Secondary Adjustments

The 2019 TP guidelines provide for the possibility to grant a secondary adjustment in Saudi Arabia in order to mitigate the consequences of double taxation due to a primary adjustment elsewhere. The taxpayer may claim a secondary adjustment within the standard statute of limitation deadlines and attach all necessary information. Claims will not be entertained if the matter was subject to a final judicial decision, or the transaction appears to be fictitious, artificial, or intended principally to reduce the tax otherwise due. The tax authorities are empowered to grant such secondary adjustments if the primary adjustment was operated by a tax treaty partner, and the Saudi tax authorities are satisfied that the adjustment reflects, both in principle and in value, an arm’s length determination. Otherwise, the Saudi tax authorities will only approach the relevant foreign authorities and attempt to reach a solution under the MAP procedure (see Sec. 13.4.4.).

Intra-Group Services and Cost Contribution Agreement

The domestic law does not provide specific rules for determining the arm’s length price of intra-group services and cost contribution agreement and relies on the OECD TP guidelines.

Intangible Property

The TP guidelines include specific guidance on the application of the arm’s length principle with respect to intangibles, particularly in respect of:

• Transactions involving transfers of intangibles or rights in intangibles; and
• Transactions involving the use of intangibles in connection with the sale of goods or the provision of services.

The TP guidelines provide the following steps for analyzing intangibles from a transfer pricing perspective:

• Identify the intangible used or transferred;
• Identify the economically significant risks associated with the development, enhancement, maintenance, protection and exploitation (“DEMPE”) of the intangible;
• Identify the full contractual arrangements;
• Identify the persons performing functions, using assets or managing (i.e., controlling) risks in relation to the DEMPE of the Intangible in order to determine the De Facto Ownership of the Intangibles;
• Confirm the consistency between the contractual arrangements and the conduct of the persons, and determine whether the person assuming the economically significant risks also controls the risk in relation to the DEMPE of the intangible;
• Determine the controlled transactions related to the DEMPE of the Intangible(s) in light of legal ownership, other relevant contractual arrangements, conduct of the persons and the functions performed, risks assumed, and assets used by the persons involved;
• Determine the arm’s length pricing for the use or transfer of Intangibles or the nonrecognition of the transaction.

The TP guidelines further provides that taxpayers may use the comparable uncontrolled price method where a reliable comparable is publicly available. Alternatively, the profit split method may be applied.

Financial Transactions

The TP guidelines include specific guidance on the application of the arm’s length principle with respect to various financial transactions particularly in respect of:

• Loan transactions;
• Guarantees;
• Cash management, optimization and cash pooling;
• Factoring and invoice discounting;
• Securitization;
• Hedging; and
• Captive insurance.

The TP guidelines provide that in order to determine the arm’s length price for a controlled financial transaction, an accurate delineation of the transaction must be made. The following must be analysed while determining the arm’s length price for financial transactions:

• Examination of the contractual terms of the transaction;
• Functional analysis;
• Analysis of the characteristics of the financial instrument;
• Analysis of the economic circumstances of the parties involved and of the market;
• Analysis of the business strategy of the related persons and/or the group involved; and
• Analysis from the perspective of an independent lender and an independent borrower (a two-sided perspective).

Permanent Establishment (‘AOA Approach’)

Under the Authorized OECD Approach (AOA), the OECD has published TP guidelines for the allocation of profits to permanent establishments. Saudi Arabia does not follow the AOA in any of its tax treaties. The erstwhile OECD MTC is followed in most of Saudi Arabia’s tax treaties and in around 13 treaties, the United Nations’ Force of Attraction approach is applicable.