Middle East Countries Adopt New Transfer Pricing Documentation Requirements
Countries in the Middle East are increasing their focus on transfer pricing, as certain jurisdictions in the region have recently adopted new legislation that will significantly change transfer pricing documentation requirements for multinational enterprises (MNE) in the region. Certain jurisdictions that have not had transfer pricing rules in the past have enacted documentation requirements. A few governments in the region recently announced stimulus measures to combat the adverse effects of the SARS-CoV-2 virus and incidence of COVID-19 on the economy. Middle Eastern governments may seek additional methods of boosting tax revenues in the future to fund any COVID-19 stimulus measures. New transfer pricing documentation requirements will allow governments to target MNEs’ transfer pricing arrangements as a means of raising tax revenues.
Certain countries in the Middle East will begin requiring taxpayers with cross-border transactions to prepare transfer pricing documentation that is consistent with Action 13 of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting initiative. These changes are significant, as many of the countries in the region did not previously have transfer pricing documentation requirements. The new rules will increase documentation obligations by requiring taxpayers to prepare documentation that is consistent with the OECD’s three-tiered approach, including master file, local file and country-by-country (CbC) reporting, in addition to existing documentation requirements. In 2019, Bahrain, Egypt, Saudi Arabia, Qatar and the United Arab Emirates (UAE) introduced new transfer pricing regulations. In 2020, Turkey introduced new transfer pricing regulations, and Bahrain and Oman also are expected to introduce new transfer pricing regulations before the end of the year.
The increased focus on transfer pricing by countries in the Middle East is in part due to the list of noncooperative jurisdictions for tax purposes published by the European Union in 2017. The list initially included Bahrain and the UAE, while Jordan and Oman were added in 2019. As a result of compliance with commitments on tax cooperation, Bahrain, Jordan and the UAE have since been removed. Many jurisdictions in the Middle East have now committed to the OECD’s Inclusive Framework for the implementation of minimum standards. Some recent changes to the transfer pricing requirements of countries in the Middle East are summarized below.
Bahrain published rules, effective from January 2019, that require profits generated by Bahraini companies to be commensurate with actual economic activity in Bahrain. The new rules are designed to combat situations where the Bahrain legal entity accrues significant profits related to the attribution of certain functions; however, in actuality it does not have the requisite level of substance to manage and control such functions. Relevant entities subject to the rules are required to file an annual Economic Substance report within three months from the end of the financial year. Bahrain also is expected to introduce CbC reporting requirements in 2020.
Egypt introduced master file and local file documentation requirements that became effective in January 2019. The rules apply to tax years beginning on or after January 1, 2018. No minimum threshold has been set for the preparation of a master file and local file. In addition, a CbC report is required for MNEs with consolidated group revenue of at least EGP 3 billion (USD 190 million). Egypt is expected to provide additional guidance on intangibles and other transfer pricing matters in 2020.
Oman currently does not have specific transfer pricing documentation requirements; however, it has joined the OECD’s Inclusive Framework for the implementation of minimum standards. As a result, Oman is expected to introduce CbC reporting requirements in 2020.
In December 2019, Qatar published Executive Regulations to the Income Tax Law that introduced transfer pricing documentation requirements for tax years ending on or after December 31, 2019. The new rules require a transfer pricing questionnaire to be submitted with the annual tax return. In addition, master file and local file requirements were introduced, which supplement the CbC reporting requirements that have been in effect since 2018. The threshold for preparation of a CbC report is QAR 3 billion (USD 825 million). The threshold for preparation of a master file and local file has not yet been set.
On February 15, 2019, Saudi Arabia introduced final transfer pricing bylaws, which introduced transfer pricing documentation requirements for fiscal years beginning on or after December 2018. Taxpayers must submit a controlled transaction disclosure form within 120 days of the end of the fiscal year and file it as part of the annual income tax declaration. The disclosure must be certified through an affidavit by a licensed auditor, which asserts that the taxpayer complied with their transfer pricing policy. In addition, Saudi Arabia introduced master file, local file and CbC reporting requirements. A master file and local file are required for intercompany transactions that exceed SAR 6 million (USD 1.6 million). CbC reporting is required for MNEs with consolidated group revenue of at least SAR 3.2 billion (USD 850 million).
On February 25, 2020, Turkey announced the adoption of a three-tiered transfer pricing documentation approach, which includes the preparation of a master file, local file and CbC report. A master file is required for MNEs with assets and revenues of at least TRY 500 million (USD 75 million). A local file is required for all entities with related-party cross-border transactions. Companies with revenues and assets of at least TRY 100 million (15 million USD) must submit a detailed form on related parties and intercompany transactions. CbC reporting is required for MNEs with consolidated group revenue of at least EUR 750 million (USD 820 million).
United Arab Emirates
In April 2019, the UAE published rules that implement an economic substance standard, whereby entities that engage in certain activities must maintain an adequate economic presence in the UAE relative to the activities they undertake. From January 2020 onward, entities subject to the economic substance rules must file an annual notification declaring the business and activities being performed and whether the economic substance test has been met. In addition, CbC reporting is required for MNEs with consolidated group revenue of at least AED 3.15 billion (USD 860 million). MNEs must notify the UAE government of the CbC filer’s tax residency. It is effective for financial years beginning on or after January 1, 2019. Since the UAE does not have a corporate income tax, the penalties for failing to prepare a CbC report or notify the UAE government on which entity is to file the CbC report are based on a flat amount.
MNEs with operations in the Middle East should carefully consider the changes to the transfer pricing documentation requirements and deadlines. As a result of COVID-19’s adverse economic effects, Middle Eastern governments may target MNEs’ transfer pricing arrangements in the future to raise tax revenue. To avoid noncompliance, taxpayers in the region will need to be attentive to preparing transfer pricing documentation and identify and address any changes that need to be made to their current transfer pricing arrangements.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. If you have questions, please reach out to your BKD Trusted Advisor™ or use the Contact Us form below.