Saudi Arabia: Tax current developments and their impacts on permanent establishments (PEs)

• In order to keep pace with changes in the global tax frameworks and consolidate its position as an attractive foreign investment destination, the Kingdom of Saudi Arabia (KSA), a G20 member, introduced significant changes to its tax regime during 2018.
• The Saudi Arabia tax regulator – the General Authority of Zakat and Tax (GAZT) – kicked off the year with the implementation of VAT and issued draft Transfer Pricing Bylaws on 10 December 2018 followed by the respective final version on 15 February 2019.
• In addition to the aforementioned changes to the KSA tax system, GAZT also issued a new draft Zakat regulation on 10 January 2019 for public consultation; the final version is still pending at the time of the editorial deadline.
• These recent changes in the Kingdom’s tax regime are having a profound impact on tax filing requirements and documentation for KSA permanent establishments (PE).

KSA income tax law: PE definition:

• The KSA tax laws permit a non-resident entity to have a PE in KSA under certain circumstances. In such cases, the PE is effectively the place, in full or in part, at which the non-resident entity carries out its activities in KSA (e.g. a construction site), or the place of its KSA agent.
• All PEs registered in KSA shall comply with Saudi tax laws, documentation and audit, including VAT, income tax, withholding tax (WHT) and TP filing requirements.

GAZT publishes draft TP bylaws:

• GAZT took a big move forward upon enacting TP tax regulations for the first time in the KSA in February this year.
• Underscoring the Kingdom’s policy to introduce laws and regulations that build on relevant international standards, GAZT implemented the Organization of Economic Cooperation and Development (OECD) BEPS recommendations regarding TP.
• Moreover, the draft bylaws, as in the OECD guidelines, set forth requirements for three tiers of documentation (Master File, Local File, Country-by-Country Reporting) and an annual disclosure for controlled transactions.
• The TP bylaws apply to all taxable persons pursuant to the law and implementing regulations. That, by default, would include PEs.
• In line with the OECD Guidelines, the draft bylaws identified the following 5 methods for TP reporting purposes. Companies should select the most appropriate method for their context.
  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Transactional profit split method

On 15 February 2019, the TP bylaws were issued in their final form including the two following major amendments, together with FAQs (in both English and Arabic) as additional guidance:

• Setting deadlines for submission of TP documentation
• A requirement for taxpayers to submit the Disclosure Form of the Controlled Transactions together with a mandatory affidavit from a licensed auditor, through which the auditor certifies that the transfer pricing policy of the MNE is consistently applied by and in relation to the taxpayer.

Key TP reporting requirements and deadlines:

Master File / Local File:

• Should be submitted by corporate income tax (CIT) entities / CIT and Zakat-paying entities only if the annual value of such entities’ controlled transactions exceeds SAR 6m (USD 1.6m).
• Might be requested at any time by the GAZT after 120 days from the corporation’s fiscal year-end.
• Deadline to provide the report is within 30 days upon request for both files; an additional 60-day extension shall be granted only in 2019 upon request.

Country-by-Country Report (CbCR):

• Should be submitted by CIT entities / CIT and Zakat-paying entities as well as Zakat-paying entities with consolidated group revenues exceeding SAR 3.2bn (USD 853m).
• Should be filed not later than 12 months after the last day of the reporting year of the multinational entities (MNE) group.
• CbCR notification should be submitted, as a part of the annual declaration by KSAbased constituent entities, to GAZT within 120 days following the end of the reporting year.

Disclosure form:

• Should be submitted by CIT entities / CIT and Zakat-paying entities, only, including an affidavit from a KSA-licensed auditor to certify the consistent application of the TP policy.
• Deadline to submit is within 120 days from the fiscal year-end.

Language of documentation

As per the TP FAQs question no. 6, GAZT encourages the submission and documentation in the official language of KSA (Arabic), to the extent that this is reasonably possible.

Penalties

The bylaws do not mention any provisions regarding penalties, although the FAQs explain that failure to comply with the TP guidance in KSA may lead to imposition of related penalties and fines applicable under the Income Tax Law.

Summary

KSA introduced significant changes to the country’s tax regime at the start of 2018, including VAT and the TP bylaws. The latter draws on many of the OECD TP reporting guidelines.

The new KSA tax developments will have significant reporting implications for all taxpayers including multinational companies, which will have to adopt significantly different reporting and filing requirements.