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On 15 February 2019, the GAZT published the Transfer Pricing By-Laws (the By-Laws) in final form as well as an accompanying frequently asked questions (FAQs) document.

The By-Laws are effective from their date of publication in the official gazette. It has also been clarified in the FAQs (in question 8) that the By-Laws will apply to the reporting year ended 31 December 2018 and all subsequent reporting years.

The By-Laws and the FAQs refer to the GAZT’s own Guidelines in many places. Whilst none have yet been published, we expect that these Guidelines will be issued in due course to provide further practical guidance to help businesses comply with the procedural aspects of the By-Laws.

Persons subject to the By-Laws

Article 2 confirms that, notwithstanding any provision to the contrary, the By-Laws shall apply to all taxable persons under the Law. The ‘Law’ means the Income Tax Law issued by Royal Decree No. (M/1) dated 15/1/1425H and its amendments. This is the Corporate Income Tax Law in the Kingdom of Saudi Arabia.

The By-Laws will therefore apply to entities that are subject to tax only, and to mixed ownership entities that are subject to both Zakat and tax, and this is stated in the FAQs (question 3). Generally, therefore, the By-Laws do not apply to entities that are subject to Zakat only.

However, Article 2 now includes additional wording to confirm that whilst the By-Laws generally apply to taxpayers (and mixed ownership entities subject to Zakat and tax), it does not prevent the country-by-country (CbC) reporting requirements as prescribed in Article 18 from applying to Zakat payers.

Scope of the By-Laws: Domestic transactions

Question 7 of the FAQs states that unless expressly exempt in the By-Laws, all related party transactions, regardless of the place of residence, nationality, or domicile of the persons are within the scope of the By-Laws.

Our understanding is therefore that alongside cross-border controlled transactions, domestic controlled transactions are also within the scope of the By-Laws.

Scope of the By-Laws: Retrospective application

Question 8 of the FAQs state that whilst the By-laws apply to reporting years ended 31 December 2018 onwards, under the Income Tax Law, the GAZT has the right to request information, documents, or perform an audit for years prior to the effective date of the By-Laws.

Question 1 of the FAQs confirms that transfer pricing is not a new concept in the KSA’s income tax regime, with Articles 63 and 64 of the Law having addressed related-party transactions long before the introduction of these By-Laws.

Non-arm’s-length pricing

In circumstances where the terms, conditions, or remuneration of a controlled transaction are not consistent with the arm’s-length principle, the GAZT has the ability to reallocate or disregard the result of the controlled transaction.