In Saudi Arabia, related-party transactions must comply with the arm’s length principle to ensure that taxable income is not distorted by inflated prices. Corporate taxpayers engaging in cross-border or domestic transactions with affiliates must meet strict transfer pricing documentation and adjustment requirements. This blog explains arm’s length rules, ZATCA compliance, adjustment mechanisms, and tax consequences for Saudi corporate taxpayers.
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified Saudi Arabia leads directly.
To claim this exclusive spot, contact us at [email protected].
Understanding the Arm’s Length Principle
The arm’s length principle ensures that transactions between related parties are priced as if they were between independent, unrelated parties under comparable circumstances. This standard is globally recognized and is a cornerstone of Saudi Arabia’s transfer pricing regulations as enforced by the Zakat, Tax and Customs Authority (ZATCA).
Overpricing related-party transactions can lead to inflated deductions and lower taxable profits, which ZATCA addresses through adjustments to align with fair market value.
When Do Arm’s Length Rules Apply?
- Sale of goods or provision of services between related entities.
- Licensing of intellectual property, trademarks, or patents.
- Intercompany financing or loan arrangements.
- Cost-sharing arrangements and management fee charges.
- Asset transfers between parent companies, subsidiaries, or affiliates.
ZATCA’s Adjustment Powers
If ZATCA determines that a transaction price deviates from the arm’s length range, it can:
- Recalculate taxable income based on fair market value.
- Disallow excessive deductions resulting from overpricing.
- Apply penalties for non-compliance with transfer pricing documentation rules.
Documentation Requirements
To defend the pricing of related-party transactions, Saudi taxpayers must maintain:
- Master File – Overview of the multinational group’s global operations and policies.
- Local File – Transaction-level details specific to Saudi operations.
- Country-by-Country Report (CbCR) – For qualifying multinational groups.
- Contemporaneous benchmarking studies supporting the selected transfer pricing method.
These documents must be provided to ZATCA upon request, typically within 30 days.
Acceptable Transfer Pricing Methods
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
- Profit Split Method
The selection of a method depends on the nature of the transaction and the availability of comparable data.
Penalties for Non-Compliance
Failure to comply with arm’s length adjustment rules can result in:
- Tax reassessments leading to higher tax liability.
- Penalties for inaccurate returns or failure to provide documentation.
- Interest charges on underpaid taxes.
In severe cases, ZATCA may also apply retroactive adjustments for prior years.
Best Practices for Corporate Taxpayers
- Perform annual transfer pricing reviews to identify potential risks.
- Benchmark related-party pricing against market data.
- Keep detailed documentation and update it regularly.
- Engage with transfer pricing experts to ensure compliance with Saudi TP bylaws.
Key Takeaways
- Overpricing related-party transactions can trigger ZATCA adjustments and penalties.
- Compliance with arm’s length rules requires robust documentation and market-based pricing.
- Transfer pricing strategies should be revisited annually to align with evolving regulations.
