Understanding Transfer Pricing Bylaws in Saudi Arabia

The landscape of transfer pricing in Saudi Arabia is governed by the Transfer Pricing Bylaws issued by the General Authority of Zakat and Tax (GAZT). Established through Board Resolution No. [6-1-19] dated 25/05/1440H (corresponding to 31/01/2019), these bylaws set out the framework for tax compliance and administration for taxable persons involved in controlled transactions. This article explores the scope of application, key terms, and implications of these bylaws.

Scope of Application

Article 2: Persons Subject to the Bylaws

The bylaws apply to all taxable persons under the provisions of the Law and Implementing Regulations. Importantly, the bylaws also consider the applicability of Article 18 concerning persons subject to Zakat, as defined by the Zakat Regulations (Ministerial Resolution No. 2082 dated 1/6/1438H). This provision ensures that even entities primarily liable for Zakat must adhere to transfer pricing principles, fostering transparency and equity in the taxation landscape.

Terms and Conditions of Controlled Transactions

Article 3: Conducting Transactions at Arm’s Length

A fundamental principle enshrined in the bylaws is the Arm’s Length Principle, which mandates that any controlled transaction must reflect the terms of comparable transactions between independent parties. Here’s how this principle is structured:

1. Controlled Transactions:Any person engaged in a controlled transaction must ensure that the terms are consistent with those observed in comparable transactions. This is essential for compliance with income tax requirements.
2. Determining the Tax Base:For Permanent Establishments in Saudi Arabia, the tax base must be established in accordance with the Arm’s Length Principle. Moreover, allowable deductions must align with Chapter 5 of the Law, ensuring that expenses are justifiable and reflect the true economic reality of the transactions.

Diverging Conditions

Article 4: Adjustments to Tax Base

When the terms or conditions of a controlled transaction diverge from those of comparable transactions, the bylaws outline specific responsibilities:

1. Tax Base Adjustments:A person involved in such transactions must adjust their tax base to include any returns that would have been received had the conditions been comparable. This adjustment must be accurately reported in their tax declarations to GAZT.
2. Authority’s Role:The GAZT reserves the right to intervene if it identifies discrepancies in controlled transactions. It may adjust the tax base of involved parties to ensure that returns reflect what would have been received under comparable conditions or even disregard the results of a controlled transaction if they do not align with the arm’s length standard.
3. Assessment of Compliance:The GAZT is empowered to assess whether controlled transactions are conducted on an arm’s length basis. This assessment is crucial in upholding the integrity of the tax system and ensuring compliance with the bylaws.

Conclusion

The Transfer Pricing Bylaws issued by the General Authority of Zakat and Tax are pivotal for businesses operating in Saudi Arabia, particularly those engaged in controlled transactions. By mandating adherence to the Arm’s Length Principle, these bylaws promote fairness and transparency in the taxation process. Understanding these regulations is essential for taxable persons to navigate their obligations effectively and maintain compliance.

As the global economy evolves, and with increasing scrutiny on transfer pricing practices, businesses must ensure they have robust frameworks in place to comply with these bylaws. This proactive approach will not only mitigate risks associated with non-compliance but also contribute to the broader goal of equitable taxation in the Kingdom.

Disclaimer:  The Content offers 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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