The income tax rules in Saudi Arabia do not allow for consolidation or grouping of taxpayers. For Zakat purposes, the concept of consolidation is acceptable and relief may be obtained for wholly owned subsidiaries by Saudi/GCC companies that are subject to Zakat.
Note that an entity operating in Saudi Arabia that has undertaken more than one project under the same commercial registration is required to consolidate the results of such projects into the financial statements of that entity and subject them to taxation as a single operation.
On 15 February 2019, the GAZT published the Transfer Pricing By-Laws (the By-Laws) in final form as well as an accompanying frequently asked questions (FAQs) document.
The By-Laws are effective from their date of publication in the official gazette. It has also been clarified in the FAQs (in question 8) that the By-Laws will apply to the reporting year ended 31 December 2018 and all subsequent reporting years.
The By-Laws and the FAQs refer to the GAZT’s own Guidelines in many places. Whilst none have yet been published, we expect that these Guidelines will be issued in due course to provide further practical guidance to help businesses comply with the procedural aspects of the By-Laws.
Persons subject to the By-Laws
Article 2 confirms that, notwithstanding any provision to the contrary, the By-Laws shall apply to all taxable persons under the Law. The 'Law' means the Income Tax Law issued by Royal Decree No. (M/1) dated 15/1/1425H and its amendments. This is the Corporate Income Tax Law in the Kingdom of Saudi Arabia.
The By-Laws will therefore apply to entities that are subject to tax only, and to mixed ownership entities that are subject to both Zakat and tax, and this is stated in the FAQs (question 3). Generally, therefore, the By-Laws do not apply to entities that are subject to Zakat only.
However, Article 2 now includes additional wording to confirm that whilst the By-Laws generally apply to taxpayers (and mixed ownership entities subject to Zakat and tax), it does not prevent the country-by-country (CbC) reporting requirements as prescribed in Article 18 from applying to Zakat payers.
Scope of the By-Laws: Domestic transactions
Question 7 of the FAQs states that unless expressly exempt in the By-Laws, all related party transactions, regardless of the place of residence, nationality, or domicile of the persons are within the scope of the By-Laws.
Our understanding is therefore that alongside cross-border controlled transactions, domestic controlled transactions are also within the scope of the By-Laws.
Scope of the By-Laws: Retrospective application
Question 8 of the FAQs state that whilst the By-laws apply to reporting years ended 31 December 2018 onwards, under the Income Tax Law, the GAZT has the right to request information, documents, or perform an audit for years prior to the effective date of the By-Laws.
Question 1 of the FAQs confirms that transfer pricing is not a new concept in the KSA’s income tax regime, with Articles 63 and 64 of the Law having addressed related-party transactions long before the introduction of these By-Laws.
In circumstances where the terms, conditions, or remuneration of a controlled transaction are not consistent with the arm's-length principle, the GAZT has the ability to reallocate or disregard the result of the controlled transaction.
Disclosure Form of Controlled Transactions (CTDF)
Article 14 of the By-Laws requires taxpayers to submit a CTDF to the GAZT together with their annual income tax declaration within 120 days of the end of the fiscal year.
Documentation must be readily accessible and available for review by the tax authority at the time of submission of the CTDF and contain information and economic analysis to verify that the conditions of the controlled transactions are at arm’s length.
The CTDF also requires confirmation of whether the taxable person maintains a transfer pricing Master File and Local File. The implied effect of this is therefore to require that Master File and Local File documentation is prepared within 120 days of the end of the fiscal year.
The By-Laws state that 'together with the CTDF, the taxpayer must submit an affidavit from a licensed auditor through which the auditor certifies that the transfer pricing policy of the multinational enterprise (MNE) is consistently applied by and in relation to the taxpayer'.
Note that 'transfer pricing policy' is not defined in the By-Laws.
Article 4, Paragraph A, of the By-Laws requires the taxpayer to make adjustments to their tax base to reflect arm’s-length pricing of controlled transactions and report those adjustments in their annual tax declarations.
Master File and Local File
The Master File and Local File requirements broadly follow those outlined by the recommendations of Action 13 of the OECD’s BEPS Project.
The Master File will need to be provided to the GAZT within a maximum of 30 days from request (or the length of time given in the request if longer). The Local File is also to be provided within 30 days upon request by the GAZT (or the length of time given in the request if longer).
The GAZT has stated on its website, and described further in the FAQs, that it will provide an extension of 60 days to the requirements to submit the Master File and Local File on request for 2019 only.
Country-by-country (CbC) reporting
The By-Laws set out the circumstances in which the Ultimate Parent Entity of an MNE Group (UPE), or a taxable person in the Kingdom of Saudi Arabia that is not a UPE, will need to submit and file reports and notifications to the GAZT, and state that these will need to be in the language and form that the GAZT may specify.
The requirements are broadly in line with the recommendations of Action 13 of the OECD’s BEPS Project.
The CbC reporting requirements now include Zakat payers as well as taxpayers.
The threshold for companies to be subject to the report filing and notification requirements is a consolidated group revenue exceeding SAR 3.2 billion, and it must be filed with the GAZT within 12 months after the last day of the year to which the report relates.
There is no special legislation governing thin capitalisation for tax purposes. A Saudi company may deduct interest payments to affiliates, but not the head office, provided that the amount of debt and rate of interest are at arm’s length and that the interest deductibility formula is met. A Saudi company may be financed with minimum capital, and there is no limit to the amount of debt that may be used.
Controlled foreign companies (CFCs)
There are no special rules for CFCs in Saudi Arabia. However, as mentioned above, the gross income derived by a capital company resident in Saudi Arabia from its operations and branches outside Saudi Arabia is subject to tax in Saudi Arabia (subject to relevant conditions).
Intra-group transactions relief
Intra-group transfers of cash, shares, financial securities, and other tangible and intangible assets can be carried out tax neutrally, provided the following conditions are met:
- Such companies should be part of a group of capital companies that are wholly owned, directly or indirectly, by one capital company.
- Such assets should not be disposed to a party outside the group before two years passes from the date of the transfer.
The 'cost base' of the relevant intra-group transactions will be net book value to achieve the no gain no loss result.
It is not yet clear whether non-resident companies or cross-border transactions would also benefit from such relief.