Transfer Pricing Essentials for Saudi Arabia Subsidiaries

The transfer pricing regime in Saudi Arabia now applies to both tax and zakat payers. ZATCA requires disclosure forms, Master and Local Files, and compliance with arm’s length standards.

Saudi Arabia’s transfer pricing rules derive from the Transfer Pricing Bylaws and Guidelines. The Zakat, Tax and Customs Authority (ZATCA) now administers it based on the arm’s length principle. Arm’s length principle means that transactions between related parties should be as if conducted under open-market conditions.

The 2023 amendment has brought further changes to Saudi regulation. For fiscal years beginning on or after January 1, 2024, transfer pricing rules extend to zakat payers, not just income-tax payers. Now even mixed-ownership and wholly Saudi-owned firms that engage in controlled transactions are under its purview.

ZATCA’s third edition of its Transfer Pricing Guidelines in June 2024 introduced:

• Separate sections on Advance Pricing Agreements (APAs);
• Guidance on transaction adjustments in accounting records; and
• Clarification of documents for entities filing single zakat returns.

Which entities and transactions are covered

Transfer pricing obligations apply to all entities subject to the Income Tax Law or the Zakat Regulations. They extend to both cross-border and domestic controlled transactions.

“Controlled transactions” also extends to relationships where one entity directly or indirectly owns 50 percent or more of another, or exercises control through financial, governance, or operational arrangements.

Thresholds and phased implementation

ZATCA has gone for a phased implementation for zakat payers:

• Phase 1 (2024-2026):
  Firms with related-party transactions below SAR 48 million (US$12.7 million) are exempt from preparing a Master File and Local File. Those with transactions above SAR 100 million (US$26.6 million) must maintain both.
• Phase 2 (from 2027 onward):
  It reduced the exemption threshold to SAR 48 million.

But regardless of transaction value, all zakat payers should file a Transfer Pricing Disclosure Form (CTDF) and obtain an auditor’s affidavit. It needs to be done as a baseline reporting standard across the system.

Transfer pricing methods

Saudi Arabia recognizes all five Organization for Economic Co-operation and Development (OECD)-endorsed methods:

• Comparable Uncontrolled Price (CUP) method;
• Cost Plus method;
• Resale Price method;
• Transactional Net Margin Method (TNMM); and
• Profit Split method.

Read more about them here: Accepted Transfer Pricing Methods in the UAE

ZATCA does not impose a strict hierarchy among these methods. Taxpayers can select the most appropriate method based on circumstances of each transaction, and availability and comparability of data.

When standard methods fail to produce reliable results, companies may apply alternative approaches, but they should justify their use through proper documents.

Comparability and adjustments

Comparability adjustments are essential part of transfer pricing analysis. They should be done to account for differences in risk, scale, market conditions, or asset intensity. ZATCA has the right to challenge a taxpayer’s analysis if they fail to show appropriate comparable selection or adjustment methods.

There are special considerations that apply to intangible assets. For intangible assets, economic ownership takes precedence over legal title, which means transfer pricing outcomes must reflect control over development, enhancement, maintenance, protection, and exploitation (DEMPE) functions. Financial transactions and intra-group services follow OECD guidance where domestic rules are silent.

Documentation and filing obligations

Controlled transaction disclosure form (CTDF)

The CTDF is filed alongside annual income tax or zakat returns, and it is due within 120 days of fiscal year-end. It summarizes all related-party transactions and must be accompanied by a licensed auditor’s affidavit certifying that transfer pricing policies are applied consistently.

Master File

Master File requirements apply to taxpayers with related party transactions exceeding SAR 6 million (US$1.5 million) annually. It contains group-level details of global structure, supply chains, and transfer pricing policies. The file must be available to ZATCA within 30 days of request, and requests can be made as early as 120 days after fiscal year-end[SS1] .

Local File

The Local File provides transaction-level detail and functional analysis for each controlled transaction. It must explain the chosen method, comparability study, and have supporting economic evidence to show that firm complied with arm’s length principle.

Country-by-Country reporting (CbCR)

Multinational groups with consolidated revenues above SAR 3.2 billion (US$853.2 million) must file a CbCR within 12 months of fiscal year-end as per OECD BEPS Action 13. The report should disclose revenue, profit, and tax allocation across jurisdictions[SS2] .

Record retention

Retention rules require that taxpayers must retain supporting documents and analysis for submission at the time of CTDF filing. ZATCA stresses on having contemporaneous documents, which means policies and pricing analyses should be prepared before or at the time of transaction, not retroactively.

Audit risks and penalties

ZATA conducts risk-based audits, which means high risk industries like oil, gas and petrochemicals, financial services, technology and intellectual property (IP), pharmaceuticals and life sciences, construction and manufacturing, face higher scrutiny.

Saudi Arabia lacks specific transfer pricing penalties, but general tax law provisions apply on non-compliance situations. Penalties for misrepresentation could reach 25 percent of tax sought to be evaded and include additional delay fines of 1 percent per month on unpaid or underpaid amounts. Tax audit adjustments carry monthly penalties of 1 percent on adjustment amounts.[SS3]

ZATCA can enforce its order by reallocating or disregarding non-arm’s length transaction results, and thus, potentially increasing taxable income by a lot. ZATCA also conducts joint audits with Saudi Customs to ensure declared import values match transfer pricing policies. If discrepancies are found between customs declarations and reported transfer prices, it often invites larger and stricter audits on the firms.

Advance pricing agreement mechanism

Saudi Arabia introduced its first Advance Pricing Agreement (APA) framework in 2025, and created an option for tax certainty that did not previously exist. The program offers binding agreements between ZATCA and qualifying taxpayers on transfer pricing methodologies for controlled transactions.

To qualify, applicants must have annual related-party transactions of at least SAR 100 million, so it is mostly relevant for large multinationals and capital-intensive sectors.

Application process

The APA process begins with a mandatory pre-filing meeting, wherein companies clarify their procedural issues and confirm their eligibility. Then formal submissions occur at least 12 months before the first financial year covered. They need following documents[SS4] :

• Corporate structure details and ownership charts;
• Intercompany transactions and pricing models;
• Functional and comparability analyses; and
• Supporting financial data.

Once approved, an APA provides a three-year binding term during which ZATCA cannot challenge agreed method, if the taxpayer meets all conditions and assumptions.

Afterwards, holders of APAs must file Annual Compliance Reports (ACR) to show they are sticking to the terms and applying the approved method. ACR can help protect your firm against unnecessary audit exposure.

What does it mean for your company’s day-to-day functioning

Saudi subsidiaries are now expected to adopt a governance-driven approach to transfer pricing. They should work towards establishing an effective governance system in their company by:

• Defining clear roles and accountability across tax, finance, and operations teams;
• Conducting periodic reviews to update methods as business models evolve; and
• Implementing all document procedures that integrate Master File, Local File, CbCR and disclosure reporting.

Companies cannot function in silos anymore, because preparing these documents will require cross-department collaboration. The financial data should be reconciled with statutory records, intercompany agreements, and management reporting, because ZATCA essentially wants consistency of figures across these sources and treats discrepancies as red flags during audits.

One can also integrate transfer pricing into finance and budgeting systems to ensure that transfer pricing policies are actually implemented and not only recorded for compliance purposes. Companies can invest in a professional audit and finance firm to get the best of their expertise and technology, and avoid grey zones of transfer pricing.

(US$1 = SAR 3.75)

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