What is Internal Transfer Pricing?
Transfer pricing is the price one part of a company charges another for goods, services, or financing transferred between them. It affects how profit is split between divisions or subsidiaries and is heavily regulated when those units sit in different countries with different tax rates.
How It Works
- Methods: comparable uncontrolled price, cost-plus, resale-minus, transactional net margin, profit split
- Required to be at arm’s length — i.e., what unrelated parties would charge
- Documented in a master file, local file, and (for large groups) country-by-country report
- Misuse can shift profit to low-tax jurisdictions; tax authorities push back hard
- Internal transfer pricing also affects divisional performance evaluation, not just tax
Saudi Context
In Saudi Arabia, the ZATCA Transfer Pricing Bylaws (issued 2019, updated 2023) apply to all taxpayers, with formal documentation thresholds for related-party transactions above SAR 6 million. The rules are aligned with OECD BEPS Action 13 and are actively audited.
Example
A Saudi-headquartered group has a manufacturing subsidiary in Saudi Arabia and a sales subsidiary in the UAE. The Saudi factory sells goods to the UAE arm at SAR 100/unit. ZATCA benchmarks third-party sales of similar goods at SAR 95-110 — within range, so the pricing holds up. Without documentation, ZATCA could adjust the price up and tax the difference in Saudi Arabia.