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Transfer pricing in the Middle East
This post focuses on transfer pricing (TP) considerations and developments in the Middle East. TP is relatively new in the Middle East. Prompted by changes in the international tax landscape, and domestic economic developments, countries across the Middle East are just beginning to introduce corporate tax regimes, while also aligning their TP regulations with international standards. As governments in the region seek to diversify away from a dependence on oil revenues, they are implementing a series of tax incentives and regulatory changes to increase foreign direct investment and improve the business climate. Meanwhile, for similar reasons, there is also an increased drive to enhance TP enforcement and tax collections. Amid this confluence of events, it is essential for businesses to understand and adapt to the evolving tax and investment landscape in the Middle East.
TP compliance landscape
Many countries in the region, including the United Arab Emirates (UAE), Saudi Arabia, Qatar, Egypt and Jordan, have recently established a comprehensive legal and regulatory framework to govern rules for pricing of cross-border transactions between related entities. The TP regimes in these countries are broadly aligned with the OECD TP Guidelines in that they require the arm’s length standard, apply the same TP methods, and require the OECD’s three pillars of transfer pricing compliance (i.e., the Master File, Local File, and Country-by-Country Reporting (CbCR)).
The adoption of the OECD’s three pillars of TP compliance across the Middle East
| Country | Master File | Local File | CbCR |
| Bahrain | - | - | ✔ |
| Egypt | ✔ | ✔ | ✔ |
| Jordan | ✔ | ✔ | ✔ |
| Kuwait | - | - | - |
| Oman | - | - | ✔ |
| Qatar | ✔ | ✔ | ✔ |
| Saudi Arabia | ✔ | ✔ | ✔ |
| UAE | ✔ | ✔ | ✔ |
Data as of December 5, 2024
Although the TP rules in the Middle East are broadly aligned with the OECD TP Guidelines, there are some unique requirements and nuances to consider, namely:
- Localized Benchmarking: Certain jurisdictions (in particular, Egypt and Saudi Arabia) have more strict requirements on the selection of comparables, such as a requirement to remove loss makers, as well as a preference for Middle East companies or—if not possible—companies operating in Eastern Europe.
- TP Disclosures and Certification: In addition to the three prongs of TP compliance noted above, certain countries, such as the UAE, Saudi Arabia and Jordan, require additional TP disclosures and filings. In addition to a TP disclosure form, a certified TP Affidavit is required to be filed in Saudi Arabia and Jordan along with the tax / Zakat return. The TP Affidavit provides a third-party auditor certification that the TP policy of the group was applied consistently by the local entities.
- TP Documentation Filings: Certain jurisdictions in the Middle East, such as Egypt, require that the Local File and Master File are filed with the tax returns. Even where filing is not required, there is a short window to provide these documents to tax authorities upon request (e.g., 30 days in Saudi Arabia).
Recent developments impacting TP
Beyond the introduction of TP compliance across the Middle East, there are a number of recent developments in the region that will have a significant impact on transfer pricing. Some of the most important ones are noted below:
- Advance Pricing Agreement (APA) Program: The APA program in Saudi Arabia was launched starting January 1, 2024. The program does not allow for rollbacks and will cover a period of three years. However, it is expected that renewals will be relatively straight forward. There is a transactional threshold of approximately $25m but the tax authority may also accept applications for highly complex transactions that are below the threshold. The program is currently only accepting unilateral APAs, although the tax authority in Saudi Arabia (ZATCA) has indicated that they will introduce the option for bilateral APAs in the near future. Given the program has just recently launched, there have not yet been any concluded APAs, though we expect ZATCA to conclude a significant number of cases by the end of next year. Other than Saudi Arabia, Egypt has also operated an APA program for a few years but has yet to conclude cases due to a lack of sufficient resources.
- Regional Headquarters: Effective January 1, 2024, companies conducting business with the government in Saudi Arabia must set up a regional headquarters (RHQ). The RHQ is entitled to certain tax benefits such as being exempt from corporate income tax and withholding tax. The RHQ in Saudi Arabia is required to perform strategic management and other services on behalf of its related parties in the region. Further, RHQs cannot conduct commercial activities. As such, these entities derive their income via the TP policy applied to remunerate them. RHQs are required to be audited every year by the tax authority. Further, failure to properly apply the local TP rules to RHQs could result in a loss of the license, tax incentives, and the ability to contract with the Saudi government. As such, special care should be given to the transfer pricing policy, legal agreement, and documentation for RHQs.
- Free Zones / Special Economic Zones: Several countries in the Middle East region have created areas where companies can obtain tax incentives or exemptions, such as Free Zones in the UAE and Special Economic Zones in Saudi Arabia. These zones can be very beneficial across all areas of taxes, but for these structures to be sustainable, it is critical that TP support is robust and can demonstrate that companies are not artificially shifting profits to these free zones from other related parties.
- Pillar Two: While the majority of Middle Eastern countries are yet to publicly announce how and when they will implement the Pillar Two rules, certain jurisdictions have taken steps towards implementation. Notably, Qatar has recently amended its existing income tax law to include a foundation for the Pillar Two rules, including a domestic minimum tax. Bahrain's National Bureau for Revenue recently introduced a Domestic Minimum Top-Up Tax to ensure that branches and subsidiaries of multinational enterprises located in Bahrain pay a global minimum tax of 15 percent on their profits. The UAE’s recent amendments to the Federal Corporate Law to introduce a definition for Top-up Tax and MNEs paves the way for the UAE to implement the Pillar Two rules, noting that the UAE’s Ministry of Finance has indicated that the UAE is looking to implement Pillar Two measures in 2025. Lastly, Kuwait’s recent decision to become a member of the OECD Inclusive Framework on BEPS is a positive sign towards the country’s intent to adopt the Pillar Two Rules in the near future. Given the overlap of TP and Pillar Two (see here for more details), it is imperative for companies operating in the Middle East to review their TP policies and the potential impact on their Pillar Two positions.
Audit environment
While countries in the Middle East are trying to enhance the investment climate, tax authorities have maintained their independence and have increased their focus on TP arrangements in their respective countries. Saudi Arabia and Egypt, where TP legislation has been in place the longest in the region, stand out as countries with elevated levels of TP audit activity. Some of the key focus areas or triggers for recent TP audits in the region include the following:
- Losses: Entities or branches in the region with losses are red flags to the local tax authorities, particularly where there is a high amount of outbound payments.
- Fly-in, fly-out: Companies where employees or consultants operate on a fly-in / fly-out basis are triggers to tax authorities in the region. Under these models, there is pressure on whether there is a permanent establishment created by the foreign entities that employ the individuals flying in. There is particular sensitivity where local substance is limited, and revenue is booked by the foreign company.
- True downs: Where a local entity has a true down adjustment to earn a target margin, tax authorities often question the rationale for the true down and challenge the nature of the balancing payment. Under these circumstances, tax authorities will often require evidence that the local entity is not undertaking the key value driving activities or exposed to significant risks.
- Lack of proper documentation: Where taxpayers in Saudi Arabia have not prepared sufficient documentation (e.g., local file) at the time of a TP audit, it is very difficult to reach a positive outcome with ZATCA—even where the technical position of the taxpayer is strong.
Key takeaways
As Middle Eastern countries seek to diversify away from oil revenues, attract foreign investment and align with international tax norms, companies should be aware of the changes and opportunities across the region. Companies operating in this region must adapt quickly to meet new TP compliance requirements and avoid penalties or lengthy disputes. By understanding local regulations, establishing robust TP policies and support, and being aware of new developments, companies can manage their TP obligations more effectively and continue operating successfully in the region.
Stay ahead of the Middle East’s TP developments by partnering with experienced tax advisors and implementing strong documentation practices.
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