Perspective

ZATCA releases updated third edition of TP Guidelines

On 24 June 2024, the Zakat, Tax and Customs Authority (ZATCA) released the third edition of its Transfer Pricing (TP) Guidelines (“TP Guidelines) with several updates. This update follows ZATCA’s announcement on 20 March 2023, where the Board of Directors approved the proposed amendments to the Kingdom of Saudi Arabia Transfer Pricing Bylaws (KSA TP Bylaws). These amendments extend the applicability of the TP compliance requirements to Zakat payers, effective for financial years beginning on or after 1 January 2024. The updated third edition of the TP Guidelines, available here, captures key updates related to the recently amended KSA TP Bylaws.

Key comments

The third edition of TP Guidelines has been released in Arabic. The currently available English version is the previous edition from 2021.A summary of the updates to the third edition of the TP Guidelines have been outlined below:

The applicability of TP to Persons

The first and second edition of the TP Guidelines specified the applicability of TP to Persons considered to be Taxable Persons under the Income Tax Law of the Kingdom. The third edition of the TP Guidelines mentions that the rules contained in the TP Bylaws shall apply to anyone who is considered a Taxpayer under the Income Tax System and Zakat Regulations, or both.

TP Documentation requirements

The updated TP Guidelines reflect changes in TP Documentation requirements introduced by the amended TP Bylaws, extending the applicability of the TP compliance requirements to Zakat payers, effective for financial years beginning on or after 1 January 2024.

Additionally, the exemptions provided for under Article 19 of the amended TP Bylaws are reflected in the updated TP Guidelines, stating that Local file and Master file documentation requirements are not applicable to (a) wholly state-owned companies exempt from Zakat collection, and (b) investment funds.

Further clarifications have been inserted on Group companies that submit a consolidated Zakat return in accordance with the Zakat collection regulations. The TP Guidelines clarify that such Group companies would be exempt from TP reporting requirements for transactions conducted amongst themselves (i.e., entities which are part of Zakat consolidation). However, these companies must disclose transactions with other companies which are not part of Zakat consolidation (i.e., entities where the Group ownership is less than 100%).

A new appendix has been added (Appendix 7) with a table outlining the exceptions related TP requirements:

*Note:

Phase 1: From 2024 -2026, aggregate value of related party transactions is equal to or less than SAR 48 million: Not applicable; aggregate value of related party transactions is more than SAR 48 million but less than SAR 100 million: Optional; and where the aggregate value of related party transactions is SAR 100 million or more: Mandatory.

Phase 2: From 2027 onwards: Aggregate value of related party transactions is less than SAR 48 million: Not applicable, and Aggregate value of related party transactions is SAR 48 million or more: Mandatory.

Financial Transactions

Although there are no significant changes in the TP Guidelines on Financial Transactions, with Zakat Payers now coming within the ambit of TP Bylaws, it is worthwhile to highlight Chapter 8 on Financial Transactions, which provides detailed guidance on financial transactions, specifically loan arrangements.

The TP Guidelines provide more guidance on financial transactions, specifically covering equity and loans. The newly inserted section provides guidance on how to define the characteristics of a transaction and evaluating whether it should be classified as a loan or equity. Below is a summary of the guidance provided on financial transactions:

To ensure compliance with the arm's length principle for financial transactions between related parties, particularly loan agreements, it is essential to accurately define transaction characteristics, including:

Contractual Terms Review: Ensure that the contract provides sufficient detail about the financial transaction. Additional documentation may be required if necessary.
Functional Analysis: Identify the functions performed, assets utilized, and risks assumed by each party involved.
Financial Instrument Characteristics: Pay attention to the unique features of different financial instruments involved in the transaction.
Market Conditions Analysis: Assess variations in the markets of related and unrelated parties, which may affect pricing and necessitate adjustments.
Business Strategies: Consider the purpose of the loan and how different strategies may influence terms and conditions.

When determining the nature of the transaction, the debt-to-equity ratio and the borrower's creditworthiness should be evaluated. This analysis would be critical to assess whether the transaction should be classified as a capital contribution rather than a loan, which could have an impact on the Zakat base in the case of Zakat payers.

Advance Pricing Agreements (APAs)

A new section covering APAs has been added to the third edition of the TP Guidelines. An APA is a crucial tool for managing TP risks. It seeks to provide certainty and minimize the potential for disputes with the tax authority. Additionally, it enables taxpayers to manage their tax/zakat matters with greater confidence and reduces their risk of double taxation.

The newly inserted section provides updated on the scope of APAs, including unilateral APAs, procedures for requesting an APA including what information and documents must be included as part of the request, and matters pertaining to the conclusion of the APA. A summary of these updates is provided below:

Scope of APA: APAs can now be requested for related party transactions with a minimum value of SAR 100,000,000. This value can be supported by financial accounts, draft legal documents, or business plans. The governor may exempt certain complex transactions from this threshold.
APA Procedures: To start an APA request, multinational groups that meet TP Guidelines must contact the authority for assessment. If feasible, a comprehensive application must be submitted at least 12 months before the first financial year covered by the APA. The application should include detailed information about the group’s structure, transactions, financial statements, functional analysis, and comparable data.
Conclusion of APA: Once an agreement is reached, it becomes binding for three financial years, specifying tax terms. The authority cannot challenge the TP policy during this period. However, significant changes to the facts related to the APA must be reported to the authority, which may then amend or terminate the agreement

Summary

The updated TP Guidelines in KSA provide key information and direction to taxpayers regarding the practical aspects of TP in the Kingdom. They also help clarify the authority's views and interpretation on the application of the TP bylaws.

With the recently amended TP bylaws taking effect on 1 January 2024, significant updates include the extension of TP compliance requirements to Zakat payers and the introduction of the APA program. The release of these updated TP Guidelines is timely and important.

Zakat payers who are now subject to TP compliance requirements, as well as any taxpayers looking to participate in the APA program, should refer to the updated TP Guidelines for clarity and guidance.

How Deloitte can help

At Deloitte, we understand the significance of the amendments in the TP Bylaws and the recently updated TP Guidelines and its implications for your business. Our expert team has designed a specialized approach and methodology to support zakat payers in their TP compliance obligations which are applicable from 1 January 2024 onwards. Our expert team are also ready to assist you with engaging in the APA program to obtain upfront certainty on your TP.

Contacts

Deloitte will continue to support you in your tax related queries. If you have any further questions, please contact one of the team members below:

Middle East Transfer Pricing Leader

Mohamed Serokh
mserokh@deloitte.com

KSA Transfer Pricing contacts

Danial Khalid
dkhalid@deloitte.com

Husain Miyasaheb
hmiyasaheb@deloitte.com

Joy Mukherjee
jmukherjee2@deloitte.com

Nidhin Vijayan
nivijayan@deloitte.com

Yunus Afsar
yuafsar@deloitte.com

Mohammed Abu-Hijleh
mabuhijleh@deloitte.com

Gopal Agarwal
gopaagarwal@deloitte.com

Andrian Hartanto
ahartanto@deloitte.com

Mohand Alghamdi
malghamdi@deloitte.com

Mohammed Tulayhi
maltulayhi@deloitte.com

Joud Alhashdi
jalhashdi@deloitte.com

Regional Transfer Pricing contacts UAE