KSA issues guidance on the Mutual Agreement Procedure
The General Authority of Zakat and Tax (GAZT) in the Kingdom of Saudi Arabia (KSA) issued guidance on the Mutual Agreement Procedure (MAP).
MAP is a procedure through which competent authorities (CAs) consult and interact to resolve international tax disputes including transfer pricing (TP) disputes and to avoid double taxation arising from actions of one or both of the contracting states resulting in taxation not in accordance with the applicable Double Taxation Treaty (DTT). Please note that all KSA’s DTTs contain a MAP provision.
The Guidance is issued as per the KSA’s commitment to the Base Erosion and Profit Shifting (BEPS) initiative developed by the Organization for Economic Co-operation and Development (OECD). Making dispute resolution mechanism more effective is one of the minimum Actions (14) of the BEPS. The measures developed under Action 14 of the BEPS Action Plan aim to strengthen the effectiveness and efficiency of the MAP process.
Examples of applicability of MAP
The Guidance provides for the following non-exhaustive list of examples when the MAP case could be requested:
- The taxpayer disagrees with the tax authorities on the interpretation and application of provisions or principles of the double tax treaty or if an application of a domestic law anti-abuse provision is in conflict with the provisions of a DTT;
- The taxpayer disagrees with the tax authorities on the existence of a permanent establishment (PE) or on the adjustments made or to be made for the profits of a PE; and
- TP adjustments between associated enterprises of different States, has occurred or will occur.
Steps to keep in mind
In addition to the above, below are the steps to keep in mind during this process.
- There should be an effective DTT in place in order to initiate the MAP case;
- The MAP case can be submitted to the GAZT by a taxpayer of either contracting state, however, the guidelines do advise taxpayers to consider submitting MAP requests to the CA of their country of residence. The full list of the formal minimum requirements for a MAP request are detailed in the Guidance;
- It is possible to achieve a multi-year resolution in respect of recurring matters under a single MAP request. This of course would be subject to limitation provisions contained in the relevant tax treaty.
- Most of the DTTs signed by KSA provide for the time limit of 3 years for requesting the MAP, which typically starts from the first notification of the action which gives rise to taxation not in accordance with the DTT;
- MAP cases should be resolved within 2 years, depending on the complexity of the case, and the GAZT will try to resolve the case as quickly as possible;
- To the extent possible, the GAZT will review if it can reach the unilateral resolution of the MAP case. If not, it will seek to resolve the case with the CA of the other contracting state;
- Although, the CAs will seek to reach an agreement, there might be the case when the MAP case could be closed without agreement. In this case, the taxpayer can seek tax relief under domestic objection, review and appeal rights.
Transfer Pricing and MAP
As one of its objectives, the MAP is designed to relieve double taxation typically arising from transfer pricing (TP) cases. The MAP Guidelines are in line with the provisions of Articles 20 and 21 of the KSA transfer pricing bylaws (TP bylaws) which allow taxpayers to utilize the MAP in the context of cross-border TP adjustments. The MAP guidelines are also in line with Article 9 (Associated Enterprises) of most bilateral treaties concluded between KSA and other countries.
With the GAZT’s increasing focus and scrutiny of related party transactions, especially cross-border related party transactions involving global inbound entities which are part of large multinational groups, the risk of double taxation arising from transfer pricing adjustments and accompanying tax disputes is on the increase. With the release of MAP guidelines, Saudi Arabian taxpayers now have an opportunity to approach GAZT in case of double taxation arising from adjustments to transfer pricing.
The MAP Guidelines provide that taxpayers making an MAP request must provide the GAZT with Transfer pricing documentation in addition to the information required to justify the case to GAZT. There are no provisions for arbitration in all Saudi Arabia’s tax treaties therefore in case of no agreement between the CAs of two contracting states, the case cannot be submitted to arbitration.