Saudi Transfer Pricing Methods: Selection and Examples

Begin with the transaction, then select the method

A transfer-pricing method answers an economic question about a particular controlled transaction. Its reliability depends on what the parties actually do, the assets they use, the risks they control and the available independent evidence. A method cannot repair an inaccurate description of the arrangement.

Articles 5–9 of the amended Saudi Transfer Pricing Bylaws govern comparability and method selection. Article 7 lists CUP, resale price, cost plus, TNMM and profit split. Article 7(b) does not establish an automatic hierarchy. Article 6 requires the most appropriate method for the circumstances. A preference based solely on familiarity with TNMM, or a blanket instruction always to use traditional methods first, does not meet that analysis.

CUP: establish that the price comparison is reliable

The comparable uncontrolled price method compares the controlled price with a sufficiently comparable independent transaction. An internal comparable can be valuable because the business knows the product and terms; it still needs to examine volume, geography, credit, delivery, warranties and material product differences.

Official illustration: ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024, Annex 1, compares a related-party unit price of SAR 20 with an independent sale carrying a 10% discount, producing SAR 18. On the stated 200,000 units, the difference is SAR 400,000. This conclusion depends on the illustration’s comparability assumptions. A discount offered in a different market is not automatically an adjustment available for every related-party sale.

Annex 2 illustrates an external CUP. Its selected price is a result of that example’s facts, rather than a universal price or mandatory adjustment point.

Resale price: compare gross margins on a consistent basis

The resale price method works back from an independent customer’s purchase price, allowing a gross margin appropriate to the reseller’s functions. Processing, valuable marketing assets, warranty responsibilities and different accounting classifications can undermine a superficially attractive comparison.

Official illustration: Annex 3 of the same guideline uses a resale price of SAR 1,000 and purchase cost of SAR 750. Gross profit is SAR 250, or 25% of sales. The stated comparable gross-margin range is 17%–27%, and the result falls within it.

The advisory point is the denominator: gross margin is measured against sales. A 25% gross margin is not a 25% mark-up on purchase cost. Neither figure becomes a Saudi distributor safe harbour simply because it appears in an official illustration.

Cost plus: define costs before debating the mark-up

Cost plus applies an appropriate gross mark-up to a properly defined cost base. Comparability requires consistent treatment of production overheads, pass-through expenditure and other costs. Choosing a percentage before deciding which costs it applies to can produce a materially distorted price.

Official illustration: Annex 4 uses production costs of SAR 8 million and an actual 40% mark-up, giving revenue of SAR 11.2 million. On the example’s selected 44% mark-up, revenue becomes SAR 11.52 million: an increase of SAR 320,000.

That 44% is an illustrative selection from the stated comparable evidence. It is not a default for Saudi contract manufacturers, nor a net operating margin. The supplier’s actual functions and the comparables’ cost definitions remain central.

TNMM: test the appropriate party and transaction result

TNMM compares a net profit indicator against an appropriate base, such as sales, costs or assets. The tested party should be the one for which the method can be applied most reliably; its location does not decide the answer. Reliable segmentation is necessary where unrelated activities would distort the controlled transaction’s result.

Official illustration: Annex 5 tests the routine distributor rather than the manufacturer holding unique intellectual property. Sales of SAR 100,000, cost of goods of SAR 88,000 and operating expenses of SAR 10,000 produce operating profit of SAR 2,000. The example uses a 5% target, giving SAR 5,000 operating profit and a SAR 3,000 adjustment.

At unchanged sales and operating expenses, that target implies cost of goods of SAR 85,000. The underlying relationships should reconcile; an inconsistent subtotal in an illustrative table should not be copied into a client’s calculation.

Profit split: demonstrate what creates the combined profit

Profit split can be appropriate where the transactions are highly integrated or both sides make relevant unique and valuable contributions. It requires a reasoned combined-profit measure and allocation factors that reflect those contributions, rather than an arbitrary division chosen to achieve a desired country result.

The guideline’s Annex 6 considers innovative contributions on both sides. Its discussion qualifies the use of research expenditure as an allocation factor: current expenditure must actually reflect the relevant contribution, including the effect of previously developed intangibles and different risks.

Dariba analysis: a 60:40 spending ratio does not prove a 60:40 entitlement to all group profit. Establish which profit is being split, whether routine contributions have already been rewarded and why the selected measure captures the value created.

Aggregation and alternative methods require justification

Article 10 permits closely linked transactions to be considered together where the conditions support it. This does not authorise netting every service, loan, royalty and product sale into an entity-wide result that conceals individual pricing problems.

Under Article 9, another method requires justification where the approved methods cannot appropriately be applied. Article 8 does not require several methods merely to validate an otherwise appropriate one. A cross-check can help, but multiplying analyses does not cure weak comparables.

Article 13 also matters: comparable information must satisfy the applicable availability requirements. Geographic differences and adjustments should be explained, rather than assuming all foreign data is unusable or every regional company is comparable.

Defend the conclusion, not just the spreadsheet

Articles 11–12 connect the arm’s-length range and adjustments to the selected method and actual circumstances. There is no universal instruction to adjust every result to either the lowest point or the median. A result outside the range requires an appropriate analysis of the adjustment; a result inside a poorly constructed range is not automatically reliable.

Dariba recommendation: retain a clear chain from actual conduct to functional analysis, method selection, comparable search, adjustments, segmented accounts and the reported transaction. Explain material differences and changes from the previous year. The strongest conclusion is one a reviewer can reproduce without guessing how the business or calculation works.