In order to keep pace with changes in the global tax frameworks and consolidate its position as an attractive foreign investment destination, the Kingdom of Saudi Arabia (KSA); a G20 member, has introduced during 2018 significant changes to its Tax regime.
The Saudi Arabia Tax regulator; General Authority of Zakat and Tax (GAZT) kicked off the year with the implementation of VAT and issued on 10th December 2018 the draft Transfer Pricing (TP) Bylaws, the final version of which was released on 15 February 2019.
A side of the aforementioned changes in the tax system in KSA and on 10 th January GAZT issued a new draft Zakat regulation as well for public discussion and the final version is still pending to be released.
These recent changes in the kingdom’s Tax regime are having profound impact on KSA permanent extablishments (PE) tax filing requirements and documentation.
KSA Income tax law PE definition:
The KSA tax laws permits a non-resident entity to have a PE in KSA under certain circumstances. In such case, the PE is effectively the place, in full or in part, at which the non-resident entity carries out its activities in KSA (e.g. Construction Site), or the place of its KSA agent.
All PEs registered in KSA shall comply with Saudi Tax laws, documentation and audit, including VAT, Income Tax, Withholding Tax (WHT) and TP filing requirements.
GAZT publishes draft TP By-laws:
GAZT took a big move forward upon enacting TP Tax regulations for the first time in the KSA in February this year.
Underscoring the Kingdom’s policy to introduce laws and regulations that build on relevant international standards, GAZT implemented the Organization of Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) recommendations regarding TP.
Moreover, the draft By-laws, as in the OECD guidelines, set forth requirements for three-tiers of documentation (Master File, Local File, Country-by-Country Reporting) and an annual disclosure for the Controlled Transactions.
The TP By-laws shall be applicable to all taxable persons pursuant to the law and implementing regulations. That, by default would include PEs.
In line with the OECD TP guidelines, the draft By-laws identified the following 5 methods for TP reporting purposes. Companies should select the most appropriate method for their context.
- Comparable uncontrolled Price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Transactional profit split method
On 15 February 2019, the TP By-laws were issued in its final form including the two following major amendments together with FAQs (both in English and Arabic) as an additional guidance:
Setting deadlines for submission of TP documentation.
A requirement for tax payers to submit the Disclosure Form of Controlled Transactions together with a mandatory affidavit from a licensed auditor through which the auditor certifies that the Transfer Pricing policy of the MNE is consistently applied by and in relation to the Tax Payer.
Key TP reporting requirements and deadlines:
Master file/ local file:
Should be submitted by corporate income tax (CIT) entities / CIT and Zakat-paying entities only), if such entities controlled transactions annual value exceed “SAR 6M” (US$ 1.6M) threshold.
Might be requested at any time by the GAZT after 120 days from the corporate’s fiscal year-end.
Deadline to provide the report is within 30 days upon request for both files and an additional 60-day extension shall be granted only in 2019 upon request.
Country-by-country report (CbCR):
Should be submitted by (CIT entities / CIT and Zakat-paying entities as well as Zakat-paying entities with consolidated group revenues exceeding SAR 3.2B (US$ 853M).
Shall be filed not later than 12 months after the last day of the Reporting Year of the multi national entities (MNE) Group.
CbCR notification should be submitted as a part of the annual declaration by KSA-based constituent entities, which is to be submitted to GAZT within 120 days following the end of the Reporting Year.
Disclosure form:
Should be submitted by (CIT entities / CIT and Zakat-paying entities only), including an affidavit from an KSA licensed auditor to certify the consistent application of the TP policy.
Deadline to submit is within 120 days from the fiscal year-end.
Language of documentation
As per the TP FAQs “question no.6”, GAZT encourage the submission and documentation in the official language of KSA (Arabic) to the extent it is reasonably possible.
Penalties
The by-laws did not mention any provisions regarding penalties, although the FAQs explains that failure of complying with the TP guidance in KSA, may lead to impose the related penalties and fines applicable under the Income Tax Law.
Summary
KSA introduced significant changes to the country’s Tax regime beginning of 2018, which includes VAT and TP bylaws. The latter draws on many of the OECD TP reporting guidelines.
The new KSA Tax developments will have significant reporting implications for all taxpayers including multinational companies, which will have to adopt significantly different reporting and filing requirements.