The tax regimes of the six countries—the Kingdom of Saudi Arabia,the Kingdom of Bahrain,the State of Kuwait, the Sultanate of Oman, the State of Qatar and the United Arab Emirates—that make up the Cooperation Council for the Arab States of the Gulf (better known as the GCC) are evolving and changing rapidly. Saudi Arabia, as the leader of the pack and the biggest economy in the region, has led the tax revolution by introducing - all within just the last five years - excise tax, value added tax, transfer pricing (TP) and electronic invoicing.
International regulators often suggest that large multinationals (MNEs) have been able to lower the effective tax rate on their global profits by shifting some - or all - of them to regions where they’ve had minimal economic activity or substance – GCC being one such region.Saudi Arabia,for its part,is one of over 140 countries that are committed to promoting international tax transparency by implementing minimum standards agreed through the Organisation for Economic Co-operation and Development’s (OECD’s) inclusive framework.
Saudi Arabia introduced TP regulations in 2018. MNEs are now expected to analyse and benchmark economic activities to justify doing business with connected parties. Over the past 18 months,there has been a noticeable increase in the number of TP audits issued by the Saudi tax authority.
TP requires a study of the terms and conditions influencing the cost of supplies between connected parties. The OECD’s inclusive framework recommends certain methods to ensure prices charged between the parties are at ‘arm’s length’. In some (limited) circumstances, MNEs may adopt a different method which they consider to be better aligned to its business model or activities.
From a compliance perspective, MNEs in Saudi Arabia are required to prepare and maintain five separate sets of documents – a-controlled transaction disclosure form, a TP affidavit, a Saudi local file, a group master file and a country-by-country report – most of which have to be prepared and updated annually (the master file is prepared every three years).WhileTP is still very much in its nascent stage in Saudi Arabia, MNEs are expected to leverage past experiences in mature jurisdictions to meet their Saudi reporting obligations.
MNEs doing business in Saudi Arabia should have a carefully documented TP policy governing all intra-group transactions for goods and services. To manage tax and reputational risk,it is also crucial for MNEs to regularly review and update their transfer pricing policy to ensure their rationale for doing business with connected parties will convince the tax authorities.
High-risk businesses and activities
The audit selection process used by tax authorities is rarely aimless. Certain business profiles or characteristics - low-margins, persistent losses, large payments to connected parties for the use of intangibles, a significant number of transactions to zero- or low-tax jurisdictions, substantial revenues from connected parties, insufficient documentation and recurring business restructuring - are red flags and so are more likely to be investigated.
Saudi Arabia’s TP regulationsare closely aligned with the OECD model. To manage risks, businesses should prepare and maintain local and master files; ensure any economic analysis and benchmarking studies are comparable to the tested party; prepare income projections and cash flows to justify loss-making activities; and ensure agreements are filed to support dealings with connected parties and favourable tax jurisdictions. MNEs should also holistically review and assess risks to the entire group.
Risk assessments can help key decision makers at Saudi businesses to determine if adjustments are required to their accounting and tax records before submitting them to ZATCA - the tax authority. Risk assessments may also show new transactions with connected parties have been undertaken at market value.
The tax authority’s approach
Where the tax authority believes there is a case to be answered, ZATCA – the Zakat, Tax and Customs Authority - will request- either by setting up an interview or sending a written request - a business’ local and master files, intra-group agreements and risk profile. After reviewing the documentation (which sometimes is required within three working days), ZATCA will finalise its position and issue an assessment.
If a business’key decision makers decide to reject an assessment, they can file a carefully-developed objection with ZATCA. If an agreement or settlement cannot be reached, litigation (through the tax courts) is the next step. At this stage, businesses should seek legal advice because procedural and legal formalities need to be complied with before an appeal can be heard and decided.
Being able to explain a business’ model, structure and key functions to justify TP appropriateness is key.Stakeholders across all levels of the business - not just the tax and finance functions - should take necessary steps to avoida lengthy (and often costly) litigation process.
While Saudi Arabia can be a challenging place to do business, many global corporates make significant revenues doing business there.To support ‘Saudi Vision 2030’,the government is making a concerted effort to diversify the economy from one that is heavily dependent on hydrocarbons by investing heavily in infrastructure, developing small and medium-size industries, supporting the commercial services sector and encouraging greater foreign and private sector investment.Taxation is an important part of how Saudi Arabia is planning to achieve its goals. TP’s introduction underscores the expectation that international businesses doing business in Saudi Arabia should contribute to government finances hard hit by the impacts of COVID-19.
Raman Ohri is the head of direct tax at Keypoint,a leading professional services firm that operates in Saudi Arabia, Bahrain and Jordan.
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You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax