General Authority of Zakat and Tax (GAZT) in the Kingdom of Saudi Arabia (KSA) released final Transfer Pricing Bylaws (TP Bylaws) in February 2019. Subsequently, in March 2019, GAZT issued the First Edition of Transfer Pricing Guidelines that provide insights and guidance and represents GAZT's views on the application of Transfer Pricing Bylaws.
GAZT has now issued Second Edition of TP Guidelines (KSA TPG), which provide much-needed clarification on certain important aspects relating to the applicability of the TP Bylaws, Country by Country Reporting (CbCR) compliances and also provide the definition to certain important terms used within the Bylaws.
This article summarizes key changes and clarifications introduced in the aforesaid second edition.
Transfer Pricing Bylaws of KSA are applicable to transactions between Related Persons, wherein, the term Related Persons has been defined to include cases where Effective Control exists. Further, the definition of Effective Control has the following parameters:
|LEVELS OF EFFECTIVE CONTROL
|Control Via Governance ||Control Via Funding||Control Via Business|
|" Perform management functions for other entity
" Act as trustee for other entity
" Control, appoint or remove >=50% of Board of Directors
|" Right to receive >= 50% of share in profits
" Provide loans >=50% of total debts of borrower
" Issue guarantee >= 25% of total borrowings of other Person
|" >=50% business activities depends on transactions with other Person
The above indicative parameters seem to be very comprehensive to cover a greater part of the situation where there is a possibility of influencing the 'Price.' However, the second edition of the KSA TPG states that the above parameters create a rebuttable presumption that 'effective control exists.' The guidelines acknowledge that there may be other factors as well, to determine effective control. Therefore, the second edition of the KSA TPG has now clarified that in such instances, the taxpayer could take a position that there exists 'No effective control.' Accordingly, the transacting party does not fall under the definition of Related Persons, and such a transaction will be out of the coverage of TP Bylaws.
It will be interesting to see how GAZT will react to such a position of the taxpayer (if at all adopted), especially in situations described in the table mentioned above.
On a related note, the second edition of the KSA TPG has also provided the definition of 'Beneficial Ownership,' which includes persons who exercise ultimate effective control over a taxpayer or arrangement.
|B. Intangible owner? Satisfy the DEMPE test.
|" The guidelines now define 'De facto owner of intangibles' to regard a person as an economic owner of intangibles if he in control of DEMPE functions, making significant decisions and managing and bearing respective risks. It is possible that the legal owner and de facto owner are not the same person.
" If the Related Person does not control nor perform any functions related to DEMPE of Intangible, the legal owner would not be the De Facto Owner of Intangibles. For example, a Related Person providing funding, exercises control over the associated financial risk, without the assumption of and control over any other specific risks, such Related Person will receive only a risk-adjusted return on its funding.
The above guidance implies that while allocating returns on intangibles, GAZT emphasizes 'Economic Ownership,' which is in line with OECD's guidance on BEPS.
|C. CbCR filing necessary for the KSA subsidiary? Not if the filing is triggered due to the threshold difference.
|" As per updated guidelines, constituent entities operating in KSA shall not be required to file CbCR in KSA if the ultimate parent entity is not required to file CbCR in its local jurisdiction on account of threshold limits not being met. However, such constituent entity shall have to notify GAZT and provide necessary information to show that while laws of KSA require CbCR to be filed, the same has not been filed only on the ground that Group has not met the threshold of that local jurisdiction.
" Considering the currency fluctuations, a situation may arise wherein thresholds of SAR 3.2 billion shall not be aligned with EUR 750 million. Further clarification is required from GAZT regarding this aspect.
|D. Other Amendments / Clarifications:
|" Assurance: It has been clarified that 'Limited,' as well as 'Reasonable' assurance engagements, shall be accepted for certification as long as it is provided by a licensed auditor in the KSA. This amendment shall now provide more flexibility to Certified Accountants to issue either category of certification.
" Form Deadlines: While the deadline for disclosure form coincides with filing of tax return, it has been clarified that any change in tax return deadline shall not affect deadlines for filing disclosure form.
" The Guidelines have further clarified that there shall not be any materiality thresholds for the applicability of Arm's length principle on Controlled Transaction entered into by Related Persons.
The transfer pricing regime of KSA is just in the second year of its implementation. The taxpayers would have welcome the guidance and instructions that provide clarity on this highly subjective topic.
The second edition KSA TPG appears to include more cosmetic changes to the original KSA TPG. However, the taxpayers are given the option to decide the Effective Control, and the applicability of TP Bylaws may create more confusion for taxpayers regarding their position on the compliances. The position of 'No effective control,' if adopted by the taxpayer, is likely to lead to litigation with the tax authorities.
The clarification with regard to the Intangible ownership is much more on the expected lines. Globally, most of the developed and developing jurisdictions have adopted DEMPE as an effective tool to measure the ALP in cases involving Intangible related payments. This alignment of the TP Bylaws with international guidelines will provide much relief to the KSA taxpayers, especially an organization with a presence in multiple jurisdictions where intangible transactions are being increasingly scrutinized by tax authorities.