Viewpoint : Wadih AbouNasr

With the recent introduction of transfer pricing (TP) regulations, Saudi Arabia edges closer to the alignment with global taxation trends. As of February 15, 2019, the General Authority of Zakat and Tax (GAZT), issued the final approved TP By-laws. The by-laws are based on the OECD model and are an integral part of the base erosion and profit sharing initiative first announced by the G20 in 2015. The approval of the TP By-laws comes only a year after the introduction of value-added tax (VAT) on January 1, 2018, which represented one of the key fiscal measures to help diversify sources of income away from the hydrocarbons industry. Furthermore, the signing of the multilateral instrument agreement paves the way for the start of an exchange of information with other tax authorities. This designates the Kingdom as one of the leaders in the GCC region in introducing measures on transparency and compliance, helping to fight tax evasion using offshore accounts.

The newly introduced TP By-laws will align the Kingdom with the global economy but will also allow the GAZT to have a better understanding of inter-company transactions and how such transactions may impact the taxable base of such an entity or their branches in Saudi Arabia. This measure will allow for a potential increase in tax revenues without introducing new taxes, by making sure that cross-border and related party transactions are executed at fair market value and that the value creation in the Kingdom is taxable in accordance with the applicable tax rates of the country. Furthermore, the GAZT will have access to the country-by-country reporting (CbCR) of certain entities operating in the Kingdom, especially when they are part of a significant multinational group. CbCR will allow the GAZT to assess their global tax footprint in relation to their taxable income locally. Similarly, Saudi-based entities need to ensure such information is available to the tax authorities who signed the bilateral agreement on CbCR.

The signing of the Foreign Account Tax Compliance Act Intergovernmental Agreement (IGA) with the US, and more recently the signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters Agreement, which includes the Common Reporting Standard Multilateral Competent Authority Agreement, puts the Kingdom at the forefront in the GCC region in fighting tax evasion and the use of offshore investment vehicles. Saudi Arabia has signed reciprocal agreements to provide 62 countries with detailed account information, including balances and numbers; and income, which includes interest, dividends, proceeds and other types of income of foreign tax residents with bank accounts in Saudi Arabia. It will receive information on Saudi tax residents with foreign accounts from 86 countries. Under the IGA, similar information is reported to the Internal Revenue Service on accounts relating to US citizens with accounts in the Kingdom.

The GAZT has developed a modern system of dealing with taxpayers, signalling certainty and transparency. In 2018 the Ministry of Finance introduced the Dispute Resolution Committee to assist in quick settlements of tax disputes, following the establishment of the twolevel appeal committee system. Regular publication of guides on VAT, tax and zakat – which is payment under Islamic law used for charitable or religious purposes – and other taxes by the industry sector and profession signal the GAZT’s intention to be client-centric.

Saudi Arabia has long been the engine of growth of the GCC and MENA region. The 2019 budget represents the largest budget to date, amounting to expenditures of SR1.1bn ($293.3m) to stimulate growth. With the national transformation and realisation of Vision 2030, the country must find alternative sources of income and adopt measures to attract foreign investors and ease doing business for both local and foreign investors, as well as introduce measures to make the tax system transparent, stable, certain and fair. With recent developments, Saudi Arabia is more aligned than ever with the worldwide trends in taxation, signalling that it is serious about its tax measures and open for business.