Saudi Arabia is not a member of the OECD, however, in 2024 they signed a Memorandum of Understanding (MoU) to strengthen the cooperation in several policy areas, aiming to align domestic rules with relevant OECD standards and best practices.
As a result, Saudi Arabia’s transfer pricing (TP) framework is closely aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Its domestic transfer pricing rules are provisioned in two main legal acts: Transfer Pricing Bylaws (TP Bylaws) and the Transfer Pricing Guidelines (TP Guidelines).
Arm’s Length Principle
Saudi Arabia follows the definition of the arm’s length principle stipulated in Article 9 of the OECD Model Tax Convention, and under the current legislation, the arm’s length principle is primarily defined under Article 1 (2) of the TP Bylaws. It stipulates that when related persons are involved in commercial or financial transactions under conditions with different terms than those agreed upon by independent parties, profits that would have been made under arm’s length conditions but were not due to these differences can be adjusted and taxed accordingly. This ensures that between related parties, business or financial transactions are subject to fair market value to prevent profit shifting and maintain tax compliance.
Related Party Definition
In Saudi Arabia, Section 1(25) of the TP Bylaws defines related parties for transfer pricing purposes. According to this article, related parties are defined based on relationships that constitute control or influence over financial and business decisions. This includes three main categorizations:
- Natural persons who are related by blood or marriage up to the fourth degree, or who are partners in a partnership.
- Natural persons and legal entities are related if (i) the individual directly or indirectly controls 50% or more of a partnership’s voting rights, income, or capital; (ii) the individual holds a significant ownership stake in a company, trust, or fund and can benefit from its assets, and (iii) the person participates in the management or decision-making of a juridical entity.
- Legal entities are considered related when (i) they are under common control by the same entity or individuals; (ii) one entity has effective control over another, influencing its business decisions, and (ii) the same controlling person or entity influences multiple entities.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price are in alignment with the OECD-approved methods and include:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
Saudi Arabia’s transfer pricing framework does not differentiate between the methods. Instead, it supports the application of the most appropriate method. In addition, the TP Bylaws Article 9 allows the taxpayer to choose another method different from the above if it can prove that neither of the methods listed can be used to ensure a reliable measure of the Arm’s Length Principle.
Comparability Analysis
Saudi Arabia’s comparability analysis ensures that transactions between related parties reflect fair market conditions by assessing whether they align with those conducted between independent entities. If differences exist between related-party and independent transactions, adjustments must be made to ensure accurate comparability. The evaluation considers key factors such as the nature of the transaction, functions performed, assets used, risks assumed, contractual terms, economic conditions, and business strategies. To maintain transparency, taxpayers can only rely on comparable transactions if the relevant data is accessible to tax authorities. While local market data is preferred, foreign comparables may be used if no reliable domestic data exists, provided they accurately reflect economic conditions.
Documentation Requirements
Transfer pricing documentation requirements in Saudi Arabia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Saudi tax authority.
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master File and Local File
Taxable persons engaged in controlled transactions must maintain both a Master File and a Local File, except for natural persons and small enterprises (entities with annual controlled transactions valued at 6 million riyals or less). These documents must be made available upon request by the General Authority of Zakat and Tax (ZATCA), and taxpayers must submit them within the specified period, which cannot be less than 30 days from the request date.
The Master File provides a global overview of the MNE group to which the taxpayer belongs. It includes details on the organizational structure, business operations, intangibles, intercompany financial activities, and financial and tax positions. This information helps tax authorities assess the overall transfer pricing policies and related-party transactions of the MNE, ensuring compliance with international best practices.
The Local File focuses on the Saudi entity’s specific controlled transactions. It must include a detailed description of the taxpayer’s management structure, business activities, material-controlled transactions, industry analysis, and financial information, including annual financial accounts. This document ensures that all related-party dealings within Saudi Arabia are well-documented and justifiable under arm’s length pricing.
Country-by-Country (CbC) Reporting
Country-by-country (CbC) reporting applies to multinational enterprise (MNE) groups whose income exceeds 3.2 billion riyals. The report must include information regarding the revenue, profit or loss before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees, and tangible assets for each jurisdiction in which the MNE operates. It must also include each constituent entity (CE), its tax residence, and its main business activities.
The ultimate parent entity (UPE) or a surrogate parent entity (SPE) must file the CbC report. However, a Saudi CE may be required to file if the UPE/SPE is not required to file in its jurisdiction, its jurisdiction lacks a qualifying competent authority agreement, or it fails to provide Saudi Arabia with CbC reports. In cases where multiple Saudi CEs exist, one may be designated to file on behalf of the group. Additionally, all Saudi CEs, including the UPE or SPE, must notify the tax authority within 120 days after the reporting year regarding the reporting entity’s identity and filing jurisdiction.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Saudi Arabia uses Tax Rulings and MAP to manage and resolve international tax disputes.
Tax Rulings: Individuals and businesses can request a tax ruling from the tax authority to clarify how tax laws apply to their specific circumstances. Rulings are binding on ZATCA but not on the applicant. Requests must include detailed transaction information and supporting documents and may be submitted in Arabic or English. Certain cases, such as disputed tax amounts, hypothetical scenarios, or matters under audit, are not eligible for rulings. If accepted, ZATCA aims to respond within 45 days, though complex cases may take longer. In case of conflict, tax laws and international agreements prevail.
MAP Procedure: MAP is a process through which taxpayers can resolve disputes arising from the application or interpretation of Double Tax Treaties (DTTs). Taxpayers can submit a MAP request to the General Authority of Zakat and Tax whenever they believe that action by one or both contracting states results or will result in taxation contrary to the tax treaty applicable. The MAP assists in solving such issues by ensuring negotiations between the competent authorities of the contracting states to reach an agreement on a solution, thereby eliminating double taxation and ensuring consistent application of DTTs.
Approach to Transfer Pricing Audits
In Saudi Arabia, the tax authorities can conduct transfer pricing audits at any time during business hours without prior notification, but corporations are generally informed in advance. The Zakat, Tax, and Customs Authority can estimate the tax base and impose penalties if the taxpayer fails to present sufficient documentation to support its tax returns. These estimates vary by industry, and inspectors are allowed a risk premium in assessing liabilities. Tax auditors also receive bonus payments for increasing tax revenues, which can influence audit behavior and lead to more aggressive assessments.
Penalties
The TP Bylaws contain no specific penalties regime; all penalties and fines under the Income Tax Law apply to all income tax matters.
Taxation at a Glance
The Kingdom of Saudi Arabia Saudi Arabia is divided into 13 provinces, with Riyadh as the capital. The official language of Saudi Arabia is Arabic, and the currency is the Saudi riyal (SAR). Saudi Arabia’s tax authority is called the General Authority of Zakat and Tax (ZATCA).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 20% |
VAT | 15% |
Withholding tax on dividends to non-residents | 5% |
Withholding tax on interest to non-residents | 5% |
Withholding tax on royalties to non-residents | 15% |
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