Understanding Transfer Pricing in Saudi Arabia
Transfer pricing refers to the pricing of transactions conducted between related entities, including the sale of goods, provision of services, financing arrangements, or the transfer of intangible assets. These transactions must adhere to the arm’s length principle, which requires that prices and terms reflect those that would be agreed upon by unrelated parties under comparable conditions.
In 2019, the Zakat, Tax and Customs Authority introduced Transfer Pricing Bylaws applicable to all entities subject to income tax. These bylaws are broadly aligned with the OECD Transfer Pricing Guidelines, while incorporating local regulatory expectations and enforcement priorities. The framework applies to any Saudi-based taxpayer with related-party transactions, including those operating under mixed ownership structures subject to both zakat and corporate income tax. In such cases, transfer pricing rules may apply to the income tax-assessable portion, with potential implications for the business's wider governance and reporting obligations.
Core Compliance Requirements
Businesses subject to the Transfer Pricing Bylaws must comply with several key documentation and disclosure obligations:
- Disclosure Form: All taxpayers engaged in related-party transactions must submit a disclosure form alongside their annual income tax return. This form summarises the nature, volume, and financial impact of each transaction.
- Master File and Local File: Entities with annual revenues exceeding six million Saudi riyals must maintain a Master File and Local File.
- The Master File provides a comprehensive view of the group’s global operations, including its business model, intangibles, financing structure, and consolidated financial performance.
- The Local File details the local entity’s related-party transactions, supporting economic analyses, and benchmarking studies to justify the pricing adopted.
- Country-by-Country Report: Multinational enterprise groups with global consolidated revenues exceeding three billion and two hundred million Saudi riyals must submit a country-by-country report. This report outlines income, taxes paid, and business activity in each jurisdiction in which the group operates. The obligation generally lies with the ultimate parent entity or a designated local surrogate.
While the Master File and Local File are not submitted with the tax return, they must be readily available and provided to the authority within seven days of request. This requirement underscores the importance of real-time readiness and robust internal documentation procedures.
Applying the Arm’s Length Principle
To demonstrate compliance with the arm’s length standard, businesses must adopt one or more recognised transfer pricing methods. The choice of method depends on the nature of the transaction, availability of reliable data, and the functions, assets, and risks involved. Commonly accepted methods include:
- Comparable Uncontrolled Price Method.
- Resale Price Method.
- Cost Plus Method.
- Transactional Net Margin Method.
- Profit Split Method.
A detailed functional analysis must accompany the chosen method, explaining the economic roles of the parties, the assets deployed, and the risks assumed. This analysis forms the foundation for benchmarking and price justification.
Challenges in Implementation
Although the regulatory framework is well established, many businesses face practical challenges in implementing transfer pricing policies, particularly during the early stages of compliance maturity. Common difficulties include:
- Identifying and categorising related-party transactions accurately.
- Accessing reliable and regionally relevant benchmark data.
- Integrating transfer pricing protocols into enterprise resource planning systems.
- Preparing documentation in Arabic, where required, and aligning with local audit practices.
Moreover, the Saudi interpretation of OECD guidelines includes jurisdiction-specific requirements. For instance, during tax audits, ZATCA may apply distinct evaluation criteria, and insufficient documentation can lead to tax reassessments, penalties, and prolonged resolution processes.
For chief financial officers and tax leaders, this highlights the need to embed transfer pricing compliance within the broader financial governance and risk management framework, rather than treating it as an isolated or annual requirement.
Strategic Opportunities Through Transfer Pricing
Beyond regulatory compliance, transfer pricing presents meaningful opportunities for operational and strategic optimisation:
- Operational Consistency: A unified transfer pricing policy ensures consistent internal pricing, supports transparent performance measurement, and facilitates alignment between business functions.
- Efficient Investment Structuring: Proper planning can reduce the risk of double taxation and improve the after-tax return on investment, especially in cross-border financing or licensing arrangements.
- Audit Readiness: Strong documentation and robust internal controls position companies to respond confidently to inquiries from the tax authority.
- Proactive Risk Management: Early identification of pricing risks enables timely course correction, reducing the likelihood of retrospective adjustments or disputes.
Furthermore, well-informed transfer pricing policies can enhance decision-making in areas such as supply chain restructuring, sourcing, and the negotiation of intercompany service agreements.
Emerging Trends and Regulatory Developments
Saudi Arabia’s tax landscape continues to evolve in step with international trends, reinforcing the importance of a forward-looking transfer pricing strategy. Key developments include:
- Digital Transformation in Tax Oversight: ZATCA is increasingly using digital tools and data analytics to review taxpayer submissions, assess risk, and conduct e-audits.
- Focus on Complex Transactions: The authority has intensified scrutiny on areas such as the transfer of intangibles, intra-group financing, and management service fees, which often involve subjectivity and high-value considerations.
- Global Alignment: Initiatives such as the OECD Pillar One and Pillar Two frameworks are likely to influence future transfer pricing regulations in the Kingdom, particularly for large multinational groups.
- International Transparency and Data Sharing: As global tax authorities expand information exchange protocols, consistency between local and global positions becomes critical. Companies must ensure their Saudi documentation aligns with disclosures made in other jurisdictions.
Inclusion of Zakat Payers Under Transfer Pricing Rules
Recent regulatory updates have expanded the scope of Saudi Arabia’s transfer pricing framework to include certain Zakat payers. Under these changes, Zakat-paying entities may now be subject to transfer pricing requirements if specific conditions are met — for example, where the entity engages in cross-border related-party transactions and prepares financial statements under IFRS. To fall within the scope, the taxpayer must meet ZATCA’s defined thresholds and criteria regarding ownership structure, transaction type, and materiality. This development underscores the need for Zakat payers to assess whether they are now required to prepare disclosure forms, maintain transfer pricing documentation, and comply with other related obligations.
Transfer pricing in Saudi Arabia is no longer a technical compliance exercise, it is a dynamic discipline that intersects with finance, operations, legal, and strategy. As regulatory expectations continue to evolve, businesses must adopt a proactive, structured, and informed approach to transfer pricing governance.
By institutionalising transfer pricing within tax risk management frameworks, developing high-quality documentation, and aligning practices with international standards, companies can not only meet their compliance obligations but also strengthen their financial integrity, enhance investor confidence, and uncover significant operational and strategic benefits.
