Transfer Pricing in GCC: Key Challenges and Developments

Transfer Pricing (TP) has become a crucial aspect of financial management for businesses operating in the GCC region, which includes countries like the UAE, KSA, Qatar, Oman, Bahrain, and Kuwait. 

The UAE's Federal Tax Authority now mandates that businesses with revenues exceeding AED 200 million, or those part of multinational groups with consolidated revenues over AED 3.15 billion, must prepare comprehensive TP documentation.

For businesses engaged in intercompany transactions, understanding and complying with these regulations is essential to avoid hefty penalties and ensure smooth operations.

This blog provides a comprehensive overview of the existing TP regulations in GCC member states, recent developments in the UAE and KSA, and the financial impacts of non-compliance.

Key Takeaways

• Stricter TP Regulations in GCC: Countries like the UAE, KSA, and Qatar have tightened transfer pricing rules to prevent tax base erosion and profit shifting, with documentation requirements like Master Files, Local Files, and Country-by-Country Reporting (CbCR).
• KSA’s Expanded Scope: From January 2024, Zakat payers are included under KSA’s TP regulations, applying to transactions between related parties and Permanent Establishments (PEs).
• Phased TP Documentation in KSA: KSA introduces phased documentation for Zakat payers, with compliance becoming mandatory for transactions over SAR 48 million from FY 2027.
• Financial Impact & Compliance: TP adjustments affect VAT and customs duties, potentially increasing VAT liabilities and customs costs. Non-compliance can result in severe penalties, including fines and tax adjustments.

What are the Transfer Pricing (TP) Regulations in the GCC Region?

The tax dynamics across GCC countries have changed significantly, leading to increased focus on Transfer Pricing (TP), especially since most of the region has joined the Base Erosion and Profit Shifting (BEPS) framework.

Here are the Transfer Pricing regulations for each GCC region

1. United Arab Emirates (UAE)

• Country-by-Country Reporting (CbCR): Since 2019
• TP Regulations: Effective from June 1, 2023.
• Expert Services: Assistance with Corporate Tax, Transfer Pricing, and International Tax.

2. Saudi Arabia (KSA)

• Country-by-Country Reporting (CbCR): Since 2018
• Applicability: TP regulations apply to all juridical persons, including mixed companies.
• Documentation: Local File, Master File, controlled transaction disclosure form, and general documentation required.
• Tax Return: TP disclosure must be included.
• Advanced Ruling: Permissible.
• Penalties: Non-compliance penalties apply as per the IT Law.

3. Qatar

• Country-by-Country Reporting (CbCR): Since 2018
• Applicability: Applies to transactions between Qatar resident entities and foreign entities in preferential tax regimes or cooperative/non-cooperative countries.
• Pricing Methods: Preferably, the use of the Comparable Uncontrolled Price (CUP) method, but OECD methods are also allowed.
• Documentation: Local and Master files required.
• Tax Return: TP declaration must accompany the annual tax return.
• Advanced Ruling: Permissible.
• Penalties: Non-compliance penalties apply as per the IT Law

4. Oman

• Country-by-Country Reporting (CbCR): Since 2020
• Applicability: No specific TP regulations, but related party transactions are monitored through IT Law measures.
• Pricing Methods: OECD guidelines recommended.
• Documentation: Recommended but not mandatory. Documentation must be available upon request.
• Advanced Ruling: Permissible.
• Penalties: Imposed for non-compliance.

5. Bahrain

• Country-by-Country Reporting (CbCR): Since 2021
• Applicability: No specific TP regulations in place.
• Pricing Methods, Documentation, Ruling, Penalties: Not applicable due to the absence of a formal TP regime.

6. Kuwait

• Country-by-Country Reporting (CbCR): Not applicable (Kuwait has not joined BEPS).
• Applicability: TP regulations apply to transactions between domestic and foreign entities at arm’s length.
• Documentation: Requires documentation for contracts and declared costs/expenses with related parties.
• Advanced Ruling: Not applicable.
• Penalties: Not applicable unless a tax treaty applies.

The UAE's adoption of Transfer Pricing regulations in 2023 marked a shift in the region's tax compliance system. To understand how businesses must adapt to these changes, let’s see the specific documentation framework that the UAE has implemented.

What are the Transfer Pricing Documentation Requirements in the UAE?

The UAE follows a structured, three-layered approach to Transfer Pricing (TP) documentation, aligning with the framework set by the OECD. These stricter documentation rules have been enforced since June 2023.

The UAE requires three key documents, though not all apply to every company:

CbCR (Country-by-Country Report)

Provides a summary of income, tax, and operations in all countries.

Required when the group revenue is above AED 3.15 billion

In addition to these files, every business engaging in related party dealings must file a Disclosure Form along with its tax return, subject to the fulfillment of the threshold

1. Master File: The Master File provides a full picture of the global group and must be updated annually, even though it is only submitted upon request. It must include:

• Group structure, covering both legal and operational aspects
• The group's key business activities and overall strategy
• Information about intercompany transactions
• Consolidated financials and the pricing methods applied

2. Local File: The Local File is more detailed, focusing specifically on transactions between the UAE entity and related parties. This file must demonstrate:

• The entity’s management structure and its competitors
• A description of each related transaction
• Contracts or agreements between the transacting parties
• Financial details, along with the proof of the pricing method used

3. Country-by-Country Report (CbCR): This report is mandatory only for businesses with global revenue exceeding AED 3.15 billion. The CbCR must be submitted yearly within 12 months of the group’s fiscal year-end. It must include:

• Revenue, profits, taxes, assets, and the number of employees per country
• A list of all group companies and their corresponding activities

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Beyond preparing the required documentation, the choice of transfer pricing method directly impacts how these documents are prepared and what evidence must be maintained to demonstrate compliance.

What Are the Approved Transfer Pricing Methods in the UAE?

The Federal Tax Authority (FTA) mandates businesses to maintain detailed documentation that supports the pricing methodology used, so that it reflects the actual business operations. The UAE recognizes 5 primary pricing methods for intercompany transactions:

1. CUP Method (Comparable Uncontrolled Price): Ideal for comparing prices of commodities or products sold in open markets.
2. Resale Price Method: Typically used by distributors, this method focuses on the resale margin after deducting the cost of goods sold.
3. Cost Plus Method: Suitable for manufacturing businesses, requiring a precise breakdown of direct and indirect costs.
4. TNMM (Transactional Net Margin Method): The most widely used method, demanding robust benchmarking studies to determine appropriate margins.
5. Profit Split Method: Best suited for integrated operations, though it is complex and data-intensive, often requiring detailed financial analysis.

While the UAE has established its framework, neighboring Saudi Arabia has been refining its approach with notable sophistication. The Kingdom's recent regulatory updates reflect a pricing that balances compliance rigor with taxpayer certainty.

KSA Transfer Pricing Updates and Key Developments

In June 2024, the Kingdom of Saudi Arabia (KSA) released the 3rd edition of its Transfer Pricing (TP) Guidelines, issued by the Zakat, Tax, and Customs Authority (ZATCA). These updates introduce changes, including an expanded scope of applicability and the introduction of a formal Advance Pricing Agreement (APA) program. 

Below is an analysis of the key KSA Transfer Pricing updates: 

1. Expanded Scope of Applicability

The updated TP provisions extend the regulations to a broader range of entities and transactions:

• Zakat Payers Included: Starting from fiscal years beginning on or after January 1, 2024, TP provisions are extended to Zakat-paying entities. This includes anyone considered a taxpayer under the Income Tax system, Zakat Regulations, or both.
• Transactions Covered: TP regulations apply to all taxpayers, including Permanent Establishments (PEs). The provisions cover transactions between related parties or entities under common control (defined as ≥50% ownership) or effective control (via governance, funding, or business). Both international and domestic transactions are now included.

2. Advance Pricing Agreements (APAs)

A major development is the introduction of a formal APA program, which is aimed at increasing tax certainty and reducing disputes:

• APA Program Launch: ZATCA has launched an APA program for both taxpayers and Zakat payers for financial years beginning on or after January 1, 2024. A new section detailing APAs has been added to the guidelines.
• Eligibility and Duration: APAs are available for transactions valued at no less than SAR 100 million. Once approved, an APA is effective for 3 financial years, during which the agreed-upon TP policy cannot be challenged by the tax authority.
• Application Requirements: Multinational groups must submit their applications at least 12 months before the start of the relevant financial year. The application must include information on the group structure, transaction descriptions, financial statements, functional analyses, and competitor studies.

3. Arm's Length Principle (ALP) for Financial Transactions

Saudi Arabia’s Transfer Pricing framework guidelines also provide detailed guidance on applying the Arm’s Length Principle (ALP) to financial transactions.

• Debt vs. Equity Characterization: The guidelines emphasize the need to properly define whether transactions should be classified as loans or equity. This distinction determines the treatment of the transaction under Saudi tax regulations.
• Debt Capacity Analysis: A debt-to-equity ratio analysis is required to assess whether the company can bear the proposed debt, as third-party lenders may not lend excessive amounts. This is important for Zakat payers, as it impacts the Zakat Base when a transaction is reclassified from a loan to a capital contribution.
• ALP Factors: To comply with the ALP for loan agreements, taxpayers are required to analyze several factors, including:
  
  • Contractual terms of the transaction.
  • Functional analysis (tasks performed, assets used, risks assumed).
  • Characteristics of the financial instruments involved.
  • Economic conditions and the company’s business strategy.
• Intangibles: The guidelines also require businesses to assess transactions involving intangible assets to determine which party within the multinational group benefits from the returns generated by those assets.

These policy shifts have direct implications for how businesses structure their compliance processes. The documentation expectations have evolved, particularly for entities subject to Zakat, requiring careful attention to new thresholds and timelines.

What Are the Revised Documentation and Reporting Requirements for KSA Transfer Pricing?

The updated KSA Transfer Pricing guidelines introduce new documentation obligations, with a phased approach, particularly for Zakat payers. Here’s a breakdown of the key changes:

• Mandatory Documentation Threshold: Taxpayers must maintain Master and Local Files if their related-party transactions exceed SAR 6 million annually. Exemptions apply to small businesses and natural persons.
• Affidavit Requirement: In addition to the Disclosure Form, which must be filed with the annual income tax/Zakat declaration, taxpayers must submit an Affidavit (Chartered Accountant Certificate). This certificate must confirm that the multinational enterprise (MNE) group’s TP policy is consistently applied to the taxpayer in KSA.

Zakat Payer Phased Documentation Requirements

Below is a summary of the implementation phases, detailing the compliance thresholds and the point at which documentation becomes mandatory.

Exemptions:

• Wholly state-owned companies are exempt from Zakat, and investment funds are not required to comply with specific documentation requirements.
• Group companies filing a consolidated Zakat return are exempt from TP reporting for internal transactions involving entities where they hold less than 100% ownership.

Meeting documentation requirements represents just one of the compliance equations. The real complexity arises when transfer pricing interacts with other tax regimes, creating potential misalignments that can expose businesses to unexpected liabilities or audit scrutiny.

What are the Financial Impacts and Compliance Challenges for Businesses Operating in the GCC

Managing transfer pricing, VAT, and customs duties simultaneously presents a unique challenge for businesses operating in the GCC. The adjustment in transfer pricing affects VAT and customs duties, so maintaining consistency is crucial across all tax filings.

For Instance, the introduction of Value Added Tax (VAT) in the UAE, KSA, Oman, and Bahrain complicated this landscape. Many businesses were caught off guard by VAT, and the rapid implementation timelines left companies scrambling to comply with the new tax regime.

1. Transfer Pricing Adjustments and VAT

• Upward adjustments to transaction values may result in additional VAT liabilities.
• Downward adjustments could lead to VAT credits, potentially affecting previously declared amounts.

2. Impact on Customs Duties

• Increases in transaction values may result in higher customs duties.
• Decreases in transaction values can reduce customs liabilities.
• Accurate documentation is essential to justify these adjustments and ensure consistency in filings.

3. Compliance with the Arm's Length Principle

• Companies must prove their transactions comply with the arm’s length principle, ensuring they reflect what independent parties would agree upon in similar circumstances.
• Non-compliance, inadequate documentation, misstatements, and late filings can result in severe fines.

4. Enforcement of Compliance

• GCC states, such as the UAE, have strong legal frameworks and are enhancing audit capabilities, particularly in high-risk sectors and among large taxpayers.
• Timely and accurate documentation is crucial to minimize risks and avoid hefty fines.

5. Importance of Synchronized Records

• Businesses must ensure that changes in transfer pricing are accurately reflected in VAT and customs records.
• Real-time updates in financial records are necessary to effectively navigate the interlinked tax frameworks and avoid scrutiny by tax authorities.

Also Read: Financial Optimization Strategies for Business Success

Addressing these challenges requires specialized expertise and a deep understanding of the region's evolving regulatory environment. Businesses looking to manage these complexities often benefit from partnering with advisors who can provide solutions across tax, accounting, and compliance functions.

How VJM Global Can Support Your Business with International Consulting Needs

In the transfer pricing regulations across the GCC, businesses require a trusted partner to simplify the complexities and provide compliance. VJM Global, a leading firm specializing in tax, accounting, and business consulting services, offers solutions to meet the unique needs of companies operating in the region.

Key Services Offered by VJM Global

• Accounting & Bookkeeping Outsourcing: Outsourced solutions for managing financial records, balance sheets, and income statements.
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• Business Setup & Regulatory Compliance: Support for company registration, obtaining licenses, and compliance with local laws, especially for foreign businesses.
• Corporate & Investment Advisory: Consulting on corporate governance, investment strategies, and business restructuring to optimize operations and manage risks.
• GST Tax Advisory: Guidance on GST and indirect tax compliance, helping businesses navigate complex tax regimes across different countries.

Conclusion

Transfer Pricing (TP) regulations across the GCC region have become increasingly complex, with significant developments in countries like the UAE, KSA, Qatar, Oman, and Bahrain. 

As businesses comply with these regulations, it is essential to understand the documentation requirements, such as the Master File, Local File, and CbCR, along with the financial implications and compliance challenges that arise from managing transfer pricing in conjunction with VAT and customs duties. 

Companies must adopt proactive measures, ensuring compliance with the arm’s length principle to avoid severe penalties and optimize their tax positions.

As the regulatory landscape becomes more stringent, partnering with experts like VJM Global can provide invaluable support. Their services, including accounting outsourcing, international tax planning, audit support, and business setup, are tailored to help businesses effectively navigate these complexities. 

Get in touch today to stay compliant!

FAQs

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1. What do you mean by transfer pricing?

Transfer pricing refers to the pricing of goods, services, or intellectual property exchanged between related entities within a multinational company. It ensures that transactions between these entities reflect market-based pricing.

2. What are the objectives of transfer pricing?

The primary objectives of transfer pricing are to allocate profits fairly across different jurisdictions, ensure compliance with tax laws, and prevent tax avoidance by applying the arm's length principle.

3. How can transfer pricing be avoided?

Transfer pricing itself cannot be avoided, but businesses can minimize risks by adhering to local regulations, maintaining accurate documentation, and using appropriate pricing methods.

4. What are the advantages and disadvantages of transfer pricing?

Advantages include tax optimization and profitability allocation. Disadvantages include the complexity of compliance, potential penalties for non-compliance, and the administrative burden of documentation.

5. What are the risks of transfer pricing?

The risks include tax audits, penalties for non-compliance, reputational damage, and financial adjustments if tax authorities find discrepancies in the pricing or documentation.

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