Article 13 - Arm's Length Principle and Transfer Pricing Documentation Requirements

For the purposes of applying the provisions of Clause 10 of Paragraph A of Article 12 of these Regulations, a Constituent Entity located in the Kingdom shall make an adjustment to the amount recorded in its financial accounts in determining its Constituent Entity Income or Loss to ensure that an outcome of a transaction or an arrangement with another Constituent Entity located in a different jurisdiction which is a member of the same Multinational Enterprise Group is consistent with the Arm's Length Principle.

For the purpose of applying the Arm's Length Principle the most appropriate method shall be used in consideration of the facts and circumstances of a transaction or an arrangement and shall be one of the following methods, provided that the Arm's Length Principle and the method used shall be applied in a manner consistent with the Transfer Pricing Guidelines

1. Comparable uncontrolled price method according to which the price for property or services transferred between Constituent Entities of the same Multinational Enterprise Group shall be compared with the price charged for property and services transferred in the comparable uncontrolled transaction in comparable circumstances.

2. Resale price method according to which a price at which a product that has been purchased from another Constituent Entity of the same Multinational Enterprise Group is sold to an independent entity.

3. Cost plus method according to which a comparable cost-plus mark-up shall be added to appropriate direct and indirect costs incurred by the supplier of property or services in a transaction or an arrangement with other Constituent Entity of the same Multinational Enterprise Group.

4. Transactional net margin method according to which a comparable net profit margin relative to an appropriate base shall be added to the appropriate costs to price the one or more transactions or arrangements with other Constituent Entity.

5. Profit split method according to which a relevant profit was identified and split between Constituent Entities of the same Multinational Enterprise Group from one or more transactions or arrangements between them based on economically valid criteria.

For the purposes of applying the provisions of Paragraph A of this Article, where a bilateral or multilateral Advance Pricing Agreement has been agreed by the relevant competent authorities of the jurisdictions of the Constituent Entities, the adjustment to the Constituent Entity Income or Loss shall be applied consistently in accordance with the arm's length price agreed under the Advance Pricing Agreement.

Where Constituent Entities that are members of the same Multinational Enterprise Group are located in the Kingdom, any loss from a sale or transfer of an asset between them shall be adjusted based on the Arm's Length Principle for the purposes of determining the Constituent Entity Income or Loss of those Constituent Entities.

Constituent Entities located in the Kingdom which are party to a transaction or an arrangement with another Constituent Entity which is a member of the same Multinational Enterprise Group shall prepare and maintain a local file and a master file in the manner prescribed by the Bureau.

For the purposes of applying the provisions of Paragraph E of this Article, the local file shall include all of the following concerning a Constituent Entity located in the Kingdom:

1. A description of the Constituent Entity, business activities and its business strategy including an indication of whether the Constituent Entity has been involved in or affected by a business restructuring or intangible asset transfer in the Fiscal Year or immediately preceding Fiscal Year together with the explanation of those aspects of such transaction affecting the Constituent Entity.

2. A description of the management structure of the Constituent Entity, local organisation chart and a description of the natural persons to whom local management reports.

3. An identification of the relevant Constituent Entity's transaction or arrangement with other Constituent Entity which is a member of the same Multinational Enterprise Group together with a description of all identified transactions or arrangements including the context in which such transaction or arrangement take place.

4. An identification of other Constituent Entities involved in each of the identified transactions or arrangements and the relations among them.

5. A detailed comparability and functional analysis of the Constituent Entity and relevant other Constituent Entities with respect to each identified transaction or arrangement in accordance with Clause 3 of this Paragraph, including significant changes compared to prior years.

6. A list and description of selected internal or external comparable uncontrolled transactions or arrangements, if any, and information on relevant financial indicators for independent enterprises which has been relied on for the purposes of the transfer pricing analyses, including a description of the comparable search strategy and all the steps taken and the source of such information.

7. A description of any comparability adjustments performed, and an indication of whether any adjustments have been made to the results of the tested party, the comparable uncontrolled transactions or arrangements, or both.

8. A description of the transfer pricing policy in place.

9. An indication of the most appropriate transfer pricing method with regard to the identified transaction or arrangement together with a descriptive explanation of the reasons for selecting that method and, if applicable, an explanation of the tested party.

10. Copies of all material intercompany agreements concluded by the Constituent Entity.

11. Copies of existing unilateral, bilateral or multilateral Advance Pricing Agreements and other tax rulings to which the Kingdom is not party and which are related to identified transactions or arrangements.

12. Financial information of the Constituent Entity including the annual financial accounts for the Fiscal Year.

13. Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements.

For the purposes of applying the provisions of Paragraph E of this Article, the master file shall include all of the following:

1. An organisational structure illustrating the Multinational Enterprise Group's ownership structure and geographical location of operating entities.

2. A general description of the Multinational Enterprise Group's business or businesses which includes all of the following:

   1. Important drivers of business profit.

   2. A description of the supply chain for the Multinational Enterprise Group's five largest products or service offerings based on turnover and any other products or service offerings which account for at least 5% of the Multinational Enterprise Group's turnover.

   3. A list and description of important service arrangements between members of the Multinational Enterprise Group, except for research and development services.

   4. A description of the main geographic markets for the Multinational Enterprise Group's products and services identified under Subclause b of Clause 2 of this Paragraph.

   5. A functional analysis describing the principal contributions to value creation by individual Constituent Entities within the Multinational Enterprise Group.

   6. A description of important business restructuring transactions, acquisitions and disposals which occurred during the Fiscal Year.

3. A description of the Multinational Enterprise Group's overall strategy for the development, ownership and exploitation of intangibles, including the location of principal research and development facilities and location of research and development management.

4. A list of intangibles or groups of intangibles owned by the Multinational Enterprise Group that are important for transfer pricing purposes and information regarding which Constituent Entity legally owns them.

5. A description of the Multinational Enterprise Group's transfer pricing policies related to research and development and intangibles.

6. A description of any significant transfers of interest in intangible assets amongst Constituent Entities which are members of the same Multinational Enterprise Group during the Fiscal Year including the Constituent Entities and compensation involved.

7. A description of how the Multinational Enterprise Group is financed, including significant financing arrangements with unrelated lenders.

8. The identification of any members of the Multinational Enterprise Group that provides a central financing function for the Group, including the country under whose laws the entity is organised and the place of effective management of such Entities.

9. A description of the Multinational Enterprise Group's transfer pricing policies related to financing arrangements between Constituent Entities which are members of the Group.

10. The Multinational Enterprise Group's annual Consolidated Financial Statement for the Fiscal Year concerned, if prepared, for financial reporting, regulatory, internal management, tax or other purposes.

11. A list and brief description of the Multinational Enterprise Group's existing unilateral Advance Pricing Agreements and other tax rulings relating to the allocation of income among countries.

For the purposes of applying the provisions of Paragraphs C, F and G of this Article, an Advance Pricing Agreement is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time.