Saudi Arabia's new transfer pricing bylaws (TP regulations) were issued on 31 January 2019 and are effective from 15 February 2019. Additionally, updated transfer pricing guidelines (TP guidelines) have been published by the Saudi Zakat, Tax, and Customs Authority (ZATCA) in November 2021 which generally apply from the fiscal years ending on or after 31 December 2018.

The TP regulations provide that the transactions between related parties (including notional transactions or transactions carried out with permanent establishments) are required to be at arm’s length, and in case of deviation, the tax authorities have the right to adjust the taxable income or disallow an expense or assess an additional income of the taxpayers. The TP guidelines define the arm’s length principle as "where conditions are made or imposed between two or more related persons in their commercial or financial relations which differ from those which would be made between unrelated persons, then any profits which would, but for those conditions, have accrued to one of such related persons, but, by reasons of those conditions, have not so accrued, may be included in the profits of that person and taxed accordingly".

The above TP regulations are applicable to all taxable persons in Saudi Arabia. However, until financial year ending 31 December 2023, the TP regulations (except CbC reporting requirements, see Sec. 13.4.3.) did not apply to entities or persons that were subject only to Zakat. The transfer pricing rules only applied to Zakat payers that were shareholders in "mixed companies" to the extent the company was subject to income tax. Mixed companies are generally defined as companies with at least one shareholder subject to income tax and at least one shareholder subject to Zakat.

From the financial years beginning on or after 1 January 2024, the transfer pricing regulations are extended in a phased manner to also cover entities and persons subject only to Zakat as follows:

• Phase 1: For financial years beginning on or after 1 January 2024, Zakat payers with aggregated related party transactions below SAR 100 million are exempted from the Local file and Master file requirements. The transfer pricing compliance is optional for taxpayers with aggregated related party transactions of more than SAR 48 million but less than SAR 100 million. Investment Funds are exempted irrespective of the aggregate value of transactions; and
• Phase 2: For financial years beginning on or after 1 January 2027, Zakat payers with aggregated related party transactions below SAR 48 million are exempted from the Local file and Master file requirements. The general exemption for Investment Funds is removed from the same date.

Definition of Related Parties

Pursuant to the new TP guidelines, related parties for transfer pricing purposes are defined as follows:

With respect to individuals:

• Relatives through marriage or through bloodlines up to the fourth degree;
• A partner in a partnership who is entitled, whether alone or in concert with related persons as defined above, and whether directly or indirectly, to 50% or more of the share capital or entitlement to profits; or
• A shareholder in a company controlling, alone or in concert with the related persons defined above, and whether directly or indirectly, 50% or more of the share capital or voting rights;

With respect to legal entities where:

• Persons are under common control;
• One person has effective control, whether alone or in concert with other related persons, on the other person; or
• A person who controls or who has the ability to control the business decisions of a juridical person, alone or together with a related person, having effective control over the other juridical person.

For the above purposes, two or more persons are deemed to be under common control where:

• One person controls at least 50% or more of the capital, voting rights, beneficial interest or entitlement to profits in another person, whether alone or in concert with other related persons; or
• One person or a group of related persons has the power, whether individually or collectively and whether directly or indirectly, to direct the business decisions of the other party or to effectively exercise control on that other party in whichever form.

For the above purposes, ‘effective control’ means the ability of a person to control the business decision of another person. A person or group of persons, either individually or jointly, directly or indirectly, are presumed to be able to control the business decisions of another person in any of the following cases – without limitations:

• One person or a group of related persons have the ability to conclude an agreement to provide management services to the company or otherwise effectively perform the functions of management for the other person;
• One person or a group of related persons have the ability to act as trustee (manager) of the other person under a trust arrangement;
• One person or a group of related persons have the ability to directly or indirectly control the composition of 50% or more of the board of directors or has/ have the right to appoint or dismiss the representatives of management of the other person;
• One person or a group of related persons have a legal or de facto right to receive, directly or indirectly, 50% or more of the profits of the other person;
• One person or a group of related persons have provided loans to other person directly or indirectly and the total outstanding balance of such loans represents 50% or more of the of long term & short-term debt and capital excluding retained earnings as of the year-end balance of the reporting year, except where such person is a financial institution;
• One person or a group of related persons have issued guarantees to cover 25% or more of the value of other person’s total borrowings as of the year-end balance of the reporting year, except for financial institutions;
• 50% or more of the absolute aggregated value of a person’s business activities as of the year-end balance of the reporting year depend on the transactions with such other person;
• One person or a group of related persons, jointly or severally, are the principal or supplier of other person under an exclusive agency, distributorship arrangement or any such similar contract for the sale of goods, services or rights and such person is a dependent agent of the principal and who is prohibited from entering into other similar agency, distributorship arrangement or any such similar arrangement for the duration of such person’s relationship with the principal; or
• In the case of a non-resident related person, where a substantial portion of the business activities of a resident person depend on the transactions with a non-resident person, and the resident person’s business activities depend on rights in intangible property granted to such person on an exclusive basis directly or indirectly by the non-resident person.

Applicable TP Methods

The following TP methods are applicable to transactions between related parties:

• Comparable uncontrolled price method;
• Resale price method;
• Cost-plus method;
• Transactional net margin method; and
• Profit split method.

The 2019 TP regulations specifically determine that there is no hierarchy between the authorized methods. The taxpayer may use any of the authorized methods provided that the method used is the most appropriate for determining an arm’s length price.

The determination of the most appropriate method should be based on such factors as:

• Strengths and weaknesses of the various methods;
• Specific nature of the controlled transactions determined through a functional analysis;
• Availability of reliable information and comparables; and
• Degree of comparability with uncontrolled transactions.

Taxpayers are allowed to use methods other than the authorized methods above. In that case, however, the burden of proof is on the taxpayer to demonstrate that the other method used provides a reliable measure of an arm’s length result, whereas the authorized methods do not.

Use and Availability of Comparables

The TP regulations include TP guidelines on the selection of comparables. Taxpayers may use comparables where:

• There are no significant differences between them that could materially affect the financial indicator being examined under the appropriate transfer pricing method; or
• When such material differences exist, if a reasonably accurate comparability adjustment is made to the relevant financial indicator of the uncontrolled transaction in order to eliminate the effects of such differences on the comparison.

Generally, the taxpayer may not use any comparables unless the same is available or can be made available to the tax authorities. Conversely, the tax authorities may not reassess transactions unless the comparables used are available or can be made available to the taxpayer. The tax authority may accept the use of foreign comparables in case domestic comparables are not available and it is demonstrated that the comparables are consistent with the requirements provided in the regulations, based, inter alia, on geographical and other factors.