On February 15, 2019, the General Authority of Zakat and Tax (the "GAZT") published its final transfer pricing by-laws (the "TP Bylaws") for the Kingdom of Saudi Arabia ("KSA"). The Bylaws were released in draft for public comments in December 2018, and the final rules now include several minor amendments and clarifications. In addition to the Bylaws, the GAZT released its TP Frequently-Asked Questions ("TP FAQ").

The introduction of the TP Bylaws demonstrates GAZT's increased focus on tax collection and its continuing efforts to broaden the Saudi tax base. In general, international businesses with activities or operations in the KSA should expect more scrutiny from the GAZT on transfer pricing policies and intercompany transactions.

TP Bylaws application

The TP Bylaws will apply retroactively to all related party transactions (defined as "Controlled Transactions") concluded by taxable persons subject to the KSA Income Tax Law ("KSA ITL") and its implementing regulations. As such, the TP Bylaws could be applicable to KSA resident companies (to the extent they have non-GCC shareholders or companies operating in particular sectors), non-KSA natural persons conducting business in the KSA, and KSA permanent establishments. The rules cover both cross border and domestic transactions and they apply to a KSA taxable person from reporting year ended December 31, 2018 (according to the TP FAQ).

New TP requirements

The requirements imposed on taxpayers are essentially threefold:

  1. Controlled Transactions must be conducted under terms that are similar to comparable transactions between independent persons (i.e., the "arm's length principal" or "ALP").
  2. The taxpayer must submit a disclosure form regarding the Controlled Transactions ("CTDF") together with its annual income tax return (which includes a section on TP documentation requirements described below).
  3. The taxpayer must maintain TP documentation which consists of a master file, local file, and (depending on the taxpayer's group revenue), a Country-by-Country report ("CbCR").

As noted above, the TP Bylaws dictate that KSA taxpayers must maintain and make available (upon request by the GAZT) a master file, local file, and (depending on the taxpayer's group revenue) a CbCR. An exception to these requirements is made for natural persons and small businesses parties to Controlled Transactions that are less than (SAR 6 million during any 12 month period). The CbCR is required for groups with a consolidated group revenue exceeding SAR 3.2 billion.

The accompanying documentation requirement contains specific guidance for local file, master file, and CbCR. The local file is country specific and focusses on specific intercompany transactions. The local file consists of the following four categories: taxpayers information (management structure, business strategy), documentation on material Controlled Transactions, an industry analysis of the taxpayer's industry (e.g. competitors, SWOT) and the taxpayer's financial information. The master file is a single document describing (at a high level) the group consisting of the following five categories: organizational structure, global business operations, intangibles, intercompany financial activities and the financial and tax positions. The master file is generally prepared and updated by the ultimate parent company. The CbCR is prepared by the ultimate parent company and contains aggregate tax jurisdiction-wide information (i.e., revenue, profit (or loss) before income tax, tax paid and/or accrued, capital, employees and tangible assets). In addition, the CbCR contains information on the tax residency of the taxpayer's related entities.

Expected deadlines in KSA for the relevant documents are as follows:

Timelines for documentation requirements

CTDF filing

Within 120 days post fiscal year end

master file and local file

Ready within 120 days post fiscal year end

CbCR notification (by taxpayer)

Submit within 120 days post fiscal year end


File within 12 months post fiscal year end

TP methods

The TP Bylaws approve five TP methods, which have been developed by the Organization for Economic Co-operation and Development ("OECD"). These OECD TP methods are the Comparable Uncontrolled Price Method ("CUP"), the Resale Price Method ("RPM"), the Cost Plus Method ("CPM"), the Transactional Net Margin Method ("TNMM") and the Transactional Profit Split Method ("TPSM").

The TP Bylaws prescribe that the most appropriate method must be used (this approach was introduced in the 2010 OECD Guidelines). The most appropriate method is determined by taking into consideration various metrics such as the respective strengths and weaknesses of the methods, the nature of the transaction, the availability of reliable information, and the degree of comparability.

Key Takeaways

It should be noted that the KSA ITL has already included the ALP as part of its general anti-tax avoidance rule ("GAAR"). The GAAR allows the GAZT to re-allocate (or disregard) revenue and expenses in transactions between related parties, to reflect the returns that would have realized if the parties were independent and unrelated. As such, the TP Bylaws can be considered as a formalized (additional) layer of TP guidance and a confirmation of the OECD prescribed TP methods.

The main impact of the TP Bylaws for taxpayers is that Controlled Transactions must be conducted under terms that are similar to comparable transactions between independent persons. A Controlled Transaction means any transaction between related parties, and the relation can be through direct or indirect shareholding, ownership, board positions and/or family ties. Any transaction not considered a Controlled Transaction is considered an Uncontrolled Transaction. Uncontrolled Transactions are, in principle, outside of the scope of the TP Bylaws.

Although no particular order of preference in TP methods has been indicated by the TP Bylaws. similar to the OECD Guidelines, it is assumed that an application of a traditional transaction method (CUP, RPM, CPM) is preferable to a transactional profit method (TNMM, TPSM). In other words, a hierarchy can be ascertained. The TP Bylaws suggest that additional guidance from the GAZT should be expected.