Transfer Pricing Audits & Dispute Resolution Developments in Saudi Arabia

Executive Snapshot

• Scope: Saudi transfer pricing applies to related-party transactions (goods, services, financing, IP, cost sharing) and permanent establishments.
• Standard of review: Arm’s length principle—supported by comparables, tested party selection, and appropriate profit level indicators (e.g., TNMM, CUP, cost-plus).
• Data-driven audits: ZATCA cross-checks e-invoicing (FATOORA) data, customs imports, WHT returns, and GOSI payroll with your TP disclosures.
• Disputes: Multiple pathways may be available—administrative engagement, objections/appeals through tax committees, and treaty-based relief for cross-border double taxation.

What Triggers a TP Audit in Saudi Arabia

• High-risk intercompany payments: large service/management fees, royalties, interest or guarantee fees to non-residents without clear benefit tests.
• Margins below peers: persistent operating losses or margins outside interquartile ranges.
• Mismatch signals: e-invoicing exports ≠ VAT returns; WHT forms ≠ GL; customs values ≠ TP policies.
• Reorgs & restructurings: business transfers, IP migration, or principal model changes without compensation analysis.
• Financing structures: shareholder loans, cash pools, or back-to-back banking support without arm’s-length pricing and thin-cap analysis.

Documentation: Master File, Local File, CbCR & Disclosures

Saudi TP compliance typically includes:

• Control form / disclosure with annual return outlining related-party transactions.
• Local File for the Saudi entity—functional analysis, tested party, benchmarking, and financial schedules tying to audited FS.
• Master File—group structure, intangibles, financing, and global allocation of income.
• CbCR (where thresholds are met)—timely notifications and accurate country-by-country information.

Housekeeping tip: Ensure consistency across TP files, statutory accounts, VAT/WHT returns, and e-invoicing. Inconsistencies are common audit triggers.

Audit Lifecycle: From Notice to Assessment

1. Risk notice or information request: ZATCA asks for TP files, agreements, invoices, and benefit evidence.
2. Interviews & walkthroughs: management explains value creation, decision-making, DEMPE for intangibles, and why the tested party is chosen.
3. Method & comparables challenges: authority may contest search criteria, screens, geographic scope, or propose alternative PLIs.
4. Proposed adjustment: draft assessment with reasons, schedules, and penalties (if any).
5. Resolution: settlement discussions, revised computations, or formal objection/appeal within deadlines.

Keep a dated “audit room” index (requests, responses, evidence, reconciliations). It shortens cycle time and reduces misinterpretation.

Building & Defending Your TP Positions

• Benefit test for services: scope of work, deliverables, KPIs, and contemporaneous evidence (emails, reports, timesheets).
• Royalty/IP: DEMPE analysis; actual exploitation in KSA; rate benchmarking; avoid double-dipping with management fees.
• Distribution & manufacturing: characterize risks (limited-risk vs. full-risk); ensure target margins reflect functions and market conditions.
• Intragroup financing: pricing policy, guarantees, thin-cap/interest-limitation impacts, and WHT/VAT mapping on ancillary fees.
• Rebuttal file: pre-drafted responses to likely challenges (tested-party choice, geographic filters, working-capital adjustments).

Dispute Resolution Options in KSA

• Administrative engagement with ZATCA: clarify facts, provide additional benchmarking, or agree on computations before assessment finalizes.
• Objections & appeals through tax dispute committees: file within statutory timelines with a robust statement of facts, legal basis, and quantitative schedules.
• Treaty-based relief (MAP): where a double-tax treaty applies, seek mutual agreement procedure to relieve double taxation created by a primary adjustment outside KSA.
• Prospective certainty tools: where available, consider forward-looking arrangements to reduce repeat controversy risk for recurring transactions.

Timing matters: Log all statutory due dates (objections, appeals, MAP request windows). Late filings can shut doors that would otherwise reduce cash tax and penalties.

Recent Practical Developments (What We See)

• Deeper data analytics: increased reliance on e-invoicing and third-party data to select cases and size adjustments.
• Services & IP scrutiny: more probing of management fees, cost allocations, and brand/technology royalties—expect granular benefit tests.
• Financing focus: pricing of intercompany loans, cash-pool spreads, and guarantee fees reviewed alongside thin-capitalization and interest-limitation outcomes.
• Alignment requests: authorities expect the same story across TP files, audited FS, VAT/WHT returns, and customs declarations.

Note: Specific procedures and remedies can evolve; always verify current ZATCA publications and applicable treaty guidance before filing.

Audit-Ready Checklists

Core File

• Signed intercompany agreements aligning with actual conduct and invoicing.
• Master/Local File with current benchmarks, search strategies, and financial tie-outs.
• Benefit evidence for services; DEMPE narrative for intangibles; financing policy pack.
• Trial balance mapping to TP categories; reconciliations to VAT/WHT and e-invoicing.

During Audit

• Single point of contact; response calendar; index of submissions.
• Variance memos explaining year-on-year margin movements and business changes.
• Quality control: legal review of positions; numeric review of schedules and formulas.

FAQ: Saudi Transfer Pricing Audits & Disputes

Are there safe harbors?
No general safe harbor applies; benchmarking quality and functional analysis are essential.

Do we need TP files every year?
Yes—contemporaneous documentation aligned to the current year’s facts and financials is the strongest defense.

What if a counter-party’s country makes a primary adjustment?
Consider MAP under the relevant treaty to relieve double taxation, and assess correlative adjustments in KSA.

How do TP and VAT interact?
Intercompany pricing affects VAT bases; ensure TP and VAT positions are consistent (especially for management services and cost allocations).