International tax dynamics have significantly changed in the last decade due to economic challenges and financial crisis. Topic of Transfer Pricing (TP) has obtained a significant momentum over past few years especially after introduction of Base Erosion and Profit Shifting (BEPS) framework by Organisation of Co-Operation and Development (OECD).
Transfer pricing is a term used to describe intra-group pricing arrangements amongst multinational corporations. While over a 100 developed and developing countries have introduced formal Transfer Pricing Regulation, few other countries are in the process to roll out the regime. In fact, many countries that do not have formal Transfer Pricing Regulation yet, have at least issued arm’s length principle in their domestic tax legislation, which requires to demonstrate fair market value between related party dealings.
As on February 2021,139 countries have joined OECD’s BEPS Inclusive Framework and thereby, committed to implement at least 4 minimum standard Action Plans. Gulf Cooperation Council (GCC) countries which include Kingdom of Saudi Arabia (KSA), United Arab Emirates (UAE), Sultanate of Oman (Oman), Qatar, Kingdom of Bahrain (Bahrain), State of Kuwait (Kuwait) have also taken into consideration these global developments. At present, except Kuwait, all GCC countries have signed BEPS Framework and thereby, committed to implement minimum standards to implement tax transparency measures.
We have summarised below Transfer Pricing requirement and implementation of BEPS Inclusive Framework in GCC countries:
Name of country
BEPS Inclusive Framework Signatory?
TP/ Related Party Disclosure Form
Yes (as part of tax return)
Kingdom of Saudi Arabia - Being a G20 member, KSA was the first GCC country to formally introduce full-fledged TP Regulation in 2018 and taxpayers are in a process to undertake their 3rd TP compliance in April 2021. While arm’s length principle existed in domestic tax legislation since 2005, detailed regulation and guidelines was only introduced in 2018. KSA has adopted 3-Tier documentation approach and also requires domestic related party transaction (in addition to cross-border transactions) to be at arm’s length. Moreover, it also requires the taxpayers to make disclosures (In Form No. CTDF) relating to related party transactions along with Transfer Pricing methodology adopted to benchmark the transactions along with tax return. It is learnt that Tax Authority (GAZT) in KSA is quite aggressive in scrutinizing the Transfer Pricing cases and taxpayers who have not maintained appropriate documentation are facing difficult situations.
Qatar - Similarly, Qatar too introduced full-fledged 3-Tier TP legislation recently and awaiting first compliance from its taxpayers in April 2021 (extended up to 30th June 2021). Qatar tax authority has also released their online tax portal ‘Dhareeba’ where taxpayers are required to submit Transfer Pricing Form as well as tax return. We are experiencing that lot many taxpayers in Qatar have not yet prepared to comply with Transfer Pricing regulation and they may face challenges ahead if they don’t take action immediately.
United Arab Emirates, Sultanate of Oman and Kingdom of Bahrain - At present, UAE, Oman and Bahrain have introduced only CbC Reporting in their country. While we are expecting that Oman may soon introduce formal TP Regulation soon, its domestic tax regulation requires transactions between relation parties in consistent with arm’s length principles. In our experience, related party transaction is one of the most prone area in tax scrutiny and strict approach is adopted for evaluating arm's length principle. Moreover, scrutiny is quite detailed in the case of related party transactions with a non-tax region (like UAE).
UAE and Bahrain may need to introduce TP Regulation once they commence corporate tax regime in a country. Meantime, both UAE and Bahrain, on account of their commitment as a member of OECD BEPS Inclusive Framework, have introduced Economic Substance Regulation (ESR) to ensure that entities in their country report actual profits that are commensurate with the economic activity. This footstep of introducing CbCR and ESR articulates the intention of both countries to increase tax transparency within country and therefore, time is not far when they may announce Transfer Pricing regulation in country. Most multinational groups who have incorporated entity in UAE mainly from tax efficient structure perspective have pro-actively commenced their analysis to revisit their operations to mitigate their transfer pricing risk. Meantime, taxpayers are recommended to prepare TP documentation to substantiate their intra-group transactions at arm’s length.
State of Kuwait - Lastly, while Kuwait is not yet a signatory to BEPS Inclusive Framework, it has signed multilateral convention to implement tax treaty related measures. Moreover, Kuwait already has corporate tax regime in a country and therefore, we expect Kuwait to soon initiate implementing Transfer Pricing legislation in a country.
Traditionally, GCC region was recognised as a tax haven or popular region to especially structure business model to reduce overall tax expense. Surprisingly, in last decade, GCC region has shown significant progress on tax front. In fact, most of these countries have achieved a milestone in successfully implementing Value Added Tax, Corporate Tax, Withholding Tax, Transfer Pricing, signatory to exchange tax related information, implementing double tax avoidance agreement, introducing FATCA and CRS information, etc.
It is recommended that a GCC headquartered entity having presence in other region or foreign (non-GCC) headquarter entity having presence in GCC should formulate transfer pricing policy regardless of whether the specific country has introduced formal Transfer Pricing legislations. Local entity of MNCs need to showcase valid justifications for intra-group transactions in their respective country by maintaining appropriate documentation.
Moreover, exchange of CbC Report information amongst countries have already commenced and it will be interesting to witness as to how these information would be analysed to undertake transfer pricing risk assessment of multinational group.
Additionally, while few other Regulation like Value Added Tax, customs or corporate tax require related party transaction to be at fair market value, these regulations don’t prescribe detailed guidance/methodology and therefore, one need to leverage on Transfer Pricing principles while justifying related party transactions.
In a nutshell, multinationals are advised to relook their existing Transfer Pricing policy for intra-group transactions, make immediate corrective actions (if required) to mitigate the potential risk and maintain robust documentation to showcase their arm’s length principles. Pro-activeness in maintaining documentation is a key to avoid challenges in the future.