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Saudi Arabia has been one of the most active countries in the Middle East in terms of digital transformation of its tax administration and recently introduced new e-invoicing in Saudi Arabia requirements for VAT purposes. Starting December 4, 2021, any business that is engaged in business in Saudi Arabia is required to submit their tax invoices in electronic form to the Zakat, Tax and Customs Authority (ZATCA). This change towards E-Invoicing and Transfer Pricing in KSA is a step within the process of increasing the transparency and effectiveness of the tax reporting. Electronic invoices are new to the business world since it requires compliance with certain rules concerning the format of the invoice, the use of QR codes, and language.
The businesses are more concerned about the compliance of their functions with the e-invoicing in Riyadh framework and at the same time they should be more careful about other taxes, specifically the Transfer Pricing in KSA. Transfer pricing means the pricing of intercompany transactions between related companies and it is done at arm’s length. Transfer Pricing in Saudi Arabia is done in accordance with the arm’s length principle which means that the prices of the transactions between related parties should be the same as those between unrelated parties. There is a synergy between e-invoicing and Transfer Pricing because both are regulatory that require full compliance to their provisions in the business world.
This article will try to explain the relationship between e-invoicing and transfer pricing in Saudi Arabia as well as how to manage the rules well. We will examine the problems that may occur when both frameworks are applied simultaneously and for international operations and intercompany relations. Also, we will discuss the consequences of noncompliance and provide recommendations to help businesses keep e-invoicing KSA in line with Transfer Pricing rules in KSA so that their operations are fully compliant with Saudi Arabia tax laws.
E-invoicing or the submission of invoices electronically was made compulsory in Saudi Arabia from the 4th of December in the year 2021. This was aimed at improving on the efficiency of VAT collection, enhance compliance and increase the level of compliance in the Kingdom. The expansion of e-invoicing in Saudi Arabia is an essential component of KSA’s vision to transform and go digital in the kingdom’s taxation system.
The Zakat, Tax and Customs Authority or ZATCA has provided a number of guidelines for business to adhere to in regards to the e-invoicing framework. The e-invoicing KSA rules mandate that businesses send invoices to their customers electronically for all taxable supplies of goods and services and to upload them to ZATCA’s portal.
Invoicing Format: This also means that all invoices have to be in electronic form and in a format that is easily readable by ZATCA’s system and this includes XML or JSON.
QR Codes: QR code for the invoice will be mandatory and will enable the customer as well as the tax authorities to authenticate the invoice. The QR code that appears below acts as an electronic seal for each transaction.
Arabic Language: The invoices should be in Arabic, or the text should be translated into Arabic when submitting to ZATCA.
Tax Invoices for VAT: E-invoices must reveal the VAT amount charged on every taxable supply alongside the standard rate of 15% or the zero-rated VAT that applies to certain goods and services.
Transfer Pricing in Saudi Arabia is regulated by ZATCA and complies with the global standards, among which the OECD Transfer Pricing Guidelines. It is intended to make sure that related parties transactions (like between a parent and a subsidiary) are carried at the same price that would have been charged by unrelated parties. This is called the “arm’s length principle.”
In Saudi Arabia, the arm’s length principle requires that related parties involved in cross border transactions have to prove that the price charged for goods, services or intangible assets is reasonable and market value comparable to prices that would be agreed between unrelated parties.
Documentation Requirement: Companies are also obliged to prepare transfer pricing documentation which contain reports about the used pricing methods as well as about the measures taken to fulfill the arm’s length standard.
Reporting: These reports should be submitted to ZATCA and should contain details on intercompany transactions and pricing policies as well as any changes made to the prices of the transactions.
Penalties: If the arm’s length pricing rules are not complied with or if the documentation is inadequate there may be penalties and the taxable income may be adjusted.
E-invoicing in KSA becomes a challenge for businesses when it is integrated with Transfer Pricing rules since both are different tax compliance mechanisms. Here’s how they interact:
Arm’s Length Price and VAT Calculation:
Transfer Pricing Impact: Whenever an intercompany transaction occurs, it is mandatory that the price which one business charges to another is an arm’s length price. This means that the prices have to be realistic and standard, that is, related to market prices for tax purposes.
E-Invoicing Impact: Here, e-invoicing regulations demand that the VAT on the transaction should be computed in accordance with the total price of the taxable supply. The intercompany transaction price may not conform to the arm’s length standard; this will impact the VAT computation since incorrect VAT charges may be levied, thus, tax evasion or non–compliance may occur.
For instance, if the price at which a parent company sells its goods or services to its subsidiary in KSA is below the market price, that is at a price other than an arm’s length price, the VAT that is being charged on this transaction may not be a true representation of the value of the transaction, hence the differences between VAT payable and VAT recoverable.
Transfer Pricing Documentation: By adopting e-invoicing KSA, it has been realized that the electronic invoices must be in line with the transfer pricing documentation of the businesses. This means that the e-invoice should contain reference to the transfer pricing arrangements put in place in intercompany transactions.
Audit Trail: The Saudi Arabia e-invoicing solution as well as the transfer pricing rules entail that businesses should keep proper records. ZATCA may compare the VAT invoicing details with the documentation of the transfer pricing to ensure that the transactions are standard. This helps in making sure that e-invoicing cannot be used as a tool in management of the price in a way that will reduce VAT or transfer pricing adjustments.
Cross-Border Sales: Whenever a Saudi business undertakes a cross-border transaction with a related party, it has to meet the transfer pricing rules in a way that the prices charged in the transactions should be the same as those that would be charged under an arm’s length transaction. The e-invoicing system mandates that VAT is charged on such transactions, and any deviation from the right VAT rates in the intercompany cross-border transactions may be against the transfer pricing and VAT laws.
E-Invoicing and Cross-Border Compliance: Many internationals companies doing business in Saudi Arabia have to make sure that their e-invoices contain the arm’s length price and the right rate of VAT for each transaction.
Thus, as the regulations of e-invoicing KSA and Transfer Pricing in KSA are developed, it is critical to meet both frameworks. The key risks businesses face in this area include:
Non-compliance with E-Invoicing Requirements: Any failure to issue e-invoices correctly attracts penalties and more scrutiny from ZATCA.
Transfer Pricing Risks: When the intercompany transactions are not properly priced, it results adjustment and penalties.
Discrepancies between VAT and Transfer Pricing: Lack of proper synchronization between VAT and transfer pricing rules lead to the emergence of disparities between the overall taxable supplies and the actual amount of payments that are made, which in turn attract fines and adjustments by the ZATCA.
To ensure compliance with both e-invoicing in KSA and transfer pricing rules, businesses should:
Stay Informed: It is advisable to periodically check the news from ZATCA concerning e-invoicing and transfer pricing.
Seek Expert Guidance: Hire tax advisors or consultants who are conversant with both VAT and transfer pricing compliance to assist in these two areas.
Invest in Compliance Software: Use compliance software to bring together the e-invoicing KSA and transfer pricing documentation that must meet all legal requirements for tax invoices and pricing.
E-invoicing and transfer pricing are two important frameworks that organizations in Saudi Arabia need to understand well. However, e-invoicing makes the VAT invoicing process easier while at the same time coming into contact with the transfer pricing rules in KSA especially in cross border and intercompany deals. Companies need to be particular about the fact that the e-invoicing done in KSA is done in accordance with the VAT laws as well as the arm’s length principle concerning transfer pricing. Businesses should ensure that they are aware of these taxes and how they apply them in their operations in Saudi Arabia to avoid incurring penalties.
