What is Transfer Pricing?
Transfer pricing is the practice of setting prices for goods, services, or intangible assets exchanged between related entities within the same group. To avoid profit shifting, tax authorities require that transfer prices be set at arm’s length, that is, comparable to prices that would be agreed between unrelated parties.
How It Works
- Identify all related-party transactions: tangible goods, services, financing, intangibles, cost-sharing arrangements.
- Select the most appropriate transfer pricing method (CUP, resale price, cost plus, TNMM, profit split).
- Apply the chosen method to set or test the prices using benchmarking studies.
- Prepare contemporaneous documentation: local file, master file, and country-by-country report where applicable.
Saudi Context
ZATCA enforces transfer pricing under bylaws that align with OECD guidelines. Saudi taxpayers with related-party transactions above defined thresholds must prepare a local file and disclose transactions in the annual income tax return. Penalties for non-compliance include fines and adjustments to taxable income.
Example
A Saudi subsidiary buys software services from its UAE parent for SAR 2 million per year. To meet ZATCA requirements, the company benchmarks the cost-plus margin against independent providers and documents the result in its local file.