TRANSFER PRICES FOR DIGITAL BUSINESS MODELS: EVIDENCE FROM SAUDI ARABIA

Abstract

The study aims to investigate the influence of the challenges to the applied transfer prices (TP) methods for digital business (DB) transactions on the effective tax accounting in Saudi Arabia. The study discussed both the arm's length transaction theory and the profit-sharing theory that govern transfer pricing for the related parties’ transactions. The study uses the structured questionnaire method- in which several tax and financial experts take part -to collect the primary data to measure the study variables. The first challenge to the applicable TP is the Lack of the comprehensive data and information on the DB transactions is used as the independent variable in the first regression model. While the second challenge is the absence of the physical presence of the enterprises and intangible assets is used as the independent variable in the second regression model. The study uses “Cronbach’s Alpha” coefficient to evaluate the reliability of the structured questionnaire. The results of the first least squared regression model show that the first challenge is statistically significant and has a small impact on the effective tax accounting as the model explains only 17.7 % of the change in the dependent variable. In addition, the results of the second regression model show that the second challenge is statistically significant and has an impact on the effective tax accounting as the model explains only 33 % of the change in the dependent variable. The results show that the small influence of the challenges referred to provide reasonable empirical evidence on the effective applicable of TP models for the DB in Saudi Arabia to prevent tax evasion because Saudi Arabia applies the best international practices in the field of TP for digital business, however, the Saudi Arabia  is a developed country. Some earlier studies show that there is no practical evidence of the existence of the phenomenon of profit shifting using transfer prices in Saudi Arabia, which shows the effective application of transfer pricing systems. The results of the study have positive repercussions on investors’ confidence in the investment climate in the Kingdom, as the effective tax system is one of the incentives for foreign investments.