Article Posted date 07 July 2022
5 min read

Introduction

Zakat, Tax and Customs Authority (ZATCA) in Kingdom of Saudi Arabia (KSA) has issued an amended draft of Transfer Pricing Bylaws (TP Bylaws), inviting comments from public. The deadline for submitting feedback is 1 Muharram 1444 (30 July 2022).

The proposed amendment seeks to bring Zakat payers within the ambit of TP Bylaws which was earlier applicable to taxpayers and mixed companies only. The amended TP Bylaws shall be effective pursuant to issuance of Board Resolution by ZATCA in this regard. This is the turning point for Transfer Pricing landscape in KSA.  

Key highlights of the proposed amendments in TP Bylaws are outlined below

1.

Applicability of TP Bylaws to Zakat payers

 

Currently, the TP Bylaws are applicable to all Taxable Persons under the Income Tax Law and mixed-ownership entities (Zakat and Tax). The entities that are subject to Zakat only shall be required to submit Country-by-Country Report (CbCR) and CbCR notification (depending on annual consolidated revenues). 

The amendment proposes to include 100 percent Zakat paying entities under the definition of ‘Taxable Persons’. Thus, all provisions of TP Bylaws shall apply to Zakat payers defined in Zakat Regulations.

2.

Change in definition of Related Persons

 

The term ‘Related Persons’ includes persons who have ability to control business.  The same is proposed to be amended to include persons who have ability to effectively control business. The word ‘effective’ has been added. 

3.

Threshold for TP documentation and exceptions

 

The requirement to maintain a Master File and Local File is not necessary for the following:

 

(a)

Natural persons (except Institutions);

(b)

Small size enterprises (entities with arm’s length value of ‘Controlled Transactions’ not exceeding SAR 6 million (USD 1.6 million) in a 12-month period.

 

 

Thus, Zakat payers including Institutions are required to maintain Master File and Local File if the related party transactions exceed SAR 6 million in the Tax / Zakat year.

4.

TP Disclosure Form to be filed with annual income tax / Zakat declaration

 

All Zakat payers shall be required to submit specified disclosure forms in respect of ‘Controlled Transactions,’ along with their annual income tax declaration (within 120 days following the end of their fiscal year).

The disclosure form would include details of all ‘Controlled Transactions’ including non-monetary transactions. Further, details of total revenue, total expenses, net profit or loss, assets, total funds, advance payment, debt, and other components of the Zakat base including amounts deductible from Zakat base shall be reported.

The disclosure form forming part of annual tax declaration should be submitted electronically in Arabic only by every person engaged in controlled transactions, irrespective of their value.

Moreover, Tax and Zakat payers should submit an Affidavit from their certified accountant, declaring that their Transfer Pricing policy is consistently applied in relation to the taxpayer in KSA. 

5.

Permanent Establishment

 

The tax base of Permanent Establishment shall be determined according to the Arm’s Length Principle.  Further, it is clarified that expenses may be deducted of a Permanent Establishment in accordance with related international laws, Regulations, and agreements.

6.

New definitions

 

The following new definitions have been added

"Zakat Collection Law" means the regulations issued by Ministerial Resolution No. 2216 dated 07/07/1440H and any modifications thereto.

"Declaration" means the tax declaration for the persons concerned with the declaration obligations for tax purposes under the Law, and the Zakat declaration for the persons concerned with the declaration obligations for the purposes of Zakat under the Zakat Collection Regulation.

“Group” means two or more related persons who are obligated to prepare consolidated financial statements in accordance with the relevant accounting standards, or who will be obligated to prepare consolidated financial statements in event that one of these persons is an entity listed in the financial market

7.

Interpretation

Provisions of the Income Tax Law (and Income Tax Regulations) and Zakat Regulations are to be construed and interpreted in a manner consistent with TP Bylaws.  Further, the audit rules and appeal procedure defined in Zakat Regulations shall apply.

 

8.

Other changes

The word ‘Multinational Enterprise Group’ has been replaced with ‘Multinational Group’ in the TP Bylaws.   

Conclusion

As a member state of G20, Saudi Arabia had already endorsed BEPS Pillar 1 and 2.  ZATCA has become more cognizant of the importance of tax collection, particularly as the Saudi Arabian government is seeking to diversify its revenue base and is moving away from being an oil-only based economy.

The proposed applicability of TP Bylaws to Zakat payers demonstrates ZATCA’s commitment to bring transformation in the taxation system of the country. 

In view of above, review of transactions with related parties, which could be impacted by proposed amendments is the need of the hour.

What can Companies expect?

It appears that ZATCA will scrutinize transfer pricing policies, business activities, supply chain arrangements, inter-company transactions, etc. of companies in more detail. Therefore, documentation and appropriate benchmarking of inter-group transactions to comply with the TP Bylaws is important for managing related tax and Zakat risks.  Thus, GCC owned entities that are subject to Zakat may have the maximum impact, whereas local companies with domestic inter-company transactions subject to Zakat may have a comparatively reduced impact.

By extending the scope of regulations to Zakat payers, ZATCA is seeking to ensure that there are no tax or Zakat leakages.

How can we help?

Our qualified teams with immense knowledge in Transfer Pricing, Zakat and Corporate tax can help you understand ZATCA’s requirements and expectations. Furthermore, as part of KPMG’s global network, our experts have good understanding of issues that generally arise with applicability of Transfer Pricing Regulations.  We seek to localize our international experience for the benefit of our clients. 

Get in touch

Riyadh Office

Stefan El Khouri 

Senior Director, Head of Transfer Pricing

E: selkhouri@kpmg.com

Bilal Mansoor

Associate Director | Transfer Pricing

E: bilalmansoor@kpmg.com

Jeddah Office

Lubna Khatri

Associate Director | Transfer Pricing

E: lubnakhatri@kpmg.com

Khobar Office

Tareq Al Sunaid 

Head of Tax

E: talsunaid@KPMG.COM

Rahul Shroff

Manager | Transfer Pricing

E: rshroff1@kpmg.com