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Saudi Arabia sets the Gulf standard for TP reform


After the release of its final transfer pricing by-laws, Saudi Arabia is preparing for country-by-country reporting (CbCR), but businesses are more worried about being exposed to future audits than the compliance burden.

All businesses within range must file a CbC report with the Saudi tax authority within 30 days of a request. This comes with the twinned requirements of master file and local file. Originally, Saudi taxpayers faced a seven-day deadline to produce the documentation once the tax authority issues a request.

The General Authority of Zakat and Taxation (GAZT) has confirmed that it won’t issue any request until 120 days after the end of the accounting period giving businesses until April 2019 to be ready.

Yet many companies in the Middle East are dealing with formal transfer pricing regulations for the first time and this level of transparency opens them up to possible challenges in the future

“The legal risk exposure is more serious than the possible financial costs of not being compliant,” one in-house tax director at a logistics company told TP Week. “The costs aren’t that much of an issue when you’re dealing with huge turnovers.”

Companies with decentralised business operations will have to centralise Middle East TP policy and devote more resources and measures to compliance management and risk management. The dual threat of audits and disputes is not confined to the West.

“The tax authorities are ramping up their efforts in audits and they tend to be quite strict in Saudi Arabia and the UAE,” one tax executive at a financial services company said. “But in other countries the authorities are running around like headless chickens.”

“Saudi Arabia and the UAE play by strict rules typically, and this forced up the compliance level when it came to VAT,” the executive told TP Week. “The same might be true once other taxes are rolled out.”

Unlike the rollout of VAT, the TP legislation has not caught businesses completely off guard. Saudi Arabia is closely following the OECD guidelines on everything from methodology to comparability. While CbCR is no surprise for Saudi business leaders, the new exposure to future audits and subsequent disputes might be.

The next step

The rest of the Arab Gulf states will be watching how the transition goes in Saudi Arabia. The other members of the Gulf Cooperation Council (GCC) will likely follow the Saudi model, particularly the UAE, that has its own complex array of different tax laws in each emirate.

The final Saudi by-laws confirmed that the reporting standard covers all-related party transactions regardless of residence, nationality or domicile. It’s usually the case that domestic transactions are left out from TP requirements due to tax neutrality.

“There are some positive clarifications for businesses,” explained Shiv Mahalingham, regional head of TP at Deloitte. “The requirement to include domestic transactions is not so helpful but we now know what we need to do and can get started.”

Domestic transactions can have a very different tax liability in a regime with different effective rates. This is the case in the region because of the prevalence of zakat, special economic zones, tax holidays and special benefits for the energy industry.

“Given the level of resources that would be required and the very tight time frame to meet key compliance demands, it would be very challenging for many [Saudi] businesses to meet the new requirements,” said Mohamed Serokh, TP leader at PwC.

Serokh advised businesses to start preparing by identifying all relevant Saudi entities and controlled transactions. This is necessary to draw up a risk map of potential tax exposure and develop a clear plan of action.

“The UAE, Qatar and Kuwait have all signed up to BEPS,” Serokh said. “On that basis, it is fairly reasonable to assume that those countries will introduce TP standards in a similar fashion to Saudi Arabia.”

Transfer pricing is just one site of change in Saudi Arabia. Investors are impatiently waiting for Saudi Aramco to go public. This opens up the need to create a stable tax system to make up for public spending.

These oil-rich countries have long got by without traditional tax regimes in place. Facing the possibility of greater energy scarcity, the UAE will see its state revenues go into steady decline and the development of a strong tax base is a part of a strategy of modernisation .

“The oil fields are still quite plentiful in Saudi Arabia and Bahrain, whereas in the UAE the oil is starting to run out,” one source close to the oil industry said. “They are trying to increase the refinery capacity and focus more on processing than pumping.”

As a result, the UAE is positioning itself as the world’s next great financial centre attracting more than $10 billion in foreign investment inflows in 2018. This is why the UAE is expected to introduce a federal tax system in the future. The rollout of VAT was the first step on this path, but TP reform will be the next.

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