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Transfer pricing is defined as the pricing of transactions between related persons or persons under common control (“Controlled Transactions”). The importance of Transfer Pricing Bylaws lies in the necessity to implement and enforce the Arm’s Length Principle on transactions between related persons or persons under common control as if they were conducted between independent persons.
Transfer pricing framework
1. Scope
Transfer pricing instructions apply to:
· Persons who are considered to be taxable in accordance with the income tax system in the Kingdom. This relates only to legal persons, and also to permanent establishments.
· Companies subject to both income and zakat tax (Joint Enterprises) to the extent that such companies are subject to income tax.
Transfer pricing instructions do not apply to:
A person subject to a Zakat (and not subject to income tax in the Kingdom). Despite this, the persons concerned shall, under article 18 of the instruction, fulfil the obligations stipulated therein. (Any person concerned with submission of a State's own report and compliance with the obligations set out in article 18 of the Transfer Pricing Instruction.
2. Transfer Pricing Methods
· Comparable Uncontrolled Price Method: A comparison is made between the price quoted for the property or services transferred in a transaction between related persons with the price charged for the property or services transferred in a similar independent transaction, under similar conditions. The comparable uncontrolled pricing method is preferred over other transaction pricing methods.
· Resale Price Method: A comparison is made between the resale margin achieved by the purchaser of the property in a transaction between related persons from the resale of this property in an comparable uncontrolled transaction with the margin achieved in similar transactions and resale between independent persons, and this method aims to evaluate the amount calculated in a transaction between people linked by the neutral price method with gross profit margin achieved in comparable uncontrolled transactions.
· Cost Plus Method: A comparison is made between the profit margin of costs incurred directly and indirectly in the supply of property and services under a transaction between persons related to the profit margin of costs incurred directly or indirectly in the supply of property or the provision of services under a separate and similar transaction. This method is used for application when partially manufactured goods are sold between associated parties, and when factory agreements, common facilities or long-term supplies are concluded between associated parties.
· Transactional Net Margin Method: A comparison is made between the net profit margin relative to an appropriate that a Person achieves in a Controlled Transaction with the net profit margin relative to the same base achieved in comparable Uncontrolled Transactions.
· Transactional Profit Split Method: A method of calculating the total profits of persons associated with one or more transactions between persons associated on economic grounds, so that it is possible to estimate the distribution method of the profits of the transaction expected to be realized if the same transaction takes place between independent persons, which is in line with the Arm’s Length Principle. The applicable transaction pricing method should be the most appropriate way to apply to the transaction that results in the most accurate and appropriate neutral price under the facts and circumstances of the transaction.
3. Selection
Many of the operational factors shall be taken into account when applying the methods of pricing the above-described approved transactions, where certain margins are used for similar independent persons as indicators of the impartiality of transaction prices. It may be considered that if a person associated with the same margins achieves his or her transactions with those associated, the prices of such transactions shall conform to the Arm’s Length Principle.
4. Documentation
Taxpayers shall provide transaction pricing documents that prove that transactions between related persons fulfill the following Arm’s Length Principle:
General Documents: General documents relating to Taxpayers persons who are parties to the intercommunal transaction are available (whether the transaction is in the same State or between several States).
Main File: The main file should include an overview of the international business of the multinational group of companies, the group's transaction pricing policy and functions, and the economic characteristics of the related persons.
Local File: The local file shall include details of transactions between associated persons and the taxable person in the Kingdom that are supplementary and attached to the main file.
5. Application
Transactions between related persons are included in their commercial accounts based on the accounting rules in force in the Kingdom. Accordingly, the transactions are entered into the accounting systems of the related persons, where the information is used when preparing certain records such as the statement of financial position (balance sheet) and the statement of profits and losses. Records are kept for accounting purposes, and financial statements may reflect the extent to which the prices of transactions between related persons comply with the Arm’s Length Principle, and therefore whether adjustments are required. It shall be ascertained that transactions between persons associated with the Arm’s Length Principle are periodically completed, so as to avoid the inclusion of the non-contingent transactions of the principle in commercial accounts. The multinational group usually prepares budgets at the beginning of its financial year, and transaction prices between associated persons are determined in accordance with its transaction pricing policy. In the Commission's view, it is necessary to review the costly results in order to ascertain their compatibility with the Arm’s Length Principle.
The method of transaction pricing and documentation is a government method to control any manipulation that multinational corporations can make to reduce net profit in one country and increase it in another country to pay less taxes. Also, the subsidiaries in the Kingdom of Saudi Arabia are prevented from being pressured by the parent companies to reduce their prices and achieve lower revenues due to wrong pricing, and this is done using the Arm’s Length Principle (ALP).
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