Understanding Transfer Pricing
Transfer pricing refers to the pricing of goods, services, and intellectual property transferred within a multinational group, across borders, or domestically. Tax authorities scrutinise these intra-group transactions to ensure they adhere to the arm’s length principle—that transactions between related entities should be priced as if they were between independent parties. The goal is to prevent profit shifting and tax base erosion by aligning taxable income with economic activities.
Saudi Arabia’s Transfer Pricing Framework
Saudi Arabia has gradually aligned itself with global transfer pricing norms through its General Authority of Zakat and Tax (GAZT), which has now merged with the Zakat, Tax, and Customs Authority (ZATCA). Since 2018, the Kingdom introduced its first set of detailed transfer pricing regulations; it has continuously worked to implement rules in line with the Base Erosion and Profit Shifting (BEPS) Action Plan, as outlined by the Organisation for Economic Co-operation and Development (OECD). These changes represent a clear commitment by Saudi Arabia to meet global standards, particularly with respect to transparency and fairness in taxation.
Key aspects of Saudi Arabia’s transfer pricing regulations include mandatory compliance with documentation requirements and enforcing the arm’s length principle. This principle requires that all cross-border transactions between related entities be documented and priced as though the entities were independent.
Recent Developments in Saudi Transfer Pricing Rules
One of the most impactful changes in Saudi Arabia’s transfer pricing landscape is the enforcement of country-by-country (CbC) reporting, which affects large multinational enterprises with consolidated revenues of SAR 3.2 billion or more. This requirement compels MNCs to report revenue, profits, taxes paid, and other financial data for each jurisdiction. The aim is to provide tax authorities with a global overview of the MNC’s allocation of income, economic activities, and taxes paid.
Additionally, Saudi Arabia has strengthened its documentation requirements. Entities subject to transfer pricing rules must submit a local file and a master file detailing the group’s global business operations, pricing policies, and justification of transfer pricing decisions. Failure to comply can result in significant penalties, ranging from financial fines to more severe audit scrutiny.
A recent change in Saudi Arabia’s approach is the growing focus on “economic substance.” This principle ensures that profits reported in Saudi Arabia reflect the true economic activities conducted within the Kingdom. MNCs must now ensure that the substance of their operations aligns with the profits reported or face possible adjustments by tax authorities. This shift aligns with international trends aiming to curb artificial profit shifting through low-tax jurisdictions.
Impact on Multinational Corporations
Saudi Arabia’s evolving transfer pricing regulations pose challenges and opportunities for multinational corporations. For companies with extensive intra-group transactions, the need for enhanced documentation and compliance can increase administrative burdens. This can involve significant costs related to preparing detailed transfer pricing documentation, engaging external advisors, and ensuring data consistency across multiple jurisdictions.
However, the Kingdom’s alignment with international transfer pricing standards also gives MNCs greater certainty and predictability regarding tax compliance. By adhering to OECD guidelines and BEPS recommendations, Saudi Arabia is creating a more transparent tax regime, reducing the risk of disputes and double taxation. This regulatory certainty, in turn, makes the Kingdom a more attractive destination for foreign direct investment (FDI), a key goal of the Vision 2030 programme.
The focus on economic substance also signals a shift in how multinational corporations must approach their operations in the Kingdom. Companies that attempt to shift profits without demonstrating substantive business activities in Saudi Arabia may face transfer pricing adjustments. This encourages MNCs to expand genuine economic activities within the Kingdom, such as setting up regional headquarters, investing in local industries, and hiring local talent. As a result, these rules prevent tax base erosion and support Saudi Arabia’s broader economic diversification objectives.
The Global Context and Saudi Arabia’s Role
Globally, the transfer pricing landscape is becoming more complex as countries intensify their efforts to combat tax avoidance and profit shifting. The BEPS Action Plan, spearheaded by the OECD and G20 countries, has led to the development of minimum standards for transparency and coherence in international taxation, including CbC reporting and transfer pricing documentation.
Saudi Arabia’s efforts to implement these global standards signal its active participation in international tax cooperation. The Kingdom’s membership in the OECD’s Inclusive Framework on BEPS demonstrates its commitment to improving tax transparency and preventing tax avoidance. Moreover, with global tax authorities increasing their scrutiny of intra-group transactions, Saudi Arabia’s robust transfer pricing rules position it as a proactive leader in regional and global tax governance.
As Saudi Arabia continues to reform its tax regulations, transfer pricing will remain a central area of focus. For multinational corporations, these changes represent both challenges in terms of compliance and opportunities to engage more deeply with the Kingdom’s economy. By fostering a more transparent, predictable, and economically aligned tax regime, Saudi Arabia is safeguarding its tax base and positioning itself as a competitive player in the global economy.
As tax authorities globally collaborate to address BEPS and profit shifting, Saudi Arabia will likely continue to refine its transfer pricing regulations, ensuring they remain robust, fair, and aligned with international standards. For multinational corporations, understanding and adapting to these evolving rules will be key to operating successfully in this dynamic market.
