Saudi TP for Central Treasury and Hedging

Identify what central treasury actually does

A central treasury team can coordinate financing and hedge market exposures across a group. Its existence does not determine how much profit it should earn or which entity bears the resulting risks. The transfer-pricing analysis begins with the actual activities and contractual and economic relationships.

Section 8.6 of ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024, addresses hedging. It requires arm’s-length remuneration reflecting the related party’s functional role and value added. The amended Bylaws’ comparability and method provisions apply to the actual dealings identified.

Map the underlying exposure before pricing the hedge

The guideline recognises central management of exposures, including market and foreign-exchange risks, and the use of derivatives with independent financial institutions. Identify the underlying transaction, the entity exposed to it and what the hedging arrangement is intended to achieve.

Dariba recommendation: connect the hedge to the actual exposure by currency, amount, period and relevant risk. Retain the group policy, individual authorisations, external contracts and the terms of any intercompany arrangement.

A payment described as a hedge settlement is not self-explanatory. Its economic character depends on the position being hedged, the parties’ obligations and the actual movement of risk or value.

Distinguish an intermediary from a party controlling risk

Section 8.6 expressly distinguishes a related party acting merely as an intermediary between group entities and independent financial institutions. Its remuneration should reflect that role. A coordinator should not automatically retain all gains merely because it executed the external contract.

Where treasury undertakes more significant functions, the analysis must establish the relevant control and risk bearing rather than assuming it from the treasury title. Identify who makes the hedge decisions and what obligations the entity has to the participants.

Dariba illustration: a treasury company executing a subsidiary’s approved hedge and passing through its economics has a different role from a company independently managing a portfolio and accepting material exposure. This original comparison illustrates the factual distinction; it does not prescribe a fee or a profit entitlement for either arrangement.

Test expertise and financial capacity

The guideline requires the hedging entity to possess the relevant skills and experience and sufficient financial capacity. These requirements matter when assessing whether the stated risk allocation corresponds to the actual business.

Dariba recommendation: identify the personnel who understand the instruments, approve limits and respond to adverse outcomes. Examine how losses, collateral calls and unexpected liquidity demands are managed and funded.

The analysis should not treat a funding commitment as evidence that the entity controls every underlying market risk. Equally, a team with operational expertise may need to demonstrate how the stated financial obligations are actually borne within the arrangement.

Separate service remuneration from the hedge’s economic result

Treasury’s service fee and the gain or loss on a hedging position answer different questions. Establish the actual service and risk allocation before deciding how either element should be reflected in intercompany charges.

Section 8.6 links remuneration to functions and value added; it does not set a standard treasury mark-up. Depending on the facts, a reliable independent comparison may be informative, but a bank’s quoted derivative terms should not automatically be treated as the price of an internal administrative service.

Dariba recommendation: explain which costs, services, risks and payments are covered by each charge. Avoid retaining the same economic reward twice through both a service fee and an unexplained allocation of all hedge proceeds.

Explain group netting and differences between external and internal positions

Central management can allow the group to view exposures together and obtain diversification benefits. A net external position may therefore differ from the gross positions attributed to individual participants.

Dariba analysis: reconcile those positions rather than assuming that the entity signing the external instrument generated every benefit. Explain the participants’ exposures, internal terms and the reason any residual position remains with treasury.

An external contract with an independent bank can provide useful evidence of market conditions. Its price does not by itself establish the correct allocation among related parties with different functions, timing and obligations. The internal arrangement still needs an appropriate comparison and supported explanation.

Keep accounting and other tax consequences distinct

Financial accounting presentation, including a particular hedging classification, does not alone establish the transfer-pricing result. The TP analysis concerns the actual controlled dealings and arm’s-length conditions. The accounting records should provide a reconciliation, rather than dictate the entire legal conclusion.

CIT deductibility, withholding and other consequences depend on the actual payment, instrument and applicable rules. Do not automatically treat every hedge payment as loan interest or assume that every loss is deductible merely because the position was called a hedge.

Dariba recommendation: assess material settlements before filing or payment, identifying the counterparties, source, contractual rights and relevant tax character. Any treaty conclusion requires its actual terms and eligibility to be checked.

Maintain a consistent evidence trail through the reporting period

Articles 14–17 of the Bylaws require the relevant disclosure and supporting information. Retain evidence connecting the underlying exposure, hedge decision, external transaction, intercompany terms, remuneration and final settlement. Explain material differences in period or classification.

Changes in the treasury team’s role or the risk it bears can alter the pricing analysis. A prior-year fee should not be rolled forward without reviewing those facts. The same principle applies where the business changes currency, maturity or the nature of its exposure.

Read the financing guide for loans, guarantees and cash pooling. Central treasury can perform several functions, and each needs an analysis reflecting what it actually contributes.