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Saudi businesses prepare the ground for new TP rules

Saudi Arabia has released its new transfer pricing standards in an effort to align with OECD standards from January 2019, but even the status quo brings some anxiety for taxpayers.


There is a great deal of consistency between the new TP rules and the OECD guidelines, including methodology, documentation, comparability and country-by-country reporting (CbCR). The good news is that the standards re-affirm key commitments to the arm’s-length principle (ALP) and guaranteeing more continuity for businesses.

Taxpayers have until January 9 2019 to have their say on the draft. It will become law shortly afterwards. Meanwhile, Saudi companies will have to begin work on some of the new compliance requirements from December 31 because the rules require companies to submit certain CbCR documents ahead of the effective date.

Shiv Mahalingham, Deloitte’s head of TP for the Middle East and North Africa (MENA), suggested the business community would not find it very difficult to transition to the new system.

“This is a significant step in aligning the tax framework with other G20 nations,” Mahalingham told TP Week. “The rules have long been anticipated.”

“So there is no need to panic,” he stressed.

Once the consultation period ends, the General Authority of Zakat & Tax (GAZT) will move to implement the proposals. Although the business community has more time to plan than many companies did when it came to VAT, there is still uncertainty.

One tax specialist at a Western company operating in the Middle East suggested the region is much less predictable than elsewhere.

“Even the most connected tax advisor may not know what the government is going to do and on what timescale,” the tax specialist said. “Sometimes you don’t even know how long the consultation period will last for a proposed regulation on the tax law.”

“You can’t necessarily get the kind of influence in non-democracies as you can in more developed economies,” they said. “So you’ve got to look at it through a different lens.”

“Any new rules can be a challenge at the beginning,” said Fuad Shahin, regional head of tax at DHL in Manama, Bahrain.

“The Saudi government must have a team to help businesses comply with the regulations. They must issue explanatory guides, run training sessions, provide the tools to ask and inquire about TP issues, and assist business from the start next year,” he told TP Week.

“First they need to hire good staff to run TP policy and follow the regulations,” he said. “This is the most critical point, finding people with good knowledge, who can adapt to a better accounting and reporting structure.”

Many Middle East-based professionals at MNEs are dealing with transfer pricing for the first time, as companies tend to source their TP focus to the jurisdiction where it is necessary. Companies are accustomed to decentralised models, but this may be the time to centralise TP policy and devote more resources to compliance and preventative measures against disputes and audits.

A different TP lens

What is important to bear in mind is that the new rules build on existing standards in Saudi Arabia. The notion of a permanent establishment (PE) is still going to be tied to the ALP, although certain provisions will have international precedents.

This can’t be said for every policy issue. “VAT was new to all these countries, and required much greater effort to adjust within a very limited timeframe,” said Reggie Mezu, senior counsel at Baker McKenzie in Dubai.

“As regards transfer pricing in Saudi Arabia, businesses currently try to ensure that related-party transactions are arm’s-length, as there are already anti-avoidance provisions on related-party transactions in existing income tax legislation,” he added.

There are still a lot of doubts over VAT, which can’t be said for TP practices. “Some people still don’t think the government will actually implement VAT,” said a source close to the oil industry in Bahrain.

Transfer pricing may have finally landed in the Middle East, but much like VAT, the new rules will not affect every economic sector and certainly not each industry in the same way.

“Airlines typically are exempt by virtue of the tax treaties and therefore such aspects of TP, including in Saudi Arabia, are not relevant to our industry,” the tax chief of an airline company told TP Week.

However, the draft regulations would impose challenges for certain transactions. Mezu, who previously worked for Shell International for more than a decade, suggested a slight change in wording can mean a lot for taxpayers.

“The definition of controlled transactions, for which TP adjustments may be made, in the draft regulations seems much more extensive than the coverage in the income tax legislation,” Mezu said. “The draft now includes mandatory requirements for companies above a specified threshold to maintain master files and local files on certain information and documents.”

Taxpayers must file a CbC report with the tax authority if they make more than SAR 3.2 billion ($850 million) a year. This comes with the twinned requirements of master file and local file. In this regard, the regulations are not a shock for Saudi business leaders.

Likewise, the regulations specify the TP methodology laid out in the OECD guidelines and prescribe a range of TP methods, from the comparable uncontrolled price (CUP) to the transactional profit split. For taxpayers, one method will suffice in filing. This is a welcome concession, said companies and advisors.

“All of these [obligations] require further careful consideration and preparation by companies, and will impose an additional recurrent compliance burden than is currently the case,” Mahalingham said.

The regulations require a ‘consent of disclosure’ submission to the tax authorities that sets out a number of attestations to transfer pricing compliance. Companies have 120 days from December 31 to file this consent of disclosure as part of their tax returns.

This disclosure form requires taxpayers to provide information on the parties involved in the controlled transaction, as well as information on any restructurings, total revenue, expenses and net profits. The form must confirm the TP method and the use of master and local files.

There are some helpful additions. Mahalingham pointed out “a de minimis limit for intra-group transactions under $2 million, no ‘secret comparables’”. The latter is supposed to ensure greater transparency between GAZT and businesses because it does not allow TP adjustments to be based on non-disclosed data.

These additions may have been intended to avoid some of the problems other jurisdictions have had implementing the OECD standards. The difficulty will be balancing the need to align business models with global practices and make cash savings within the new framework.

The Gulf standard

Saudi Arabia is just the latest country to introduce formal TP rules. Egypt and Qatar have already implemented TP rules, while Saudi Arabia and Oman recognise the ALP as part of their implementation of the general anti-avoidance rule (GAAR).

However, there are many countries in the region where TP is still not seen as a relevant issue and the GCC may be about to take the lead. Saudi Arabia, the UAE and Kuwait have all signed up to the multilateral instrument (MLI) as part of efforts to move towards international tax norms. This is about one thing: finding new sources of revenue.

“The drive to enhance tax revenues and clarify the applicable rules mean that it would be prudent for businesses to take steps to ensure that they have adequate and defensible supporting documentation for their related party transactions across the region,” Mezu said.

The new TP rules build on these commitments, but these countries still lack many of the tax policies taken for granted in the rest of the world.

“The UAE has yet to introduce corporate income tax at the federal level,” Mezu said. “A number of emirates impose income tax, but in practice this is restricted to oil and gas producing companies and branches of foreign banks.”

“If and when income tax is subsequently introduced in the UAE, it is possible that the [Saudi] regulations would serve as a useful reference in preparing any required transfer pricing regulations,” he explained.

The same can be said about Bahrain and the rest of the GCC, yet the big question is whether countries like the UAE and Kuwait will follow the same path as Saudi Arabia any time soon. The drive to raise new sources of tax revenue may have a momentum of its own.


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