New Transfer Pricing Guidelines for Zakat Payers

Saudi Arabia has introduced new Transfer Pricing Guidelines specifically tailored for Zakat payers. These guidelines provide comprehensive details and illustrative examples regarding the Zakat treatment of various types of related party transactions. This article aims to offer an overview of these guidelines, explain the principles of transfer pricing for Zakat purposes, and outline the phased approach to compliance.

Overview of the Guidelines 

The new guidelines address the Zakat treatment of the following eight types of related party transactions: 

• Commercial Transactions: These include transactions involving the sale of goods or provision of services between related parties, cost reimbursements, and financing transactions that create liabilities. 

• Financing Working Capital: This covers transactions involving working capital financing by related parties, leading to current liabilities. 

• Shareholders Loans: Transactions involving short-term or long-term loans from shareholders for operational or investment purposes. 

• Shareholder’s Equity: Transactions where shareholders finance in cash or kind, recognized in the statement of equity. 

• Asset Financing: Transactions where shareholders provide assets that are recognized as fixed assets. 

• Board of Directors Remunerations: Includes lump sum or other forms of compensations for board members. 

• Shareholders Salaries: Salaries, allowances, and other benefits allocated to shareholders. 

• Assets Owned by the Shareholders: Fixed assets registered in the shareholders’ names but used by the Zakat payer and recognized in their financial statements.

Applying Transfer Pricing Principles for Zakat Payers 

The guidelines clarify how the application of the Transfer Pricing Bylaws impacts the Zakat treatment for these transactional groups. The Zakat treatment depends on the commercial nature of these transactions and the appropriate application of the arm’s length principle. Here are two illustrative examples: 

Case 1: Commercial Transactions 

The guidelines provide an example involving the supply of goods between related parties. If the supply price is significantly higher than the arm’s length price set by independent suppliers, the Zakat results of the related party purchaser are adjusted to deny the expense exceeding the arm’s length price. 

Case 2: Financing Transactions 

The Zakat treatment of financing transactions depends on the commercial nature of the pricing and the specific terms and conditions of the financing arrangement. For instance, if a loan from a related person (including shareholder loans) is not priced at arm’s length or lacks commercial terms in a proper intercompany agreement, it may require adjustment to achieve arm’s length pricing or recharacterization. An example provided in the guidelines shows a loan without commercial terms being characterized as equity for Zakat purposes instead of a liability. 

For all related party transactions, the guidelines refer to the existing Transfer Pricing Bylaws and Transfer Pricing Guidelines for the methodologies to be applied.

Phasing in of Transfer Pricing Compliance 

The updated Transfer Pricing Bylaws, issued on April 7, 2023, introduced new compliance requirements for Zakat payers, including the submission of a Controlled Transaction Disclosure Form and Transfer Pricing Affidavit with their Zakat returns. Additionally, Zakat payers must prepare a Transfer Pricing Local File and Master File, subject to the following exemptions: 

• Phase 1: Covers the first three years up to 2027 and exempts Zakat payers with aggregated related party transactions less than SAR 100 million from the Master File/Local File requirement. 

• Phase 2: From 2027 onwards, only exempts Zakat payers with aggregated related party transactions equal to or less than SAR 48 million.

Way Forward 

The upcoming compliance requirements effective from January 1, 2024, will significantly impact Zakat payers. These guidelines offer crucial clarifications on the Zakat treatment of transactions that fall under the Transfer Pricing Bylaws. 

Zakat payers should: 

• Review Related Party Transactions: Assess preparedness for the new compliance requirements by reviewing the pricing mechanism for existing arrangements. 

• Implement a Transfer Pricing Policy: Establish a policy covering all in-scope related party transactions and create a compliance roadmap for future requirements. 

• Ensure Proper Implementation: Have relevant processes, controls, and legal agreements in place to implement the transfer pricing policy correctly, ensure proper Zakat treatment, and adhere to compliance requirements. 

• Conduct a Transfer Pricing “Health Check”: This initial step will help Zakat payers on their transfer pricing journey, ensuring they are prepared for the new guidelines.

Conclusion

These new guidelines represent a significant shift in how Zakat payers must manage their related party transactions. By understanding and implementing these changes, Zakat payers can ensure compliance and optimize their Zakat treatment under the new regulatory framework.

Summary 

Saudi Arabia’s new Transfer Pricing Guidelines clarify the Zakat treatment for eight types of related party transactions, including commercial deals, financing, shareholder loans, equity, asset financing, board remunerations, and shareholder salaries. Key points include the application of the arm’s length principle to ensure fair pricing and examples showing adjustments for overpricing and non-commercial loans reclassified as equity.  

Starting January 1, 2024, Zakat payers must submit specific forms and prepare Transfer Pricing Local and Master Files, with phased exemptions based on transaction value. Zakat payers should review their transactions, establish a transfer pricing policy, and implement necessary processes and controls, starting with a transfer pricing “health check” to ensure compliance. 

Disclaimer: 
The Content offer general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk. 

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