Worldwide transfer pricing reference guide 2014

Saudi Arabia
Taxing authority and tax law
Taxing authority: Department of Zakat and Income Tax (DZIT).
Tax law: Under Saudi tax law there are no specific transfer pricing regulations governing transactions with related parties. However
the tax law contains certain provisions in respect of measures against the tax avoidance which may support the DZIT when challenging
transactions between related parties.
In determining the tax liability, the DZIT is empowered to:
• Disregard a transaction that has no tax effect, or reclassify a transaction whose form does not reflect its substance
• Allocate income or expenses between related persons or persons under common control as necessary to reflect the income that would
have resulted from a transaction between independent persons
According to the Saudi tax law, companies are considered related if 50% or more are owned or controlled by the same interest. In respect
of capital companies, control is defined as ownership of the voting power, or value in the company, held directly or indirectly through one
or more subsidiary of any type of company.
Withholding tax
Generally, the withholding tax (WHT) rates range from 5% to 20% for transactions between unrelated parties. Transactions between
related parties are subject to 15% WHT.
Thin capitalization rules
The Saudi tax law does not contain any specific provision on thin capitalization. Further, the DZIT generally does not challenge the capital
adequacy of a company. The level of capital for each entity is determined by the Saudi Arabian General Investment Authority (SAGIA)
and the Ministry of Commerce and Industry (MOCI) based on the nature of the underlying project or the company’s activity.
However, in accordance with the Saudi Arabian tax law, the deductibility of interest expense is capped as follows:
The lower of the interest charged for the year and income from loan fees (interest income) plus 50% of (A–B).
Where, A and B are defined as:
A: Income subject to tax less income from loan fee (interest income)
B: Expenses allowable for tax purposes less loan fee (interest expense)
Interest (or loan fees) in excess of the deductibility limit set out above is a permanent disallowance under the tax law and its by-laws.
Banks are excluded from the application of the above regulations. Further, interest payment by branch to head-office is not allowed as a
deduction in the branch’s tax declaration.
Relevant regulations and rulings
No transfer pricing regulations or rulings have been issued in Saudi Arabia by the DZIT.
OECD Guidelines treatment
The OECD Guidelines are not binding on the Saudi Arabian tax authority, but the DZIT does expect that transactions between related
parties are in accordance with the arm’s length principle as set out in the OECD Guidelines.
Priorities/pricing methods
No specific transfer pricing methods have been prescribed in the tax law, and as such there is no hierarchy or priority over which transfer
pricing methods should be applied. If a taxpayer in Saudi Arabia adopts and properly implements a global transfer pricing policy that is
based on the commonly accepted transfer pricing methods set out in the OECD Guidelines, then the DZIT should accept the methodology
that has been applied.
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