Saudi Arabia's transfer pricing instructions require related parties to price their commercial and financial transactions on the arm's-length principle, that is, as if those transactions had taken place between independent parties, whether for income tax or Zakat collection purposes.
What Is the Arm's-Length Principle?
Transfer pricing is defined as the pricing of transactions between related persons or persons under common control, and the importance of the transfer pricing instructions lies in ensuring compliance with the arm's-length principle, namely that transactions between related persons, or persons under common control, are priced as if they were transactions between independent parties.
Approved Transfer Pricing Methods
The transfer pricing instructions set out several approved methods for applying the arm's-length principle, most notably:
- The comparable price method: a comparison between the price set for property or services transferred in a transaction between related persons and the price charged for property or services transferred in a similar independent transaction.
- The resale price method: a comparison between the margin earned by a purchaser of property in a transaction between related persons from reselling that property, and the margin earned in similar resale transactions between independent persons.
- The cost-plus method: a comparison between the profit margin on costs incurred directly and indirectly in supplying property and services under a transaction between related persons, and the profit margin on costs incurred directly or indirectly in supplying property or providing services under a similar independent transaction.
The instructions also provide for other approved methods, and the taxpayer selects the most suitable one according to the nature of the transaction and the availability of reliable information for applying it.
The Authority's Power to Reallocate Income Between Related Parties
The Authority may reallocate revenue and expenses in transactions between related parties, or parties that follow the same entity, to reflect the revenue that would have arisen had the parties been independent and unrelated.
Do the Transfer Pricing Instructions Also Apply to Zakat?
Yes; the same transfer pricing instructions issued by the Zakat, Tax and Customs Authority apply to transactions with parties related to the taxpayer, so that a Zakat taxpayer's transactions with its related parties are subject to the arm's-length principle just as an income tax taxpayer's are.
The Importance of Keeping Transfer Pricing Documentation
Taxpayers with transactions involving related parties are advised to keep documentation evidencing their choice of the appropriate transfer pricing method and the comparability basis they relied on, enabling them to justify their transaction prices to the Authority during an audit, whether those transactions are subject to income tax or to Zakat collection.
Legal References
- Transfer Pricing (informational page, Zakat, Tax and Customs Authority).
- Transfer Pricing Instructions 2019, Article Seven.
- Income Tax Law, Article Sixty-Three.
- Zakat Collection Executive Regulations 1445H (Ministerial Resolution No. 1007 dated 19/8/1445H) with Published Amendments, Article Twenty-Two.
For questions about your specific situation, you can ask the Saudi Arabia Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.