaws. Also included in the updates is an elaboration on ‘Control,’ a broadly-defined term in Saudi Arabia’s point of view. The reissue delves into ‘Effective Control.’ This also broadens the definition of related parties, thus fitting more cases into the transfer pricing policies.
Updates on selection of comparables featured a statement that the selection of comparable uncontrolled transactions must be obtained within a similar industry and in a geographical market comparable to Saudi Arabia.
On ownership, the new guidelines specify that the de-facto owner of an intangible is the person that is in control of the DEMPE functions. As a result, the person must make the significant decisions and be able to manage and bear the respective risks to be regarded as the “economic owner” of the intangibles. Documentation updates made the list as well; all controlled transactions, including controlled transactions between a taxable person and related person in Saudi Arabia, fall into the arms of the bylaws. Whereas prior some taxpayers could omit domestic transactions occurring in Saudi Arabia from transfer pricing documentation. Disclosure forms should be submitted 120-days after the last day of the financial year, regardless of any exceptions to the deadline for filing the tax return. Businesses must have the ‘yes’ box ticked on the forms when the restructuring has directly or indirectly affected the Saudi entity.
GAZT’s earlier versions were tested and adjusted upon response. The updated guidelines clarify GZAT's take on transfer pricing policies. A development of the requirements has taken place with the new issue, with a focus on audit activity and documentation. The purpose of the update is to ensure compliance and fulfillment of obligations.
— The writer is director and deputy CEO of Proven SA
