UAE firms must be aware of Saudi transfer pricing bylaws
The introduction of value-added tax (VAT) in 2018 ushered the Gulf region into a new era of taxation. While VAT and excise duty introduced in the UAE this year seem to be the key focus of consumers in general and businesses in particular, UAE companies often have to deal with taxes in relation to their overseas operations. One of such developments as regards overseas taxes is the issue of transfer pricing bylaws in Saudi Arabia that may affect UAE businesses in 2019 if they fail to comply with the new legislation as may be applicable to them.
While Saudi Arabia's income tax law already requires related party transactions to be at arm's length, it has now joined the bandwagon with the issue of detailed draft transfer pricing bylaws (the bylaws). The bylaws will have a significant impact on UAE-based businesses that operate in Saudi Arabia through group entities and even otherwise as transactions with third parties could also be covered under the bylaws.
The key question is whether the bylaws have only increased compliance burden on taxpayers or brought in new complications?
In addition to the income tax returns, following are the additional compliance requirements:
Disclosure form: To be filed by taxpayers that file an income tax return in Saudi Arabia and enter into controlled transactions;
Master file and local file: To be maintained by taxpayers having controlled transactions above arm's length value of SR6 million in a 12-month period (i.e. other than small enterprises); and
Country-by-country report (CbCr): To be filed by a taxpayer belonging to large groups having consolidated group revenue exceeding SR3.2 billion (notification to be filed in eligible cases). This report provides financial data of the entire group at a jurisdiction level to tax authorities which was previously not provided.
The transfer pricing provisions shall apply to taxpayers under the income tax law for the year ending December 31, 2018. For the first year, the due dates for filing income tax return, disclosure form and CbCr notification (if required) would be April 30, 2019, and for filing the CbCr report (if required) would be December 31, 2019. Other documents (including master file and local file) will be required to be submitted to the GAZT upon request. The time given for such submissions could be as less as seven days for local file and up to 30 days for other documentation.
Thus, UAE businesses having a business presence/creating a permanent establishment in Saudi Arabia and required to file income tax returns (i.e. where all the ultimate beneficial owners are not GCC residents) will need to make a note of the above. It appears that these provisions would also apply to transactions between two or more Saudi Arabian tax residents which are related persons. Further, clarification on the manner of applicability of the said bylaws to Zakat payers (i.e. where all the beneficial owners are GCC residents) is awaited.
The bylaws are broadly consistent with international standards on application of the arm's length principle and documentation requirements recommended by the G20 and OECD's base erosion and profit shifting (BEPS) project. This project was a global initiative to tackle tax avoidance and bring in transparency and exchange of information between tax authorities in different countries.
The 'guidelines' referred to in the bylaws are expected to shed more light on some of the questions - for instance, the arm's length range to be considered, administrative procedures, the language of documentation, a form of CbCr notification and audit procedures.
While the bylaws will pose additional compliance obligations on UAE businesses with Saudi group entities, there are certain provisions which could potentially create some complications for UAE businesses that may operate in Saudi Arabia or do business with unrelated Saudi tax residents.
Given the wide definition of related persons and persons under common control, certain arrangements with third parties in the nature of loans/ guarantees/exclusive distributorship contracts and where an entity contributes to over 50 per cent of business of another entity can meet the criteria warranting arm's length pricing even in the absence of a direct/indirect control which is the sole factor for establishing a related party relationship under the current income tax law. Thus, UAE-based businesses with operations and arrangements in Saudi Arabia even in the absence of any group companies there are also likely to be impacted.
Additionally, while master file and local file are not required to be maintained by small enterprises, the exemption is based on the arm's length value of transactions being lower than SR6 million and the determination of this 'arm's length value' would, ironic as it may seem, require undertaking a benchmarking analysis.
Since the due date of filing the first disclosure form for the fiscal year ended December 31, 2018, is April 30, 2019, covered taxpayers will need to take note of the above immediately. In cases, where it is determined that the underlying transactions are not at arm's length, adjustments would be required in the income tax return. Any irregularities observed at the time of audits would lead to adverse financial consequences in the form of interest (and any penalties which may be notified subsequently in the final bylaws).
While the draft transfer pricing bylaws certainly increase the compliance burden for taxpayers in terms of documentation, filings and potential audits, they also add to complexities in determining which are the controlled transactions, with or without 'equity-linked' control criteria. The countdown has clearly begun for UAE-based businesses having operations in Saudi Arabia to get related party transactions identified, benchmarked, documented and ensure all necessary compliances are undertaken.
Time for action in the new year.
The writer is partner at WTS Dhruva Consultants, Dubai. Views expressed are his own and do not reflect the newspaper's policy.