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Transfer pricing and disputes

 

Transfer pricing for tax purposes has long been an extensively discussed issue globally, and recent political and public concerns about tax avoidance have energised tax regimes globally to update laws and regulation in this regard. In the Kingdom of Saudi Arabia (KSA), the Zakat, Tax, and Customs Authority (ZATCA) issued Transfer Pricing Bylaws (the Bylaw) which apply to all taxable persons (being persons subject to Saudi Arabia Royal Decree No. M1/1425 Related to the Income Tax Law (Saudi Arabia Cabinet Decision No. 278/1424 On the Approval of the Income Tax Law).

 

This Bylaw set out a framework to regulate prices for controlled transactions, including but not limited to the transfer of goods, services, loans and intangibles (intellectual property). The importance of the Bylaw lies in the necessity to implement and enforce the arm’s length principle on transactions between related persons or persons under common control, as if they were conducted between independent persons.

In this Note, we aim to highlight some of these concepts and circumstances in which taxpayers are subject to the Bylaw, while considering the views of ZATCA on the arm’s length principle and related aspects, such as ‘effective control’. We also briefly highlight the suggested methods by ZATCA on how to establish an arm’s-length sale, and the extent to which ZATCA feels that it may intervene to achieve an arm’s length price. The main takeaway of the article aims to highlight learnings on common litigation issues observed in transfer pricing disputes against ZATCA, the aspects and actions that taxpayers should be aware of and follow when litigating with ZATCA, and the actions to implement into their transfer pricing strategies once these issues with ZATCA are resolved.

Practical guidance

Persons subject to transfer pricing

The TP Bylaw applies to every taxable person pursuant to Saudi Arabia Royal Decree No. M1/1425 (Saudi Arabia Cabinet Decision No. 278/1424) and Saudi Arabia Ministerial Decision No. 1425/1435 Implementing Regulation of the Income Tax Law in Saudi Arabia. At the time of writing, ZATCA has also commenced public consultation for expanding the coverage of transfer pricing requirements to Zakat payers as well, which was open to comment until 30 July 2022. In terms of the suggested amendments to the TP Bylaw, ZATCA may apply the arm’s length principle to Zakat payers, requiring such related parties to deal at arm’s length with each other.

Definitions

In terms of the Bylaw, transfer pricing refers to the setting of prices for controlled transactions, including but not limited to the transfer of goods, services, loans, capital, and intangibles (for instance, intellectual property). Controlled transactions are transactions between related persons or persons under common control.

Regarding the concept of ‘related persons’, there are two types of persons (natural and juridical) and thus the concept of being related would differ accordingly. The Bylaw defines persons as follows.

  • Natural persons
  • Two or more natural persons are related if they are:
  • relatives through marriage or are otherwise relatives to the fourth degree; or
    partners in partnership.
Natural person with juridical person

A natural person is considered related to a juridical person in any of the following circumstances:

  • if the natural person is a partner in a partnership and they, either alone or together with a related person or persons, directly, indirectly (or both) controls 50% or more of the voting rights, income, capital of the partnership;
  • if the person or a related person thereto is a shareholder in a capital company and they, either alone or together with a related person or persons, directly, indirectly (or both) controls 50% or more of the voting rights, income or capital of the capital company;
  • as for agencies administering property held in a trust, fund or any such similar arrangement, a natural person is considered related thereto if they benefit or are capable of benefiting from them, either alone or with a related person or persons; or
  • if the person alone or jointly with a related person thereto directly or indirectly participates or is able to participate in the management, control or capital of a juridical person.
Juridical person
  • Two or more juridical persons are considered related persons in any of the following cases:
    they are under common control;
  • when the person who controls or has the ability to control the business decisions of a juridical person has, alone or
    together with a related person, effective control over the other juridical person;

Authored by: Chadi Hourani, Zain Satardien, Amgad Husein*
*Member of ZH Partners – Relationship firm in Saudi Arabia

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Chadi Hourani

Managing Partner

Zain Satardien

Counsel, Head of Tax & International Trade
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