First mover: GCC tax authorities set to follow Saudi in passing Transfer Pricing Bylaws- analyst

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Saudi Arabia’s tax authority’s approval of Transfer Pricing Bylaws this week is likely to lead to other GCC countries following suit, a tax analyst told Zawya.

Although Transfer Pricing is not a tax itself, such as the value-added tax, it is a concept used for tax purposes to ensure that related companies transact as if they were independent entities and therefore minimise the potential for undesirable tax outcomes, Mohamed Serokh, a tax partner and Middle East Transfer Pricing Leader at PwC, said.

Transfer pricing rules around the world are generally based on the Arm’s Length Principle, or ALP. This requires that related parties conduct their transactions on arm’s length terms, i.e. in the same way as they would if they were independent parties transacting with each other.

Governments across the world have been keen to ensure that companies do not price related-party transactions in a way that could erode their tax bases or shift profits to low- or no-tax jurisdictions, and transfer pricing has therefore been a major focal point, Serokh noted. (Read more here).

“Saudi Arabia is the first country in the GCC to introduce transfer pricing By-Laws,” he told Zawya in emailed comments.

“Whilst there is no strict deadline for implementation, we can expect to see the other GCC countries implement the recommendations, including a consistent approach to transfer pricing documentation, in due course,” he said.

“Despite not having By-Laws or other formal guidance in place, Kuwait, Oman, and Qatar have provisions in their tax laws requiring related party transactions to be conducted on an arm’s length basis,” he added.

A statement on the website of Saudi General Authority of Zakat & Tax (GAZT) said that the Transfer Pricing Bylaws “establish obligations on taxpayers that aim to counter certain tax behaviors and practices to minimize tax liabilities.” (Read more here).

“The Bylaws will be effective starting from 15 February 2019 and all taxable persons must comply with these bylaws in all their transactions and declaration as of that date,” the statement added.

All Saudi companies subject to tax and with related party transactions, whether domestic or cross-border, (irrespective of company size, value of those transactions, or ownership) will be subject to the requirement to submit a disclosure form of those transactions to the General Authority of Zakat and Tax (GAZT) within 120 days of their year-end.

“As an example, for years ended 31 December 2018 (which is the first year-end to which the By-Laws apply), companies will have until 30 April 2019 to comply with the disclosure form and auditor certification,” Serokh explained.

“We expect that almost all multinationals in Saudi will in some way be impacted by the By-Laws,” he said.

The Bylaws that the Saudi authority approved include 26 articles, divided into 12 chapters, that illustrate the basic principles of transfer pricing via transactions between related persons or persons under common control, the statement on GAZT’s website said.

On whether the implementation of Transfer Pricing By-laws will impact foreign direct investment in Saudi Arabia, Serokh said that “transfer pricing is not unique to Saudi Arabia and multinationals looking to invest will already be familiar with transfer pricing requirements in many of the other jurisdictions in which they operate”.

“Further, businesses typically make investment decisions based on a wide range of commercial factors unrelated to tax. Experience therefore suggests that any impact should be minimal,” he added.

On the consequences of non-compliance with the new requirements in Saudi Arabia, an FAQs document which has been published alongside the Bylaws states that all penalties and fines under the Saudi Income Tax Law are applicable to all income tax matters. (Read more here).

“Our understanding is therefore that the penalty provisions in the Income Tax Law will extend to non-compliance with the transfer pricing requirements as set out in the By-Laws,” Serokh said.