1.

Introduction

i. Overview
XYZ Form (hereafter referred to as “we” or “XYZ” or “us”) has been engaged to assist in preparing
local transfer pricing (“TP”) documentation for ABC Company (“ABC Company” or “the Company”)
for the fiscal year ending March 31, 2023 (“FY2023”).

The report has been written to conform to the requirements of the Kingdom of Saudi Arabia (“KSA”)
TP rules contained in the Transfer Pricing Bylaws (Article 17) (“KSA TP Bylaws”), Transfer Pricing
Guidelines issued by the Zakat, Tax and Customs Authority (“ZATCA”) (“KSA TP Guidelines”) (Third
Edition November 2021), and the Income Tax Law of the KSA (“KSA Tax Law”) - hereafter,
collectively referred to as the “KSA TP Regulations”.

In addition, the principles outlined in the Organization for Economic Co-operation and
Development’s (“OECD”) Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations, January 2022 (“OECD TP Guidelines”) have also been referred for preparation of
this report, wherever any matter is not addressed in the KSA TP Regulations.

The purpose of this report is to review and document the following intercompany transactions of
ABC Company (hereafter referred as “Controlled Transactions”) and to determine whether these
intercompany transactions were performed at arm’s length.

ii. Scope of services

The TP analysis in this report is based on KSA TP Regulations. The KSA TP Regulations are
summarized in Appendix 1 of this report. In addition, we have also referred the OECD TP
Guidelines, which are summarized in Appendix 2.

Our understanding of the activities of ABC Company, analyzed in this report is based on discussions
with personnel of ABC Company, information available in the public domain, and other documents
supplied by ABC Company. We have asked ABC Company to review the report and confirm that
there are no material misunderstandings or misrepresentations of the facts gathered during its
preparation. We have not independently audited or otherwise verified any of the facts, assumptions
or representations contained in this report. Any changes in the facts, assumptions or
representations upon which we have relied, may require a modification of all or part of these
conclusions.

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This report represents our conclusions only and should not be taken as an assurance of the ultimate
treatment of the Controlled Transactions by ABC Company and/or tax authorities of other
jurisdictions in which ABC Company corporation and its group entities (“Travel Designer”) operates
in. The analysis contained in this document is not binding on the tax authority and should not be
considered as an assurance that the tax authority will necessarily agree with our conclusions or that
ABC Company and related persons will prevail if a contrary position is adopted by the tax authority.
Any other tax matter, including, but not limited to, other corporate income tax aspects, value added
tax (“VAT”) or customs issues, as well as accounting and legal matters, which may or may not relate
to the intercompany transactions under review, fall outside the scope of this report.

iii. Structure of the report

This report contains seven sections and four appendices.

 Section 1 provides details on the scope of the report while Section 2 presents the executive
summary of the report.
 Section 3 provides an overview of ABC Company overall business and sets out the
background to operations of ABC Company.
 Section 4 provides an industry analysis to provide the context for which the Controlled
Transactions took place. In this section, we have summarized the main features of the
industry in which ABC Company operates, with a focus on growth trends globally and in the
KSA.
 Section 5 explains in detail the nature of the Controlled Transactions; while Section 6
contains a functional analysis, which outlines the functions performed, risks assumed, and
assets employed by ABC Company and its related persons with respect to the Controlled
Transactions.
 Section 7 contains the economic analysis and an overview of the transfer pricing methods
that were used to examine the Controlled Transactions. These sections of the report also set
out why a particular transfer pricing method was chosen and how it was applied to the
Controlled Transactions by reference to a comparability analysis.

More information about the KSA TP Regulations, OECD TP Guidelines, comparability analysis and
technical aspects of our comparability analysis can be found in the appendices.

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2. Executive Summary

i. Overview
XYZ prepared this report to review and document the Controlled Transactions entered by ABC
Company with its related persons in FY2023 to determine whether they meet the arm’s length
principles as set out in the KSA TP Regulations.

Table 1: Information on sections of the report

Sr.
Contents of Local File (Article 17 of KSA TP Bylaws) Reference
No.
ABC Company’s information, including:

a) a description of the management structure of ABC Company, its

organization chart, a description of the individuals to whom ABC
Section 3.3
Company’s management reports and the countries in which such
individuals maintain their principal offices;
1
b) a detailed description of the business and business strategy pursued by
ABC Company including an indication whether ABC Company has been
involved in or affected by business restructurings or transfer of intangible
Section 3.3
property, in the current Reporting Year and the Reporting Year
immediately preceding it, and an elaboration on aspects of such
Transactions that affect the local entity and its key competitors;

Documentation on material Controlled Transactions. For Controlled

Transactions in which ABC Company is involved generally, the
following information should be included:

a) a description of the Controlled Transactions (e.g. purchases for hotel

accommodation etc.) and the context in which such Transactions take Section 5
place;

b) the amount of intra-group payments and receipts for each category of

Controlled Transactions involving ABC Company (e.g. payments for
Section 5
services) broken down by country of tax residence the foreign payer or
recipient;

2 c) an identification of Related Persons involved in each category of

Section 5
Controlled Transactions, and the relationships amongst them;

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 d) copies of all intercompany agreements concluded by ABC Company; Appendix 3

e) a detailed comparability and functional analysis of ABC Company and

relevant Related Persons with respect to each documented category of Section 6 & 7
Controlled Transactions, including any changes compared to prior years;

f) an indication of the most appropriate transfer pricing method with

regard to the category of Transaction and the reasons for selecting that Section 7
method;

g) an indication of which related Person is selected as the tested party, if

Not Applicable
applicable, and an explanation of the reasons for this selection;
h) a summary of the important assumptions made in applying the transfer
Section 1
pricing methodology;

i) if relevant, an explanation of the reasons for performing a multi-year

Not Applicable
analysis;

j) a list and description of selected comparable Uncontrolled Transactions

(internal or external), if any, and information on relevant financial indicators
for independent enterprises relied on in the transfer pricing analysis,
including a description of the comparable search methodology and the
source of such information; Not Applicable
k) a description of any comparability adjustments performed, and an
indication of whether adjustments have been made to the results of the
tested party, the comparable Uncontrolled Transactions, or both; Not Applicable
l) a description of the reasons for concluding the relevant Transactions were
priced on an arm’s length basis based on the application of the selected
transfer pricing method; Not Applicable
m) a summary of financial information used in applying the transfer pricing
Not Applicable
methodology; and

n) a copy of existing unilateral and bilateral/multilateral Advance Pricing

Agreements and other tax rulings to which the Authority is not a party and
that relate to Controlled Transactions; Not Applicable
Industry analysis which provides complete and thorough analysis of ABC
Company industry, including but not limited to:

(a) major competitors;

(b) SWOT analysis;
(c) power of suppliers;
(d) power of buyers;
(e) availability of substitutes;

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 (f) size;
(g) demand and supply trends;
(h) entry requirements;
(i) key international target markets;
(j) market share; and Section 4
(k) modes of delivery.
Financial information, including:

a) Annual financial statements for the Reporting Year concerned of ABC

Company. If audited financial statements exist, these should be supplied and
if not, existing unaudited financial statements should be supplied; Appendix 3
b) Information and allocation schedules showing how the financial data used
in applying the transfer pricing method may be tied to the annual financial
statements; and Section 3.3.h
c) Summary of schedules of relevant financial data for comparable used in
Not Applicable
the analysis and the sources from which that data was obtained.

ii. Functional analysis

The functional analysis outlines the roles, risks, and assets of ABC Company in its intercompany
transactions, particularly with its parent company, ABC Company. The functions involve
procurement of hotel accommodations, vendor relationship management, contract negotiation,
demand forecasting, order placement, and pricing reviews. ABC Company coordinates logistics and
monitors performance to ensure customer satisfaction. Key risks include market, foreign exchange,
quality, credit, and liquidity risks, while capacity utilization risk arises from fluctuating demand.
ABC Company's tangible assets consist only of laptops, and it has no significant intangible assets.

iii. Economic Analysis

a) Selection of the most appropriate TP method
In order to test the arm’s length nature of Transaction 1, Cost Plus Method was chosen to evaluate
the arm’s length nature of the Controlled Transactions as permitted under the KSA By-laws.

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b) Results
The analysis determined that the "Cost Plus method" is the most appropriate transfer pricing
approach for ABC Company. Additionally, a corroborative analysis confirmed that applying this
method ensures that the revenue earned by ABC Company, after accounting for all transactions,
complies with the arm’s length standard from a KSA transfer pricing perspective.

iv. Conclusion
Based on the above, it can be concluded that the Controlled Transactions of ABC Company
conducted during FY2023 appear to be consistent with the arm’s length principle from a KSA TP
perspective.

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3. Company Analysis

i. Introduction
This section provides the Company’s information, including description of the management
structure, organization chart, description of the individuals to whom the Company’s management
reports and the countries in which such individuals maintain their principal offices, description of
the business and business strategy pursued by the Company, indication whether the Company has
been involved in or affected by business restructurings or transfer of intangible property.

ii. Group Overview

ABC Company launched in 2007 in country, is the flagship product of ABC Company Group and is
one of the largest and fastest-growing online B2B travel portals in the Middle East, South Asia, and
Southeast Asia. From a humble beginning from country today, employs more than 250 employees in
32 offices in 18 countries worldwide.

The Company is primarily engaged in the business of Reservation of transportation, restaurants and
car rental, Reservation and marketing of tourist accommodation units and Tourism promotion
activities. As mentioned, ABC Company operates businesses in a variety of regions throughout the
world namely Middle East, South Asia, and Southeast Asia.

iii. ABC Company

a) General information
ABC Company, ("one-person limited liability company") licensed under foreign investment license
No. 0101010101010010, issued by Saudi Arabia General Investment Authority on xx/xx/xxxx
(corresponding to xx November xxxx). The Company operates under Commercial Registration
number 010101010 dated on xx/xx/xxxx (corresponding to xx December xxxx). The share capital
of the Branch amounting to SR 10,000.

b) Legal ownership structure

The ownership structure of ABC Company is illustrated in the figure below.
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Figure 1: ABC Company simplified legal chart

ABC Company ABC Company

100% ABC Company 100%
India Private
Limited

Source: Information provided by the client

c) Organization and management structure

The figure below shows ABC Company’s local organization chart and management’s roles and
responsibilities.

Figure 2: ABC Company local organization chart

COUNTR GENERA
Y L BDM
MANAG MANAG
ER ER

SALE
CLERK MANAGER &
SALE
EXECUTIVE

Source: Information provided by the client

Following is the complete detail of management’s roles and responsibilities.

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Table 2: Roles of the key functional heads3

Designation and
Key functional
jurisdiction to
head and
Role of the key functional head whom the key
department
functional head
reports to
The Country manager is responsible for Managing
Country
Operations, Develop Business & Increase -
Manager
Profitability of the Company in Specific Region of the
Country.
Key
Designation and
functional Role of the key functional head jurisdiction to
head and
whom the key
department
functional head
reports to
General Manager is High Ranking Executive who is
GM responsible for overall performance and success of Country Manager
business units, Division or even an entire company
BDM is responsible for Driving Business, Attract New
Client, Research new Markert Opportunity, and GM & Country
BDM
oversee growth project making sale project and Manager
forecasting revenue.

Sale Manager is responsible for Hiring, Recruit and

Sale Manager BDM
Train new member of Sales staff & Managing Sale.
Sale Build Business by identifying and selling prospects
Sale Manager
Executive maintaining relationship with Clients.
Handle General administrative task such as filling,
GM
Clerk Data entry, maintaining records & Organizing
Documents.

Source: Information provided by the client

d) Business strategy
ABC Company should focus on market penetration by building brand awareness and expanding its
customer base in Saudi Arabia. Forming strategic partnerships with local businesses, hotels, and
airlines can help offer competitive packages. Investing in digital marketing and technology, such as a
user-friendly booking platform and data-driven personalization, will enhance customer experience

9 | Page
and attract more clients. Customizing services, offering value-added experiences, and maintaining a
strong focus on customer satisfaction will help differentiate the company from competitors.

To manage costs and improve operational efficiency, ABC Company can explore automation,
strategic outsourcing, and cost optimization in its core processes. Leveraging its parent company’s
presence in Dubai for regional alliances and future expansion into other Saudi cities can further
boost growth. The company should also prioritize regulatory compliance and align with Saudi
Arabia’s Vision 2030 by incorporating sustainability initiatives into its business strategy.

e) Business restructurings
In FY2023, ABC Company was not involved in any business restructuring transactions.

f) Intangible property transfers

In FY2023, ABC Company was not involved in any intangible transfers.

g) Key competitors
The major competitors of ABC Company are XYZ Company.

h) Financial information
The below table summarizes the financial results reported by ABC Company for FY2023.

Table 3: Financial results of ABC Company for FY2023 valued in Saudi Riyal (“SAR”)

Particulars Amount (in SAR)

Revenue
Reservations 50,000,000
Total Revenue (A) 50,000,000
Expenses
Cost of Reservations 45,000,000
General and Administration Expenses 6,000,000
Finance Cost 100,000
Total Expenses (B) 51,100,000
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 Operating Loss (C) = (A) – (B) (1,100,000)

During FY2023, ABC Company has incurred an operating loss of SAR 1,100,000. Primary factors
contributing to losses for ABC Company are as follows:

 These are the initial years for the company, they are arranging the setup in the Saudi Arabia.
That’s why they incurred loss in the FY 2023.

The annual FY2023 financial statement of ABC Company is provided in Appendix 4.

i) Advance Pricing Agreements and other tax rulings

In FY2023, there were no advance pricing agreements or tax rulings in relation to the Controlled
Transactions.

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4. Industry Analysis
i. Introduction
This section provides an analysis of the travel and tourism in which ABC Company operates,
discussing its trends, competition and outlook (including information pertaining to major
competitors, SWOT analysis, power of suppliers/buyers, availability of substitutes, size, demand
and supply trends, entry requirements, key international target markets, market share, and modes
of delivery, etc.), as these may directly and indirectly impact the Controlled Transactions.

ii. Global travel and tourism

The global travel and tourism industry is expected to generate approximately $854.7 billion by the
end of 2023, with a compound annual growth rate (CAGR) of 4% projected from 2023 to 2027. This
indicates a robust recovery from the pandemic, driven by pent- up demand and increased
international mobility.4

a) Global travel industry drivers

The Travel & Tourism market has been experiencing significant growth worldwide, driven by
various factors such as increasing disposable income, ease of travel, and desire for unique
experiences.

Customer preferences: Travelers are increasingly seeking authentic and unique experiences, moving
away from traditional tourist attractions to more off-the-beaten-path destinations. This shift in
preferences has led to the rise of experiential travel, where immersive cultural experiences and
interactions with locals are highly valued.

Trends in the market: In the United States, there has been a noticeable trend towards sustainable
and eco-friendly travel practices. Travelers are becoming more conscious of their environmental
impact and are actively seeking out destinations and accommodations that prioritize sustainability.
This has led to the growth of eco-tourism initiatives and the popularity of destinations known for
their conservation efforts.

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b) Global travel industry trends and challenges
The key industry trends and challenges of the travel industry include:

Overtourism: Popular destinations are experiencing overtourism, characterized by excessive visitor

numbers that strain local infrastructure, harm the environment, and negatively impact the quality of
life for residents.

Safety and Security Concerns: Safety and security issues, including terrorism, political instability,
and natural disasters, can significantly impact destination choices and traveler confidence.

Global Health Crises: Events like pandemics (e.g., COVID-19) can severely disrupt global travel.
Health-related concerns, travel restrictions, and safety measures have profound implications for the
tourism industry.

Climate Change: The tourism industry is vulnerable to the impacts of climate change, including
extreme weather events, rising sea levels, and disruptions to ecosystems. Shifts in weather patterns
can affect travel patterns and destination attractiveness.

c) Travel industry segmentation

There are several different ways to segment the travel market. The four main tourism market
segments include:

a. Demographic segmentation in tourism (age, gender, income, education, and other

demographic factors)

b. Geographic segmentation in tourism (location, such as country, region, or city)

c. Psychographic segmentation in tourism (lifestyle, interests, values, and personality traits)

d. Behavioral segmentation in tourism (behaviors and actions, such as travel frequency,

spending habits, and travel motivations)

iii. KSA travel and tourism industry overview

a) Industry overview
Travel, Tourism, and Entertainment is a priority sector under Saudi Arabia’s Vision 2030 economic
diversification initiative. The Saudi Arabian government aims to increase domestic household

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spending related to entertainment and leisure activities, and to transform the country into a major
global travel destination.

b) Major players in the KSA travel and tourism industry

The major players in the KSA (Kingdom of Saudi Arabia) travel and tourism industry reflect the
country's growing efforts to diversify its economy beyond oil through its Vision 2030 initiative. Here
are some of the key companies in the sector along with their incorporation details and insights:

 XYZ Company - Founded in 1980, rebranded to Seera in 2019, XYZ Company is one of the
largest travel and tourism companies in the Middle East. The company offers various
services, including travel booking, hospitality, car rentals, and corporate travel
management.8
 XYZ Company - Established in 1976, XYZ Company is a leading hospitality company that
develops, owns, and manages a broad range of hotels and residential properties across
Saudi Arabia. The company is a major player in religious tourism, operating hotels in
Makkah and Madinah, and is expanding into leisure tourism.9
 XYZ Company - Established in 2018 (as a subsidiary of the XYZ Company), XYZ Company is
developing the Red Sea Project, an ultra-luxury tourism destination along the western coast
of Saudi Arabia. The project focuses on sustainability and is expected to include luxury
resorts, marine experiences, and cultural attractions.10
 XYZ Company - Founded in 2012, XYZ Company is an online travel agency under the XYZ
Company. It is a leading digital travel platform in the Middle East, offering booking services
for flights, hotels, and holiday packages.11
 XYZ Company - Established in 2007, XYZ Company is a low-cost airline that primarily serves
domestic and regional destinations. The company plays a key role in making travel
affordable for Saudi citizens and residents, as well as tourists.

c) SWOT Analysis
The below table includes the SWOT analysis for KSA travel and tourism industry:

Strengths Weakness

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 • Home to two very important • Restructuring of workforce and
holy mosques Saudization program impacts provision
• Numerous archaeological sites of qualified workforce in tourism
of historic and religious industry
significance • Underdeveloped entertainment
• Continued government efforts in industry
expansion and upgrade of current • Poor public transport infrastructure
infrastructure, facilities and • Religious seasonality impacts
services supply and demand in lodging
• Increased openness to foreign investors

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 Opportunities Threats
• Vision 2030 to boost attractiveness • Continued travel bans due to Covid-
of Saudi to foreign investors 19 pandemic
• Multiple mega projects supporting • Strong competition from regional peers
growth of travel sector • Continued political uncertainty in the
• Deregulation of low-cost airlines region
provides entry opportunity of
new airlines
• Huge demand for domestic / regional
air travel favors set-up of regional hub

d) Industry characteristics
a. Buyer power

Buyer power refers to the influence that customers or travel agents (buyers) have over the
company.

ABC Company KSA sells accommodations to travel agents in Saudi Arabia through its centralized
portal. Since these agents are likely to have multiple accommodation providers to choose from
(including international platforms like Expedia or Booking.com), they have some degree of leverage.

However, ABC Company KSA can streamline the process for agents, offering convenience, real-time
availability, and potentially competitive prices, which may reduce buyer power somewhat.

Moderate to High due to alternative platforms available for travel agents.

b. Supplier power

Supplier power refers to the influence suppliers have over the company, especially in terms of
pricing and availability.

The main supplier of ABC Company KSA is its parent company, ABC Company, based in Dubai, from
which it purchases hotel accommodations. Given that this is a related-party transaction, the
supplier holds significant power, especially since it controls the availability, pricing, and terms of
accommodation supply.

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While this relationship creates dependency, the fact that the supplier is the parent company
suggests that strategic decisions are likely aligned, potentially reducing some risks of supply chain
volatility.

High, with the parent company (ABC Company) controlling hotel accommodations.

c. New entrants

The threat of new entrants pertains to how easy or difficult it is for new competitors to enter the
industry.

The travel and tourism industry, especially in the digital accommodation booking segment, has low
barriers to entry in terms of setting up an online platform. New entrants can quickly develop portals
to connect buyers and accommodation providers.

However, ABC Company KSA’s established relationship with travel agents and the backing of its
parent company (ABC Company) gives it an edge. Centralization and strong network of
accommodations may deter new players from easily capturing market share.

Moderate threat, though brand recognition and supplier relationships provide a buffer.

d. Degree of rivalry

This measures the intensity of competition among existing firms in the industry.

The travel and tourism industry in Saudi Arabia is becoming increasingly competitive as the
country’s Vision 2030 attracts more international and domestic players. Competing online
platforms and traditional accommodation providers create fierce competition.

ABC Company KSA has the advantage of a niche market focus, primarily targeting travel agents via
its proprietary portal. While there is rivalry, its business model of B2B operations may be less
exposed to direct competition compared to B2C platforms.

High due to competition in the KSA tourism market, but mitigated by ABC Company KSA’s specific
B2B focus.
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5. Summary of Controlled Transactions
i. Introduction
This section describes in detail the Controlled Transactions. The information provided in this
section contains the transaction volumes in order to allow an assessment of their economic
significance. Moreover, it also describes the TP policy applied for each category of the Controlled
Transactions.

ii. Legal entities to the Controlled Transactions

The below table provides a brief overview of the related persons involved in the controlled
Transactions for FY 2023:

Table 4: Legal entity to the Controlled Transactions for FY2023

Name of Country Relationship

Legal
# related of tax with related Brief business description
Status
party residence party

The Company is primarily

engaged in the business of
reservation of transportation,
ABC Parent
1 Company Dubai restaurants and car rental,
Company Company
Reservation and marketing of
tourist accommodation units and
Tourism promotion activities.

Source: Information provided by the client

iii. Transaction flow and intra-group receipts/payments

by tax jurisdictions
The figure below depicts the flow of the Controlled Transactions carried out by ABC Company.

Figure 3: Summary of related party transactions carried by ABC Company for FY2023

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 ABC
ABC
Company
Company

Services flow

Payment flow

Source: Information provided by the client

The table below provides information on amounts of intra-group payments/ receipts for each
Controlled Transaction.

Table 5: Amounts of intra-group payments/receipts for the Controlled Transactions

Transaction Transaction Transaction Related Amount

Description Jurisdiction
No. Nature Type Person (SAR)
Hotel ABC United Arab
1 Purchases Services 8,545,045
Accommodation Company Emirates
Total 8,545,045

Copy of all intercompany agreement concluded by ABC Company with its related party for
the above Controlled Transaction is provided in Appendix 3.

a) Transaction 1: Hotel Accommodation

The agreement sets out the general terms and conditions between ABC Company and ABC
Company KSA as it relates to the purchase of accommodation reservations and other travel
related services from ABC Company using its online reservation system by ABC Company.

Hotel accommodations typically include a private room with a bed, bathroom facilities, and
daily housekeeping. Basic amenities often include free Wi-Fi, a television, air
conditioning/heating, and essential furniture like a desk and wardrobe.

ABC Company will provide the ABC Company’s agents with access to the "ABC Company s
"online reservations system for booking of hotels, and other Services that may be made
available from time to time.

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6. Functional Analysis
i. General
The functional analysis provides the factual and analytical foundation for establishing a TP
methodology consistent with the arm’s length standard. It stands for organizing facts about
the related companies (with respect to specific transactions) in terms of their functions,
risks, and assets in order to identify how these characteristics are divided between the
companies involved and between the transactions under review. A functional analysis is
essential to the development of TP policies for the following reasons:

• The functions, risks and assets associated with a related person’s operations usually
have a significant effect on its profitability; and

• The functional analysis provides the information and insight necessary to

characterize intercompany transactions and identify uncontrolled transactions comparable
to the transactions of the related persons (as well as other data).

By providing a description of the functions, risks and assets and their location within a
corporate group, the functional analysis provides the first step in evaluating the relative
contribution to profit of various related companies and the appropriate pricing of
intercompany transactions.

Based on the scope of the intercompany transactions addressed in this report, the
functional analysis includes an overview of the business functions and risks undertaken by
ABC Company and its related parties in relation to the Controlled Transactions.

ii. Functions performed

This section covers a description of the functions performed by ABC Company in relation to
the Controlled Transactions.

a) Procurement of Hotel Accommodations:

a. Vendor Relationship Management:

Vendor Relationship Management (VRM) refers to the process of building and maintaining
strong relationships with suppliers to ensure efficient procurement, quality service, and

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mutually beneficial terms. It involves communication, negotiation, and collaboration to
optimize the supply chain.

ABC Company likely maintains a close relationship with its parent company in Dubai (ABC
Company) for sourcing hotel accommodations. This involves regular communication to
ensure availability, pricing, and terms are aligned with their requirements.

b. Contract Negotiation and Terms Agreement:

Contract Negotiation and Terms Agreement is the process of discussing and finalizing the
terms of a contract between parties, including pricing, deliverables, and conditions. It aims
to ensure mutually beneficial and legally binding terms that align with both parties'
interests.

In case of ABC Company:

 Company may be responsible for negotiating the terms of the hotel accommodation
agreements, even though it's dealing with a related party. These terms could include
pricing, volume commitments, cancellation policies, and room allocation agreements.
 The contracts would also cover aspects like the duration of the agreement and any
special conditions during peak tourism seasons.
 While this is an intercompany transaction, the transfer pricing rules require these
transactions to be conducted at an arm’s length. The functional analysis would need
to document how these prices are determined, ensuring they align with market rates.

c. Demand Forecasting and Planning:

Demand Forecasting and Planning is the process of predicting future customer demand
using historical data, trends, and market analysis to optimize inventory and resource
allocation. It helps businesses ensure they meet demand without overproducing or
understocking.

ABC Company would project the demand for hotel accommodations based on anticipated
tourism bookings and market trends. They would provide forecasts to the ABC Company to
secure a sufficient number of rooms. This is essential to ensure that the ABC Company KSA
can meet customer demands without overcommitting on hotel rooms, which could result in
unused inventory.

d. Order Placement and Confirmations:

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Order Placement and Confirmations is the process of formally requesting goods or services
from a supplier and receiving acknowledgment of the order. It ensures that the order details,
such as quantity and delivery terms, are agreed upon and confirmed between both parties.

Once the demand is determined, ABC Company formally places orders for hotel
accommodations with the Dubai parent company. The entity ensures that the right quantity
of hotel rooms is booked for the required periods. This involves coordination between both
entities to confirm room availability, handle special customer requests, and guarantee a
smooth booking process for the end user.

e. Pricing Review and Payment Processes:

Pricing Review and Payment Processes involve regularly assessing the cost of goods or
services to ensure competitiveness and accuracy, followed by managing the timely
settlement of payments. These steps ensure financial alignment and compliance with
agreed terms between parties.

ABC Company must periodically review the pricing of the hotel accommodations to ensure it
remains competitive, especially if tourism demand fluctuates due to seasonal factors. The
entity will also be responsible for arranging payments for these accommodations to the
parent company, ensuring that the intercompany pricing complies with transfer pricing
guidelines.

b) Coordination of Supply Chain Logistics:

Coordination of Supply Chain Logistics involves managing the flow of goods, services, and
information across the supply chain to ensure timely delivery and efficiency. It includes
overseeing transportation, inventory management, and communication between suppliers
and customers.

ABC Company may be involved in coordinating the logistics of ensuring that the hotel
bookings are seamlessly integrated into the larger tourism packages they sell. This might
include:

a. Ensuring that reservations are made and confirmed in a timely manner.

b. Collaborating with the parent company to solve any operational issues (e.g.,
overbooked rooms, late cancellations).

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c) Monitoring Performance and Reporting:
Monitoring Performance and Reporting involves tracking the effectiveness and quality of
services or products delivered, using key performance indicators (KPIs) to assess outcomes.
This process ensures that issues are identified promptly and communicated to relevant
stakeholders for continuous improvement.

In the context of ABC Company:

a. After the accommodation services have been rendered, the ABC Company would
likely monitor the performance of ABC Company hotel accommodations in terms of
customer satisfaction and quality.

b. This involves managing feedback, resolving customer complaints, and reporting back
to the parent company about any issues that may arise, such as overbooking or poor
service quality.

iii. Risks assumed

This section covers a description of the key business risks, applicable to ABC Company in
relation to the Controlled Transactions.

a) Market Risk
Market risk refers to the risk that an entity may be unable to sell its products or services at
prices that will allow it to generate a profit or that it may be unable to sell its products or
services at all. Such risk may result from increased competition and relative pricing
pressures, declines in market demand or changes in market perceptions regarding the
entity’s products or services, and the inability to develop or penetrate in a market.

ABC Company may bear risks associated with fluctuating demand for tourism services in
KSA, and pricing pressures from competitors.

b) Inventory Risk
The risk relates to possibility of potential losses associated with carrying inventory of raw
materials (such as obsolescence, shrinkage, or market collapse).

24 | P a g e
ABC Company does not hold inventory. So, inventory risk is not applicable to their
operations.

c) Capacity Utilization Risk

This risk relates to the possibility of non-recovery of fixed costs being incurred in course of
the business. This may happen due to circumstances such as lack of production, lack of
demand, inability to recover prices, etc.

For ABC Company, risk arises from factors like seasonal demand fluctuations, increased
competition, and external events that can lead to underutilized resources and unrecovered
fixed costs.

d) Foreign Exchange Risk

Foreign exchange risk arises from any adverse revaluation of assets and liabilities due to
fluctuation in exchange rates, which would eventually have a negative impact on the
profitability of the company.

ABC Company primarily acquires hotel accommodations from ABC Company, which
introduces foreign exchange risk.

e) Quality Risk
A company bears quality risk when there is any defect in the product/service produced, sold
or given. Further, warranty risk is the risk of repairing or re-constructing the constructed
projects for its failure to meet the contractual specifications/ standards.

In ABC Company, quality risk arises if the services provided, such as hotel accommodations
or tour experiences, fail to meet customer expectations or contractual standards. Warranty
risk may involve compensating or offering refunds for subpar services or addressing
customer complaints due to service deficiencies.

f) Credit Risk
Credit risk is the risk that a customer, having entered into a sales contract and received
services, becomes unable or unwilling to pay the purchase amount to its supplier.

25 | P a g e
In ABC Company, credit risk occurs when customers, after booking and receiving travel
services, fail to pay the agreed amount.

g) Liquidity Risk
Liquidity risk is the risk that a company or bank may be unable to meet short term financial
demands. This usually occurs due to the inability to convert a security or hard asset to cash
without a loss of capital and/ or income in the process.

Liquidity risk arises when ABC Company is unable to meet short-term financial obligations,
such as supplier payments or operational costs.

iv. Assets employed

This section contains an overview of the main assets used by ABC Company under the
Controlled Transactions.

a) Tangible assets
The tangible assets used by ABC Company in conducting its activities consist solely of
laptops.

b) Intangible assets
ABC Company does not own or employee any significant intangible asset for its business
operation.

v. Summary of functional analysis

The following table summarizes allocation of functions, risks and assets of the parties to the
Controlled Transactions.

Table 6: Allocation of functions, risks and assets between the parties to the Controlled
Transactions in relation to ABC Company

Functions ABC Company

Procurement of Hotel Accommodations XXX
Coordination of Supply Chain Logistics XX
Monitoring Performance and Reporting X
26 | P a g e
 Risks ABC Company
Market Risk XX
Inventory Risk -
Capacity Utilization Risk X
Foreign Exchange Risk XX
Quality Risk X
Credit Risk XXX
Liquidity Risk XX
Assets ABC Company
Tangible assets XXX
Intangible assets -
Key
XXX Full involvement in this function, risk or asset
XX Equal involvement in this function, risk or asset
X Low degree of Bearing limited degree of risk
- No involvement in this function, risk or asset

Source: Company’s information, EY illustration

27 | P a g e
7. Economic Analysis
i. Introduction
This section discusses the selection of the most appropriate TP method,
based on Chapter 4 of the KSA TP bylaws, to analyze the Controlled
Transactions.

ii. Transfer pricing methods

a) Comparable Uncontrolled Price Method
The Comparable Uncontrolled Price (CUP) method is a widely recognized
approach for determining the arm's length price for transactions between
related entities. This method involves comparing the price charged in a
controlled transaction (between related parties) to the price charged in
comparable uncontrolled transactions (between unrelated parties). The key
aspects of the CUP method include identifying transactions that are similar in
nature to establish a pricing benchmark and sourcing data from reliable
resources such as public databases and industry reports. Important criteria
for comparability include product or service similarity, market conditions, and
the timing of the transactions.

To ensure effective comparability, it is crucial to account for any differences

that could materially impact the open market price, or to make reasonable
adjustments for those differences. The reliability of the CUP analysis depends
on the accuracy of these adjustments, as well as the establishment of
comparability. Both internal comparable (transactions between one party to
the controlled transaction and an independent party) and external
comparable (transactions between two independent parties) should be
considered when evaluating the CUP method. By focusing on these factors,
the CUP method aims to reflect true market conditions in transfer pricing.

28 | P a g e
b) Resale Price Method
The Resale Price Method (RPM) is a transfer pricing technique used to
establish the arm's length price for transactions involving the resale of goods
between related entities. This method is particularly effective when related
party buys goods from another related party and then resells them to an
unrelated party. The RPM begins with the resale price at which the product is
sold to the unrelated buyer. From this price, a gross margin is deducted,
reflecting the typical profit that a distributor or reseller would earn in a
comparable uncontrolled transaction.

The calculation for the RPM can be expressed as:

Arm’s Length Price=Resale Price−Gross Margin

The gross margin is derived from comparable uncontrolled transactions

involving independent entities. For accurate comparability, it’s essential that
the transactions occur under similar market conditions and that the goods
sold are comparable in nature and function. The RPM is most commonly
applied to tangible property transactions where the purchaser has not
significantly altered the goods or utilized intangible assets before resale.
Evaluating both internal and external comparable transactions is crucial for
effectively applying the RPM.

c) Cost Plus Method

The Cost-Plus Method (CPM) is used to determine transfer prices for goods
and services exchanged in controlled transactions by comparing the markup
on incurred costs with that of comparable uncontrolled transactions. This
method is particularly suited for valuing semi-finished goods, long-term
supply arrangements, and services. The cost-plus markup is derived either
from the markup on costs of the same supplier in internal comparable
transactions or from an unrelated party in external comparable transactions.
However, differences in accounting practices and the limited availability of
public information can complicate the assessment of comparability between
controlled and uncontrolled transactions.

In implementing the cost-plus method, companies first identify the cost base,
which encompasses all direct and indirect costs related to production,

29 | P a g e
including raw materials, labor, and overhead expenses. A markup is then
added to this cost base to reflect a typical profit margin expected in arm's
length transactions, determined through comparable transactions or industry
standards. It’s essential for the cost-plus method to comply with local tax
regulations and international guidelines, such as those established by the
OECD. This method is most effective in scenarios where market prices are
not readily available, particularly in manufacturing and service sectors where
costs can be clearly defined.

d) Transactional Profit Split Method

The Transactional Profit Split Method (TPSM) is a transfer pricing technique to
allocate profits among related entities based on their contributions to a
controlled transaction. This method is particularly valuable for transactions
involving unique intangibles or integrated activities that are difficult to
separate. TPSM operates by dividing the combined profits derived from a
controlled transaction according to the value of the tangible and intangible
assets used and the functions performed by each party involved.

The process consists of two main steps: first, determining the total profit
generated from the transaction, and then allocating that profit to each entity
based on their contributions. TPSM adheres to the arm's length principle,
aiming to reflect what independent parties would agree upon in similar
circumstances. It is particularly applicable in scenarios where there is
significant interrelation between controlled and other transactions or when
parties’ own rights to intangible assets that significantly impact profitability.
In cases where it is possible to determine an arm's-length remuneration for
specific functions performed, TPSM can be applied to the residual profit
remaining after those functions are compensated.

e) Transactional Net Margin Method

The Transactional Net Margin Method (TNMM) is a transfer pricing approach
that evaluates the arm's length nature of pricing for goods, services, or
intangibles in controlled transactions. Unlike methods focusing on gross

30 | P a g e
margins, TNMM compares the net profit margin relative to a specific base—
such as costs, sales, or assets—achieved in a controlled transaction with that
of comparable uncontrolled transactions. This method measures the total
return derived from the controlled taxpayer’s narrowly defined business
activity, emphasizing the importance of capital invested and risks assumed
by

both controlled and uncontrolled parties. While comparable must be broadly

similar, some diversity in products and limited functional differences are
acceptable.

To apply TNMM effectively, companies must identify reliable comparable

operating under similar economic conditions, often utilizing publicly available
financial data. This method adheres to the arm's length principle, ensuring
that the financial outcomes of controlled transactions align with those of
independent parties in similar circumstances. TNMM is particularly useful
when other methods, such as the Comparable Uncontrolled Price (CUP)
method, are challenging to implement due to a lack of comparable
transactions. It is commonly applied in industries where firms have similar
functions and risks, such as manufacturing or distribution, making it a
flexible and technically sound approach for assessing transfer pricing. In
contrast to the RPM and CPM, the TNMM does not require adjustments for
differences in accounting treatment of period expenses or revenues because
such differences do not affect operating profits.

f) Other Method
There may be situations where a taxpayer considers the possibilities to use
any of the transfer pricing methods recognized under Article 6 of the Bylaws
and is unable to establish an appropriate degree of comparability based on
the facts and circumstances. In such situations, the taxpayer may consider
using any method, other than the above- mentioned methods to measure
the arm’s length result (e.g., use of independent valuation reports,
quotations, etc.).

31 | P a g e
iii. Selection of most appropriate method
The following paragraphs explain in detail the method applied for Controlled
Transactions 1.

Table 7: Selection of appropriate transfer pricing method for Controlled

Transactions

Methodology Selection Selection criteria for Controlled Transactions

The CUP method is not applicable for ABC Company
because they exclusively provide services. Their parent
CUP Method × company supplies these services with a 1% margin on
each transaction, eliminating the need to compare
controlled and uncontrolled transactions.

The RPM method is not suitable for ABC Company

because it operates in the service sector rather than in
RPM × trading or manufacturing. Additionally, services cannot be
resold once they have been provided to the customer,
making this method impractical in this context.

Since ABC Company primarily provide services by

outsourcing to their parent company, the costs involved
CPM ✓ in delivering these services can be clearly defined. The
cost- plus method allows ABC Company to calculate the
transfer price by adding a markup to the costs incurred
for each service provided. This straightforward
calculation aligns well with their operational model,
where the parent company supplies services for a set
margin.
Transaction involves a consistent relationship with the
parent company, using a cost-plus approach ensures that
the pricing remains transparent and justifiable. ABC
Company can easily determine the cost base for the
services they receive and apply an appropriate markup to
CPM ✓
reflect their profit margin. This method minimizes
disputes over pricing and aligns with the arm's length
principle, making it a practical choice for managing
transfer pricing in their unique service-oriented
environment.
32 | P a g e
 TPSM is typically used in complex transactions involving
multiple parties where contributions to the overall profit
need to be allocated based on the functions performed. In
the case of ABC Company, the nature of their transactions
TPSM ×
is straightforward, as they primarily act as intermediaries
by outsourcing services to their parent company and
charging a fixed 1% margin. This lack of complexity
means there is little need to allocate profits based on
varying contributions, making TPSM unnecessary.
TNMM is not suitable for ABC Company, as it assesses the
arm's length nature of pricing by comparing net profit
margins of controlled transactions to those of comparable
uncontrolled transactions. However, ABC Company
TNMM ×
operates mainly as an intermediary, outsourcing services
to its parent. This straightforward fee structure
eliminates the complexity typically needed for a TNMM
analysis. The clear and consistent markup on outsourced
services would complicate a simple pricing model without
providing meaningful insights.
We are applying Cost Plus method for ABC Company
Other ×
that’s why there is no need for applying any Other
Method.

a) Application of Cost-Plus Method

The Cost-Plus Method (CPM) is a transfer pricing approach where the transfer
price of goods or services is determined by adding a markup to the costs
incurred in providing those goods or services. This method involves
calculating the total costs (direct and indirect) associated with production
and then applying a standard profit margin to derive the final price.

In the case of ABC Company, which takes orders from customers in KSA and
outsources services to its parent company for a fixed 1% margin, the cost-
plus method is particularly suitable. Since ABC Company primarily provides
services and has a clear cost structure associated with these outsourced
services, CPM allows for a straightforward calculation of transfer pricing. By

33 | P a g e
simply adding the 1% markup to the costs incurred, the company can
maintain transparency and consistency in pricing, ensuring compliance with
the arm's length principle. This method is effective in this context as it
minimizes disputes over pricing and aligns with the straightforward nature of
their service-oriented business model.

iv. Conclusion
Based on the above, using “Cost Plus method” was analyzed to be most
appropriate method for ABC Company. Further, a corroborative analysis was
performed using Cost Plus as the most appropriate method to conclude that
the revenue earned by ABC Company after accounting for all Transaction is
at arm’s length from a KSA TP perspective.

Appendix 1: KSA TP Regulations

Prior to the publication of the Transfer Pricing Bylaws (“TP Bylaws”), the KSA
tax law contained no detailed TP rules or guidelines. As an Inclusive
Framework member, the KSA has agreed to the implementation of four
minimum standards of the Base Erosion and Profit Shifting (“BEPS”) project,
including Action 13.

Article 63(c) of the KSA Income Tax Law allows the Zakat, Tax and Customs
Authority (“ZATCA”) to reallocate revenues and expenses associated with
transactions among related persons, as well as in the attribution of income
and expenses to branches, such that the returns reflect those that would
have resulted if the parties were independent and unrelated. This provision
in the primary tax legislation provides a statutory authority to the ZATCA to
review and adjust transfer prices that it determines are not in accordance
with the arm’s-length standard.

On February 2019, ZATCA issued the TP Bylaws that are applicable to all
persons considered taxpayers pursuant to the KSA Income Tax Law (including
mixed-ownership entities). Further, ZATCA released the Transfer Pricing
Guidelines (“TP Guidelines”) (the latest edition being the third edition in
November 2022) to provide detailed guidance and minimize any ambiguities

34 | P a g e
for the taxpayers on the intended implementation of TP Bylaws. The TP
Bylaws and Guidelines are broadly aligned with the international standards,
including establishing the arm’s length principle and documentation
standards as set out in the OECD Transfer Pricing Guidelines.

The TP Bylaws introduced new compliance requirements in the form of three-

tier transfer pricing documentation (i.e. master file, local file and country-by-
country (“CBC”) report) and the submission of a Controlled Transaction
Disclosure Form for fiscal years ending on or after 31 December 2019. The
Controlled Transaction Disclosure Form is to be filed as part of the annual
income tax declaration within 120 days from the end of the fiscal year end.
Together with the Disclosure Form of Controlled Transactions, taxpayers are
required to submit an affidavit from a licensed auditor through which the
auditor certifies that the transfer pricing policy of the multinational
enterprises (“MNE Group”) is consistently applied by such taxpayers.

The TP bylaws require KSA entities and branches of foreign companies which
are subject to corporate Income Tax Law in KSA to maintain a transfer pricing
master file and local file, when their aggregate annual arm’s length value of
the controlled transactions exceeds SAR 6 million (“m”) in a given fiscal year.
For entities not meeting the threshold, it would be adequate to maintain
documentation in any format, covering general aspects covered in master
file and local file, particularly including the functional and economic analysis.

The master file and local file are required to be submitted within 30 days
from the date of request from ZATCA. However, during 2019 only, taxpayers
will be granted an extension of 60 days to provide the master file and local
file.

KSA taxpayers and pure-Zakat entities, having consolidated group revenue

exceeding SAR

3.2b in the year immediately preceding the reporting year, will be subject to
CBC reporting requirements in KSA, and will be required to notify the ZATCA
regarding the submission of the CBC report within 120 days of the end of the
reporting year and file the CBC report within twelve months after the fiscal
year end of the MNE Group.

35 | P a g e
The arm’s length principle is defined in the TP Bylaws as follows:

“Arm’s Length Principle” or “Arm’s-Length” means where conditions are

made or imposed between two or more related persons in their commercial
or financial relations which differ from those which would be made between
independent persons, then any profits which would, but for those conditions,
have accrued to one of such related persons, but, by reasons of those
conditions, have not so accrued, may be included in the profits of that person
and taxed accordingly.

The selection of transfer pricing method as per the TP Bylaws is in line with
OECD Guidance and prescribed methods (comparable uncontrolled price,
resale price, cost plus, transactional net margin and transactional profit
split). When, none of these methods provide a reliable measure of the arm’s-
length result, the bylaws provide that a taxable person may use other
transfer pricing methods. In addition, it is also provided that one method will
be sufficient as opposed to multiple methods being adopted. This is a helpful
concession and meets with the “purist transfer pricing” view rather than
looking at multiple methods to manage overall risk. The ZATCA may from
time to time set forth any relevant information regarding the selection of an
appropriate Transfer Pricing method in the Guidelines.

While providing the definition of “related persons” for transfer pricing

purposes, the TP Bylaws has introduced the concept of “effective control”
which can be indicated by several conditions, regardless of any common
ownership of share capital between the entities. In the second edition of KSA
TP Guidelines. “Control of one Person of another through one or more of the
stated ways (i.e. Control via governance; Control via funding; and Control via
business) creates a rebuttable presumption that effective control exists.
However, other factors may be considered as well to determine whether
there is effective control. In such cases, it is up to the Taxpayer to evaluate
and demonstrate that there is in fact, no effective control.

Though the TP Bylaws does not prescribe any penalties specific to transfer
pricing, penalties prescribed under the general provisions of KSA tax law will
be applied.

36 | P a g e
37 | P a g e
Appendix 2: OECD TP Guidelines
1.1 Arm’s Length Principle

The arm’s length principle is the international transfer pricing standard that
the OECD member countries have agreed which should be used for tax
purposes by multinational enterprises and tax administrations. On January
2022, the OECD released the 2022 edition of the OECD TP Guidelines. This
new version of the OECD TP Guidelines consolidates the agreed changes to
section based on various Base Erosion and Profit Shifting (“BEPS”)
recommendations. As a result, the 2022 edition includes new guidance on
the transactional profit split method, application of the approach in hard to
value intangible transactions and guidance on financial transactions, etc.
Reference is made to Article 9 of the OECD Model Tax Convention on Income
and on Capital, in regards of the arm’s length principle, which states that:

“[Where] conditions are made or imposed between two [associated]

enterprises in their commercial or financial relations which differ from those
which would be made between independent enterprises, then any profits
which would, but for those conditions, have accrued to one of the
enterprises, but, by reason of those conditions, have not so accrued, may be
included in the profits of that enterprise and taxed accordingly.”13

The arm’s length standard is applied by comparing transactions between

associated parties (“controlled transactions”) with transactions between
independent enterprises (“uncontrolled transactions”) based on
“economically relevant characteristics.” Comparability is achieved if: (i) no
differences between the controlled and uncontrolled transactions exist; (ii)
any differences that exist do not materially affect the condition being
examined; and (iii) to the extent differences exist, reasonably accurate
quantitative adjustments can be (and are) made to eliminate the effect of
these differences.

A number of methods for demonstrating compliance with the arm’s length

standard are presented in the OECD TP Guidelines. They may be categorized
into two groups14:

38 | P a g e
► Traditional transaction methods, including Comparable Uncontrolled
Price Method (“CUP method”), Resale Price Method (“RPM”) and Cost-Plus
Method (“CP method”)

► Transactional profit methods, including the Transactional Profit Split

Method (“PSM”) and Transactional Net Margin Method (“TNMM”)

The OECD TP Guidelines state that the objective is to select the method that
provides “the best estimation of an arm’s length price.”15 Notwithstanding
this overall objective, the

OECD TP Guidelines still effectively establish a preference in which methods

should be considered. The OECD TP Guidelines state:

“Traditional transaction methods are regarded as the most direct means of

establishing whether conditions in the commercial and financial relations
between associated enterprises are arm's length.”16

As a result, where, taking account the selection criteria of the most

appropriate method for a particular case as described at paragraph 2.2, even
though a traditional transaction method and a transactional profit method
can be applied in an equally reliable manner;

13 OECD TP Guidelines January 2022, paragraph 1.6

14 OECD TP Guidelines January 2022, paragraph 2.1

15 OECD TP Guidelines January 2022, paragraph 2.12

16 OECD TP Guidelines January 2022, paragraph 2.3

the traditional transaction method is preferable to the transactional profit

method. Moreover, where the CUP method and another transfer pricing
method can be applied in an equally reliable manner, the CUP method is to
be preferred.17

Thus, it is acknowledged that there are situations in which the data available
is inadequate for the CUP method to be applied reliably. In such cases, it is
appropriate to apply another method; where, as outlined in the OECD TP

39 | P a g e
Guidelines, one of the other traditional transaction methods is preferable to a
transactional profit method.

The process of selecting which method to apply therefore entails starting

with the preferred methods and assessing whether they can be implemented
with sufficient reliability to either support a conclusion on their own merit or
with a corroborating method or, if not, considering other acceptable
methods. The following sections provide an outline of each method.

1.2 Traditional transaction methods

As outlined, the OECD TP Guidelines discuss three traditional transaction

methods: (i) the CUP method; (ii) the RPM; and (iii) the CP method.

Comparable uncontrolled price method

The CUP method compares the price charged for property or services
transferred in a controlled transaction to the price charged for property or
services transferred in a comparable uncontrolled transaction in comparable
circumstances.18 Comparability requires that a) none of the differences (if
any) between the transactions being compared or between the enterprises
undertaking those transactions could materially affect the price in the open
market; or, b) reasonably accurate adjustments can be made to eliminate
the material effects of such differences between the controlled and
uncontrolled transactions19. The extent and reliability of the necessary
quantitative adjustments will affect the relative reliability of the analysis
under the CUP method.20 As such, the reliability of the method is therefore
dependent on establishing comparability of the transactions.

In practice, there is likely to be sufficient comparability only if the nature of

the goods or services transferred, and the circumstances in which they are
transferred, are highly similar to the controlled transaction.

The Chapter II of the 2022 OECD TP Guidelines also includes new guidance
especially applicable to commodity transactions. The new guidance states
that, the CUP method would generally be an appropriate transfer pricing
method for establishing the arm’s

length price for the transfer of commodities21 between associated

enterprises22. Under the method, the arm’s length price for commodity
40 | P a g e
transactions may be determined by reference to comparable uncontrolled
transactions and by reference to comparable uncontrolled arrangements
represented by the quoted price.23 A relevant factor in

17 OECD TP Guidelines January 2022, paragraph 2.3

18 OECD TP Guidelines January 2022, paragraph 2.14

19 OECD TP Guidelines January 2022, paragraph 2.15

20 OECD TP Guidelines January 2022, paragraph 2.16

21 The “commodities” shall encompass physical products for which a quoted

price is used as a reference by independent parties in the industry to set
prices in uncontrolled transactions.

22 OECD TP Guidelines January 2022, paragraph 2.18

23 The “quoted price” refers to the price of the commodity in the relevant
period obtained in an international or

domestic commodity exchange market. In this context, a quoted price also

includes prices obtained from recognized and transparent price reporting or
statistical agencies, or from governmental price-setting agencies, where such

dinedteexrems airne iunsegd tahs

aereafperpenrcoepbryiuanterenlaetesdseontfituiess itno
gdettehrmeinqeuporitceesdinptrraicnseacftoiornsabestpweeecniftihcemc.om
modity is based on (a) the extent to which the quoted price is widely and
routinely used in the ordinary course of business in the industry to negotiate
prices for uncontrolled transactions comparable to the controlled transaction
(b) the pricing date, which refers to the specific time, date or time period
(e.g. a specified range of dates over which an average price is determined)
selected by the parties to determine the price for commodity transactions.24
Further, for the CUP method to be reliably applied to commodity
transactions, the economically relevant characteristics of the controlled
transaction and the uncontrolled transactions or the uncontrolled
arrangements represented by the quoted price need to be comparable. And
in cases where there are differences between the conditions of the controlled
41 | P a g e
transaction and the conditions of the uncontrolled transactions or the
conditions determining the quoted price for the commodity that materially
affect the price of the commodity transactions being examined, reasonably
accurate adjustments should be made to ensure that the economically
relevant characteristics of the transactions are comparable25.

Resale price method

Under the RPM, an arm’s length price for a sale from A to B is determined by
subtracting the resale price margin from the price at which B resells to a
third party. In essence, the resale price margin compensates a reseller of
goods for costs incurred and provides an appropriate profit for functions
performed, tangible and intangible assets employed, and risks borne by the
reseller.

“The resale price margin of the reseller in the controlled transaction may be
determined by reference to the resale price margin that the same reseller
earns on items purchased and sold in comparable uncontrolled transactions
(“internal comparable”). Also, the resale price margin earned by an
independent enterprise in comparable uncontrolled transactions may serve
as a guide (“external comparable”)”. Where the reseller is carrying on a
general brokerage business, the resale price margin may be related to a
brokerage fee, which is usually calculated as a percentage of the sales price
of the product sold, taking into account whether the broker is acting as an
agent or a principal.26

The RPM is generally applicable for distribution and sales transactions and is
generally not applicable for the transfer of intangible assets.

Comparability under the RPM requires that there are no differences that
would materially affect the resale price margin in the open market or that
reasonably accurate adjustments can be made to account for such
differences. The extent and reliability of adjustments will

affect the relative reliability of the RPM analysis. Fewer adjustments are
needed to account for product differences than under the CUP method, but
other comparability attributes (e.g., functions) generally are given more
weight. The RPM is not considered to be as reliable if the reseller adds
substantially to the value of the product (through functions or intangibles) or
42 | P a g e
incorporates the product into another product, because it is difficult to
ensure comparability in such circumstances.

Cost plus method

Under the CP method, an arm’s length price is determined by applying an

appropriate mark-up on costs incurred by the supplier of property or services
in a controlled

24 OECD TP Guidelines January 2022, paragraph 2.22

25 OECD TP Guidelines January 2022, paragraph 2.20

tr2a6 OnEsCaDcTtiPoGnuifdoerlinpers
oJapnuearrtyy2t0r2a2,npsafreagrrraepdh 2o.2r8services provided to an
associated purchaser. The underlying rationale is that a cost-plus mark-up
provides an appropriate profit for the functions performed, assets employed,
and risks borne by the taxpayer. This method is most useful where semi-
finished goods are sold between associated parties, where associated parties
have concluded joint facility agreements or long-term buy-and-supply
arrangements, or where the controlled transaction is the provision of
services.27

The cost-plus mark-up of the supplier in the controlled transaction should

ideally be established by reference to the cost-plus mark-up that the same
supplier earns in comparable uncontrolled transactions (“internal
comparable”). In addition, the cost-plus mark-up that would have been
earned in comparable transactions by an independent enterprise may serve
as a guide (“external comparable”).28

This method is generally not relied on in the analysis of controlled licensing

transactions as the CP method can only be applied for transactions involving
tangible products and the provision of services.

Comparability under the CP method requires that no difference exists that

would materially affect the cost-plus mark-up in the open market or that
reasonably accurate adjustments can be made to reflect any differences. The
extent and reliability of adjustments will affect the relative reliability of the

43 | P a g e
analysis. Like the RPM, fewer adjustments are needed under the CP method
to account for product differences than is the case for the CUP method, but
other comparability attributes (e.g., functions) generally are given more
weight. Thus, it is particularly important to consider differences in the level
and types of expenses – operating expenses and non-operating expenses
including financing expenditures – associated with functions performed and
risks assumed by the parties or transactions being compared.29

1.3 Transactional profit methods

The OECD TP Guidelines allow the use of “other methods” when traditional
transaction methods cannot be reliably applied. Other methods outlined in
the OECD TP Guidelines include the PSM and the TNMM, which are
collectively described as the transactional profit methods.

Transactional pro𝑓it split method

The PSM determines the division of profits that independent enterprises

would expect to realize under circumstances similar to the transaction under
review. The PSM calculates the profits (either total or residual) from the
controlled transaction and then splits them

between the associated enterprises on an economically valid basis that

approximates the division of profits that would have been agreed at arm’s
length. The contribution of each entity is determined by performing a
functional analysis and capability of being measured in a reliable manner.

There are a number of approaches to the application of the PSM, depending

on the characteristics of the controlled transactions, and the information
available. In performing a profit split analysis on a residual basis, combined
profits are divided in two categories. In the first category, are profits
attributable to contributions which can be reliably benchmarked (ordinarily a
market return based on the returns of independent

27 OECD TP Guidelines January 2022, paragraph 2.45

28 OECD TP Guidelines January 2022, paragraph 2.46

e2n9 tOiEtiCeDsT)P.
GIunidelsineecsoJannduaryc2a0t2e2g,oparrya,gratphhe2.5r1esidual profit or

44 | P a g e
loss is generated based on contributions which may be unique and valuable,
and/or are attributable to a high level of integration or the shared
assumption of economically significant risks. Stage two focuses on intangible
property contributed, relative bargaining positions, and reference to external
market data.

Transactional net margin method

The TNMM examines the net profit from controlled transactions as a

percentage of a base (e.g., costs, sales, assets). Ideally, the arm’s length net
margin should be established by reference to net margins earned by the
same taxpayer in comparable uncontrolled transactions. If that is not
possible, the TNMM refers to comparable transactions between independent
entities. Comparability between controlled and uncontrolled transactions is
established through a functional analysis.

Quantitative adjustments must be made to account for material differences

between the controlled and uncontrolled transactions. Use of an arm’s length
range, rather than a point estimate for an arm’s length consideration, further
reduces the effect of differences between the controlled and uncontrolled
transactions.

The TNMM should consider only the profits of the controlled entity that are
attributable to the transactions under review. The application of the TNMM on
a company-wide basis is inappropriate if the company engages in a variety of
different controlled transactions that cannot be compared on an aggregate
basis with those of an uncontrolled comparable company.

1.4 Intercompany services

Chapter VII of the OECD TP Guidelines discusses issues that arise in

determining for transfer pricing purposes whether services have been
provided by one member of a multinational enterprise (“MNE”) group to
other members of that group and, if so, in establishing arm’s length pricing
for those intra-group services.30

Intra-group services may vary considerably among MNE groups, and thus,
each case is dependent upon its own facts and circumstances and the
arrangements within the group.31 However, there are two main issues in the

45 | P a g e
analysis of transfer pricing for intragroup services that are addressed in the
OECD TP Guidelines. The first issue is whether services have, in fact, been
provided. The second issue is determining the appropriate charge for such
services for tax purposes in accordance with the arm’s length principle.

Determining whether intra-group services have been rendered

The fact that a payment was made to an associated enterprise for purported
services are not prima facie evidence that such services have been rendered.
At the same time, the absence of payments or contractual agreements does
not automatically lead to the conclusion that no intra-group services have
been rendered.33 The OECD TP Guidelines state that determining whether
an intra-group service has been rendered depends on whether the activity in
question provides a group member with economic or commercial value to
enhance its commercial position. This, in turn, can be determined by
considering

30 OECD TP Guidelines January 2022, paragraph 7.1

31 OECD TP Guidelines January 2022, paragraph 7.4

w3h2
eOtEhCDerTPanGuiindedlienepseJnanduearnyt2e02n2t,epraprargirsaephin7.
5comparable circumstance would have been willing

33 OECD TP Guidelines January 2022, paragraph 7.18

to pay for the activity if performed for it by an independent enterprise or

would have

performed the activity in-house for itself. 34 If the activity is not one for
which the independent enterprise would have been willing to pay or perform
for itself, the activity ordinarily should not be considered as an intra-group
service under the arm’s length principle. 35 The facts and circumstances of
each situation will largely determine the result. However, the OECD TP
Guidelines provide an analytical framework with reference to two
circumstances. It then proceeds to address particular circumstances and
suggests examples where intra-group services do and do not exist.

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The first circumstance is where the intra-group services are performed by
one member of an MNE group to meet an identified need of one or more
specific group members. In this case, an intra-group service would ordinarily
be found to exist if an independent enterprise in comparable circumstances
would have satisfied the identified need either by performing the activity in-
house or by having the activity performed by a third party36. As such, in
such a case where intra-group service is found to exist, it is essential that
reliable documentation is provided to tax administrations to verify that costs
have been incurred by the service provider.37

The second circumstance is where an associated enterprise undertakes

activities that relate to more than one member of the group or to the group
as a whole. In a narrow range of such cases, where the intragroup activity
may be performed relating to group members even though those group
members do not need the activity (and would not be willing to pay for it were
they independent enterprises). Such an activity would be one that a group
member (usually the parent company or a regional holding company)
performs solely because of its ownership interest in one or more other group
members, i.e., in its capacity as shareholder.38

This type of activity may be referred to as a “shareholder activity”, which

would not be considered to be an intra-group service, and thus would not
justify a charge to other group members. The costs associated with this type
of activity should be borne and allocated at the level of the shareholder.39

In contrast, if a parent company raising funds on behalf of a group member,

which uses them to acquire a new company, would be a chargeable service.
Where such activities are performed by a group company other than solely
because of an ownership interest in other group members, then that group
company is not performing shareholder activities but should be regarded as
providing a service to the parent or holding company.40

Intra-group activities that merely duplicate a service that another group

member is

34 OECD TP Guidelines January 2022, paragraph 7.6

35 OECD TP Guidelines January 2022, paragraph 7.6

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36 OECD TP Guidelines January 2022, paragraph 7.8

37 OECD TP Guidelines January 2022, paragraph 7.8. The OECD TP

Guidelines provide as an example of repairs performed on manufacturing
equipment by a group member as a valid intra-group service.

38 OECD TP Guidelines January 2022, paragraph 7.9. The OECD TP

Guidelines at 7.10 provide examples of non -chargeable shareholder
activities which include costs of activities relating to the juridical structure of
the parent company, costs relating

performing for itself, or that is being performed for such other group member
by a third party are not intra-group services unless they fall under one of two
exceptions. First, where the duplication of services is only temporary.41
Second, where the duplication is undertaken to reduce the risk of a wrong
business decision.42 The nature of any possible duplication of services and
the reason the company appears to be duplicating the costs need to be
identified in detail. Examination of information provided by taxpayer may
determine the exact nature of the intra-group services (different, additional,
or complementary to the activities performed in-house).43

Activities performed by a group member that relate only to some group

members but incidentally provide benefits to other group members ordinarily
would not be intra-group services for those incidentally benefited, unless
they would ordinarily be willing to pay for the benefits.44 The same analysis
applies to an enterprise that is incidentally benefited by activities because it
is part of a larger concern and not due to any specific activity being
performed.45 In contrast, activities centralized in the parent company or one
or more group service centers (such as a regional headquarters company)
and made available to the group as a whole ordinarily will be considered
intra-group services because they are the type of activities that independent
enterprises would have been willing to pay for or to perform for
themselves.46

The form that the services would generally take if the transactions were
between independent parties may also be relevant in considering whether
charges for the services are appropriate. If the charge is built into the
transaction, a further service fee is not appropriate.47 A related issue is

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whether a fee should be charged for services provided on an “on call” or
“standby” (as incurred by an independent enterprise in comparable
circumstances) basis. The OECD TP Guidelines determine reasonable conduct
by reference to the conduct of independent parties transacting with each
other.48 The OECD TP Guidelines also refer to three factors in determining
the reasonableness of a standby charge. These factors include whether the
potential need for the service was remote, or whether the advantage of
having services on-call was negligible, or whether the on-call services could
be obtained promptly and readily from other sources without the need for
stand-by arrangements. In the application of these principles, the OECD TP
Guidelines suggest looking at the benefits conferred on the group company
over a period of several years, rather than just in the year of the charge,
before determining that an intra-group service is being provided.49

41 OECD TP Guidelines January 2022, paragraph 7.11. The re-organization to

centralize its management functions is given as an example.

42 OECD TP Guidelines January 2022, paragraph 7.11. Obtaining a second

legal opinion on a subject is given as an example.

43 OECD TP Guidelines January 2022, paragraph 7.11. The OECD TP

Guidelines provide as an example of a company that performs marketing
services in-house and also is charged for marketing services from a group
company does not of itself determine duplication, since marketing is a broad
term covering many levels of activity.

44 OECD TP Guidelines January 2022, paragraph 7.12. The OECD TP

Guidelines provide as an example of an activity that is not chargeable, a re-
organization of the group, to acquire new members, or to terminate a
division that provides synergistic

benefits for other group members.

45 OECD TP Guidelines January 2022paragraph 7.13. The OECD TP

Guidelines distinguish passive association fro3m4ac|tivPe a g e

promotion that enhances the profit-making potential of particular members

of the group. Thus, a higher credit rating or a
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marketing campaign that enhances a related company is an intra-group
service.

46 OECD TP Guidelines January 2022, paragraph 7.14. The OECD TP

Guidelines give numerous examples, which include order management,
customer service and call centers, many administrative services, research
and development, and the

administration and protection of intangible property etc. for all or part of the
group.

The fact that a payment was made to an associated enterprise for purported
services can be useful in determining whether services were in fact provided.
But the mere description of a payment as, for example, “management fees”
should not be expected to be treated as prima facie evidence that such
services have been rendered. At the same time, the absence of payments or
contractual agreements does not automatically lead to the conclusion that
no intra-group services have been rendered.50

Determining an arm’s length charge

The OECD TP Guidelines permit the determination of intra-group services

through the direct-charge method and through various indirect-charge
methods. The direct-charge method is where the associated enterprises are
charged for specific services. The OECD TP Guidelines state that the direct-
charge method facilitates the determination of whether the charge is
consistent with the arm’s length principle and should be easy to employ
when similar services are provided to both related and independent parties.
Therefore, its use is encouraged in those situations unless the services to
third parties are merely occasional or marginal.51

A direct charge method for charging of intragroup practices can be difficult to

apply in practice due to which group companies have developed indirect
charge methods. Indirect- charge methods are defined as cost allocation and
apportionment methods, which necessitate some degree of estimation or
approximation as a basis for calculating an arm’s length charge. These
methods are generally not acceptable where specific services that form a
main business activity of the enterprise are provided not only to associated
enterprises but also to third parties. 52 The indirect method is specifically
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acceptable in situations where the proportional value of the service rendered
to various entities can only be approximated or estimated, and where the
separate recording and analysis of the relevant service activities for each
beneficiary would involve a disproportionately heavy burden in relation to
the activities themselves.53 The compensation for intra-group services may
also be included in the price for other transfers, such as the price for
licensing a patent included in a payment for technical assistance services or
for managerial advice on the marketing of the goods produced under the
license. In such cases, the tax administration and the taxpayers would have
to check that there is no additional service fee charged and that there is no
double deduction.54

In order to satisfy the arm’s length principle, the allocation method must lead
to a result that is consistent with what comparable independent enterprises
would have been prepared to accept.55 To achieve this, the transaction
should be considered from the perspectives of the service provider and the
service recipient. In this respect, the relevant considerations include the
value of the service to the recipient, and how much a comparable
independent enterprise would pay for the service in comparable
circumstances, as well as the costs to the service provider.56 In addition, a
particular allocation basis may be acceptable or unacceptable depending on
the nature and usage of the service.57

50 OECD TP Guidelines January 2022, paragraph 7.18.

51 OECD TP Guidelines January 2022, paragraph 7.21 and 7.22.

52 OECD TP Guidelines January 2022, paragraph 7.23.

53 OECD TP Guidelines January 2022, paragraph 7.24.

54 OECD TP Guidelines January 2022, paragraph 7.27.

55 OECD TP Guidelines January 2022, paragraph 7.24.

The OECD TP Guidelines refer taxpayers back to Chapters I, II and III in

deciding what method should be used to determine an arm’s length transfer
price for intra-group services. Generally, either a CUP method or a cost-
based method (CP method or cost based TNMM) will be used. The OECD TP
Guidelines anticipate the use of a CUP method where a comparable service is
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provided among third parties in the recipient’s market, or where the
controlled affiliate also provides similar or comparable services to third
parties under comparable circumstances. The OECD TP Guidelines anticipate
the use of the cost-based method in the circumstances where the CUP
method cannot be used, where the nature of the activities involved, assets
used, and risks assumed are comparable to those undertaken by
independent parties. In exceptional cases, where it may be difficult to apply
the CUP method or the cost-based methods, it may be helpful to take
account of more than one method in reaching a satisfactory determination of
arm’s length pricing. 58

The OECD TP Guidelines suggest the use of a functional analysis of the group
members to establish a relationship between the provided service and the
members’ activities and performance. Consideration should also be given to
the long-term effect of the service, and whether the costs will ever actually
produce benefits.59 Taxpayers should be able to demonstrate the
reasonableness of their charges to associated enterprises in light of these
issues if they are relevant under their particular circumstances.60

Another issue is whether the establishment of an arm’s length charge

requires the service provider to earn a profit on the transaction. While
service providers generally would seek to earn a profit, there are certain
circumstances where the provider would be willing to forgo profits to achieve
some other purpose.61 Therefore, arm’s length charges do not always
necessitate the earning of profits by the service provider.62

The OECD TP Guidelines specifically identify two potential problems in the

application of the cost-based method. First, the costs incurred by the group
on the provision of the services may need to be adjusted to make
comparison of the transactions valid.63 Second, when the related entity is
acting only as an agent or intermediary in the provision of the services, the
return or mark-up must be appropriate for the performance of an agency
function rather than for the performance of the services themselves.64

Based on the OECD TP Guidelines, tax administrations and taxpayers should

try to establish the proper arm’s length pricing. However, in some cases, tax
administration, in its discretion, may be willing to forgo computing an arm’s
length price from the performance of services. This concession is unlikely to
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be made where the provision of a service is a principal activity of the related
enterprise, where the profit element is relatively significant, or where direct
charging is possible as a basis from which to determine the arm’s length
price.65

58 OECD TP Guidelines January 2022, paragraph 7.31.

59 OECD TP Guidelines January 2022, paragraph 7.32. This bears on the

amount and timing of the charge for services.

60 OECD TP Guidelines January 2022, paragraph 7.32.

61 OECD TP Guidelines January 2022, paragraph 7.35. These are outlined

under business strategies in Chapter I of the OECD TP Guidelines.

62 OECD TP Guidelines January 2022, paragraph 7.35. Paragraph 7.36 offers

an example where the services are offered incidentally as a convenience to
the group.

63 OECD TP Guidelines January 2022, paragraph 7.33.

64 OECD TP Guidelines January 2022, paragraph 7.34.

65 OECD TP Guidelines January 2022, paragraph 7.37. A cost-benefit analysis

might indicate that the additional tax revenue that would be collected does
not justify the costs and administrative burdens of determining what an
appropriate arm’s

length price might be in some cases. In such cases, charging all relevant
costs rather than an arm’s length price may provide a satisfactory result for
MNEs and tax administrations.

The OECD TP Guidelines provides a series of examples of transfer pricing

issues in the provision of intragroup services. They are prefaced with the
caution that it is necessary to look at the actual facts and circumstances of
each case before judging the applicability of any transfer pricing method.

Low value-adding intra-group services

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The OECD TP Guidelines provides a simplified approach for determining
arm's length charges for low value adding intra-group services for taxpayers,
but should be applied on a consistent, group-wide basis in all countries. The
approach consists of the following steps:

► Determination of cost pools:

Step 1: On an annual basis, calculate a pool of costs incurred by group

members that conduct low value adding intra-group services. This cost pool
should exclude costs attributable to an in-house activity benefitting solely
the company conducting the activity, including shareholder activities.

Step 2: Identify and remove from the cost pool costs relating to services
performed solely on behalf of one other group company.

► Allocation of low value-adding service costs benefitting several group

members;

► Selection of the same profit mark-up to be applied on all costs in the

cost pool;

► Determination of the charge for low value-adding services; and

► Application of the benefits test to low value-adding services.

The approach aims to guarantee payer countries that the system through
which the costs are allocated leads to an equal treatment for all associated
enterprises that are operating in similar circumstances. Moreover, the
approach aims to guarantee that no overpricing takes place due to general
agreement on the categories of costs included in the cost base and general
agreement on the moderate mark-up of 5% that should be charged. Finally,
the transparency of the approach makes clear to payer countries whether
intermediary companies, that may have no or low functionality and may aim
to inflate the intra-group service charges, have been interposed.

Aggregation of transactions

Ideally, the arm’s length principle should be applied on a transaction-by-

transaction basis. However, in reality, separate transactions are sometimes
so closely linked or continuous that they cannot be evaluated adequately on
a separate basis.66 On the other hand, there are also transactions that are
54 | P a g e
grouped by related entities, which really need to be evaluated separately in
order to determine the arm’s length price.67 In these circumstances,
taxpayers and tax authorities should consider the economic reality of the
transaction or transactions in determining the best approach.

66 OECD TP Guidelines January 2022, paragraph 3.9. Different examples are

provided in the related sub-section.

67 OECD TP Guidelines January 2022, paragraph 3.11

1.5 BEPS Actions

On 5 October 2015, the OECD released final reports on all 15 focus areas in
its Action Plan on BEPS. The OECD described the final BEPS packages as
containing recommendations that fall in several different categories as
mentioned below:

► Agreed minimum standards: the recommendations on harmful tax

practices (Action 5), treaty abuse (Action 6), country-by-country reporting
(Action 13) and dispute resolution (Action 14);

► Reinforced international standards: the revised OECD TP Guidelines

(Actions 8-10) and the revised OECD Model Tax Convention (including Action
7 on permanent establishment status);

► Common approaches and best practices for domestic law: hybrid

mismatch arrangements (Action 2), controlled foreign company rules (Action
3), interest limitations (Action 4) and disclosure of aggressive tax planning
(Action 12);

► Analytical reports: tax challenges of the digital economy (Action 1),

data and analysis with respect to BEPS (Action 11) and the multilateral
instrument for implementing treaty- based recommendations (Action 15).

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Appendix 3: Intercompany agreements

The list below summarizes the intercompany agreement of ABC Company

currently in place during FY2023:

• Purchases of Home Accommodation between ABC Company and ABC

Company. The above agreements shall be provided upon request.

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Appendix 4: Annual Financial Statement of
ABC Company

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