Andersen

2021/03/14

Saudi Arabia’s Vision 2030

 In 2016, Crown Prince Mohammed Bin Salman initiated a historic vision that aims to build a bright society, a developing economy, and an ambitious nation. The Saudi Arabian Vision 2030 has three pillars; the second of which revolves around our nation’s determination to become a global investment powerhouse. Saudi Arabia holds strong investment capabilities which we will harness to stimulate our economy and diversify our revenues. These will be accomplished in many ways, one is by attracting multinational companies that will affect Saudi Arabia in many aspects. For example, by lowering the unemployment rate from 11.6% to 7%, by increasing the public investment funds by 7 trillion riyals, by increasing the private sector’s contribution to 65% of GDP, and finally by diversifying the governmental source of funding which leads to an increase in non-oil funds to 50%. As of today, the governmental funding from non-oil sources such as taxes has increased total government budget funding to 30%.

Thus, attracting multinational companies will lead to an increase in Corporate Income Tax.

Relatedly, the General Authority of Zakat and Tax (GAZT) has implemented transfer pricing as it plays a vital role in determining a company’s international transactions.  

What is Transfer Pricing?

 Transfer Pricing (TP) is a method used to determine the transaction price within or between enterprises under the same multinational group trade. Transfer Pricing (TP) is an accounting tool used to refer to the setting of a price for services and commodities by the subsidiaries within the same group.

It is mainly used to determine transaction prices between relevant parties/organizations, including the exchange of goods and services, loans, financing, tangible and intangible assets.

Transfer Pricing (TP) relies on the application of the Arm’s Length Principle (ALP). Arm’s Length Principle (ALP) depends on the principle that price charged within the same internal group of companies should be as if these parties are external companies in the market.

The Arm’s Length Principle (ALP) stipulates that the parties in a transaction are independent and on an equal footing.

Companies under common control may increase revenue in one country to increase the profit in this country which has less revenue tax percentage. On the other hand, they will increase the cost of sales in the other subsidiary country to lower the profit to pay less tax amount because of the higher tax percentage. To control this, the General Authority of Zakat and Tax (GAZT) enforces an arm’s length transaction rule that requires pricing to be based on transactions done between external parties.

The tax authorities in Saudi Arabia have two steps to control the transactions between the related parties.

The first step is to audit the method that companies use in transfer pricing. The General Authority of Zakat and Tax (GAZT) is using 5 methods. The main idea of the 5 methods is to compare the cost, price, gross margin, or profit of transactions in related companies and ensure that it is identical to the  same transactions in third-party companies. An example of the most used method by the tax authorities all over the world, as this method is the most simple and direct way, is the Comparable Uncontrolled Price (CUP). This method is based on comparing the price charged for goods or services given in a controlled transaction, to the price charged in a comparable uncontrolled transaction.

The second step for the tax authorities to control transfer pricing is documentation. The documentation goes through three phases in submitting four files.

Phase one: submit the Disclosure Form (first file) after 120 days from fiscal year-end, while submitting their annual income tax declaration to the General Authority on Tax and Zakat.

Phase two: submit Master File (second file) and Locale File (third file), shall be provided or made available to the Authority upon its request within the period specified by the Authority in the request, provided that such period shall be no less than thirty (30) days from the date of the request.

Phase three: the country-specific report only applies to groups with a turnover of transactions that exceed 3.2 billion Saudi Riyals. It should be submitted within the 12-months period immediately after the end of the fiscal year.

Auditing the transfer pricing method and the documentation is a governmental way to control any manipulation that would be done by multinational companies to decrease profit in one country and increase it across a broader transaction in another company to pay fewer taxes. The auditing does not only control tax benefits for the authorities, but it also protects the subsidiaries in Saudi Arabia from being pressured by the parent companies to lower their prices and generate lesser revenue because of the non-proper pricing between the Arm’s Length.