TP regulations proposed to be amended to increase applicability to Zakat payers

7 July 2022 - On 4 July, Zakat, Tax and Customs Authority (ZATCA) in the Kingdom of Saudi Arabia (KSA) issued a public consultation paper proposing specific amendments to the Transfer Pricing (TP) bylaws. The consultation process is open for comments from the public until 30 July 2022. The link to the proposed amendment is available on the following link. 

Similar to the approach adopted by ZATCA on its initial release of the TP bylaws in December 2018, the proposed amendments to the TP bylaws are open for consultation with the public prior to its implementation. 

This alert contains a summary of our initial and preliminary views on the proposed amendments.

Key amendments proposed

To whom will the proposed amendments apply?

Until now the TP bylaws were applicable only to Corporate Income Tax payers who were mainly entities with full or partial foreign (non-Gulf Cooperation Council (GCC)) shareholding. The coverage of the TP bylaws are now proposed to be applicable to Zakat payers, who are wholly owned GCC held corporates, having related party transactions. Prior to this amendment, wholly owned GCC corporates (100% Zakat payers) were not subject to the TP bylaws, with the exception of those meeting the Country-by-Country (CbC) reporting threshold as previously only the CbC reporting requirement was applicable to Zakat payers.

Effective date of application

The public consultation remains open to comments until 30 July 2022. It is expected that the final bylaws will be released within 1 to 2 months thereafter and will be applicable for accounting periods ending 31 December 2022. However, at this stage, whilst this is our expectation, the proposed amendments do not specify the effective date of its application. 

Definition of related party 

The related party definition within the existing TP bylaws covering effective control has been expanded to Zakat payers. 

References to Zakat regulations

The amendments to the TP bylaws make references to article 21, 22 and 23 of the Zakat regulations of 2019. These articles seem to suggest that ZATCA may apply provisions of the TP bylaws to Zakat payers prior to its effective date as the Zakat regulations of 2019 contain provisions on arm’s length dealings with related parties.  

Disclosure Form 

The regulations suggest that Zakat payers will be required to file a ‘Disclosure Form’ together with the Zakat declaration due 120 days after the financial year-end. The following additional items will be included in the Transfer Pricing Disclosure form:

• Assets, total funds, advance payments, debts and other components of the Zakat base.
• The total allowed deduction from the Zakat Base as indicated in the declaration submitted for that Zakat/Tax year.
• The taxpayer’s statement covering related party transactions without consideration or non-monetary transactions.

Transfer Pricing documentation

The TP documentation (i.e., Masterfile and Local File) threshold remains the same for both Zakat and Tax payers (i.e., a cumulative intra-group transactions value threshold of SAR 6 million). Both domestic and international transactions conducted by Zakat payers fall within the scope of the TP bylaws. 

Other changes 

There are other minor changes such as the update of the Arabic name for Multinational Enterprise & Surrogate Parent Entity (while the Arabic names have been updated, the English translation essentially remains the same), addition of the definition of groups and update of the wordings of certain provisions to include Zakat payers throughout the TP bylaws. 

Key takeaways

The proposed changes are significant to taxpayers as well as Zakat payers in KSA. It is evident that the ZATCA, through this proposed amendment to the TP bylaws is extending the coverage of the arm’s length principle and associated Transfer Pricing compliance. 

All Zakat payers having related party transactions, need to ensure that they have a robust Transfer Pricing policy set up for their intra-group transactions including the intra-group provision of goods and services, intra-group financing arrangements and intra-group intangible assets provision, (e.g., branding, technology and/or other intangible assets). For Zakat payers with intra-group transactions exceeding the SAR 6 million transactions value threshold, it will also mean additional TP compliance requirements including the completion of a Local and Master File in addition to the filing of a Disclosure Form, which needs to be undertaken irrespective of the transactions value threshold.

Deloitte Middle East is compiling questions to be submitted to the ZATCA before 30 July 2022.