The Transfer Pricing regime in Saudi Arabia has recently evolved with significant regulatory amendments that broaden its scope and strengthen documentation requirements. Subsidiaries in the Kingdom must adapt to new obligations affecting both income tax and zakat (زَكاة, an obligatory form of charity in Islam, considered one of the Five Pillars of faith), with simultaneous requirements for disclosure, documentation, and adjustments to related-party transactions. This article outlines the key rules introduced by the Zakat, Tax, and Customs Authority (ZATCA), analyzes accepted methods, and highlights compliance and audit risks from the perspective of an international tax expert.
Saudi Regulatory Framework and Recent Reforms
Competent Authority and Applicable Principles
Transfer Pricing Rules in Saudi Arabia are regulated by the Zakat, Tax and Customs Authority (ZATCA), which administers and enforces compliance with the Arm’s Length Principle. According thereto, related party transactions must be similar to those between independent parties under comparable conditions.
In 2023, reforms were introduced that became effective for tax years beginning on January 1, 2024, whereby zakat and tax taxpayers are also subject to the Transfer Pricing regime. Thus, mixed-ownership or wholly Saudi-owned companies engaging in controlled transactions are subject to the Transfer Pricing regime.
In addition, the third edition of the ZATCA guidelines, published in June 2024, incorporated improvements, such as sections addressing Advance Pricing Agreements (APAs), guidance on accounting adjustments for controlled transactions, and clarifications for those filing unified zakat returns.
Subjects, Transactions, and Thresholds
Affected Subjects and Covered Transactions
Transfer pricing obligations apply to all taxpayers under the Income Tax Law and the Zakat regulations. These obligations cover both international and domestic controlled transactions, meaning that not only are cross-border payments affected, but also related local transactions.
A transaction is considered “controlled” when one entity directly or indirectly owns 50% or more of another entity, or controls it through financing structures, corporate governance, or operating provisions.
Phased Implementation and Thresholds
For zakat taxpayers, ZATCA has adopted a phased implementation approach:
- Phase 1 (2024-2026):
- If related-party transactions are less than SAR 48 million (approximately USD 12.7 million), they are exempt from preparing Master and Local files.
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- If transactions exceed SAR 100 million (USD 26.6 million), the taxpayer must maintain both files.
- Phase 2 (from 2027):
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- The mandatory threshold for Master/Local files will be reduced to SAR 48 million.
Even if the value of transactions is low, all taxpayers subject to zakat must file a Controlled Transaction Disclosure Form (CTDF) with their tax or zakat return, along with an affidavit from a licensed auditor.
Permitted Methods and Comparability Adjustments
Recognized Methods
Saudi Arabia accepts the five classic methods endorsed by the OECD for setting transfer prices:
- Comparable Uncontrolled Price (CUP) method
- Cost Plus method
- Resale Price method
- Transactional Net Margin Method (TNMM
- Profit Split method
There is no rigid hierarchy among them; taxpayers can choose the most appropriate method based on the nature of the transaction, the availability of comparable data, and the quality of the functional analysis. If traditional methods do not yield reliable results, alternative approaches may be utilized, provided they are adequately supported by documentation and economic evidence.
Comparability Adjustments
The Saudi authority requires taxpayers to adjust for differences in:
- Risk assumed
- Scale (volume of operations)
- Market conditions
- Intensity of assets used
- Local operating factors
These adjustments aim to neutralize structural differences that may skew comparability between the tested and comparable entities. If the taxpayer does not demonstrate sound criteria for selecting comparables and adjustments, their analysis may be challenged.
The treatment of intangibles deserves special attention: The authority considers the distribution of DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions to be a priority over legal ownership of the asset when those functions are fundamental to generating economic value.
For intra-group financial transactions or internal services, the regulations follow the general OECD guidelines in areas where local laws are not specific.
Documentation and Filing Requirements
Disclosure Form (CTDF)
The CTDF must be filed within 120 days after the fiscal year-end, along with the income tax or zakat return. This form summarizes all related-party transactions along with an auditor’s affidavit certifying the consistent application of Transfer Pricing policies.
Master File
Taxpayers with related-party transactions exceeding SAR 6 million (USD 1.5 million) must prepare a Master File, which includes the group structure, global business model, supply chain, and Transfer Pricing policies. It must be made available to ZATCA within 30 days of the application date.
Local File
The Local File contains details on each controlled transaction, functional analyses, comparability studies, and support for the selected method with economic evidence. It must reflect the application of the Arm’s Length Principle to the specific transaction.
Country-by-Country Report
Multinational groups with consolidated revenues exceeding SAR 3.2 billion (USD 853 million) must file the Country-by-Country report (CbCR) within 12 months of the fiscal year-end. This report contains aggregate data on revenues, profits, taxes, and operating activities by jurisdiction of the group.
Document Retention
Companies must retain all supporting documentation and analysis from the time of the transaction until the filing of the CTDF. ZATCA requires that documentation be contemporary, i.e., analyses and policies must be prepared before or simultaneously with transactions, not retroactively.
Audits, Penalties, and Assurance Mechanisms
Audit Risks
ZATCA applies a risk-based approach to selecting audit cases. Sectors considered high risk-such as oil, gas, technology, intellectual property, and financial services-tend to receive greater scrutiny.
A discrepancy between the values declared for customs and the transfer prices declared may trigger more rigorous audits.
Applicable Penalties
Although there are no specific penalties for Transfer Pricing violations, general tax regulations provide for penalties for inaccurate returns, which can reach up to 25% of the allegedly evaded tax, plus interest for late payment (1% per month on unpaid or unadjusted amounts).
Furthermore, ZATCA may reorder, adjust, or even cancel results that are inconsistent with the Arm’s Length principle, which could increase the taxpayer’s tax base.
Advance Pricing Agreements (APA)
Since 2025, Saudi Arabia has established an APA mechanism as a tax certainty instrument.
The requirements to apply for an APA include:
- Annual related-party transactions exceeding SAR 100 million.
- Filing a formal application at least 12 months before the first year covered.
- Complete information on corporate structure, transactional model, functional analysis, and supporting financial data.
Once approved, the APA has a binding period of three years, during which ZATCA cannot question the agreed method if the agreed assumptions and conditions are respected. Beneficiaries must also submit Annual Compliance Reports (ACR) to demonstrate commitment to the plan.
Operational Implications for Saudi Affiliates
Subsidiaries operating in Saudi Arabia should adopt an integrated tax governance perspective, ensuring:
- Clear definition of roles and responsibilities among the finance, tax, operations, and internal audit areas.
- Regular review of Transfer Pricing methodologies as the business model evolves.
- Integration among local accounting, management reporting, and Transfer Pricing policies, so that discrepancies between accounting records and tax returns are minimal.
- Advance preparation of Transfer Pricing documentation, before transactions take place (contemporary documentation).
- Coordination with international advisors to align the Saudi position with the group’s global strategy, especially in complex intra-group or transnational operations.
Conclusion
The recent strengthening of the Saudi Arabian Transfer Pricing regime is a significant milestone for international tax discipline in the region. The new obligations imposed on zakat taxpayers, the requirement for disclosure forms, the Arm’s Length application to both domestic and international transactions, and the introduction of APAs mark a scenario of greater transparency and control.
Saudi affiliates of international groups must have a robust Transfer Pricing policy, with solid documentation, reliable analysis, and a strategic compliance vision. The need for proactive measures and alignment with global best practices reduces the risk of significant tax adjustments and penalties.
International Transfer Pricing Advice
At TPC Group, we provide thorough guidance on Transfer Pricing and international taxation. Our services assist companies in Latin America, the United States, and Spain in complying with both local and international regulations, optimizing tax structures, and minimizing risks associated with tax authorities.
Contact us for specialized guidance and to strengthen your global tax compliance strategy with the support of a technical team with multinational experience.
Source: Middle East Breafing